Bay Area Home Sales Plunge – But is it REALLY Because of the Tax Credits?

We all knew that homes sales would collapse in July as the tax-credit stimulus disappeared. In the Bay Area and across California, home sales fell about 20 percent.

Can we really blame the drop all on the loss of the tax-credit? Or are the tax credits simply a convenient scapegoat, distracting us from greater economic forces at play?

From Dataquick via housingstorm:

Bay Area home sales dropped sharply last month to the lowest level for a July in 15 years as the economy sputtered along and the housing market adjusted to life without federal home buyer tax credits. The median sale price dipped below the prior month and rose only slightly from a year earlier, a real estate information service reported.Last month a total of 6,773 new and resale homes closed escrows in the nine-county Bay Area, down 19.1 percent from 8,373 in June and down 22.8 percent from 8,771 in July 2009, according to MDA DataQuick of San Diego.

It was the slowest July since 1995, when 6,666 homes sold. Last month’s sales were 28.8 percent lower than the July average of 9,515 transactions since 1988, when DataQuick’s statistics begin.

…

“There was more to last month’s sales drop than expiring federal home buyer tax credits, but we think they were the main reason the decline was so sharp. As the boost from the credits waned, low mortgage rates just weren’t enough to outweigh the weak economic recovery and low consumer confidence,” said John Walsh, MDA DataQuick President.

Clearly some demand was pulled forward. But, remember, we’ve had some form of home-buyer tax credit since 2008. That’s two full years of bribing would-be buyers to take action…talk about tax credit fatigue!

Besides, buyers with the most tax-credit-enthusiasm would have likely bought before last November’s extension. I would guess that many of this Spring’s buyers appreciated the tax credits, but didn’t act because of them…especially here in the Bay Area where $8,000 doesn’t get you very far.

Changing Social Mood

Just as the economic vernacular has fallen from “recovery” to “double-dip,” so too has homebuyers’ enthusiasm to potentially catch a falling knife. The dream of home price appreciation is fading fast. Here in the Bay Area, where wealth-through-home-price-appreciation is considered a birthright, the shift in psychology has been especially pronounced.

It’s not just that the tax credits are gone. HAMP has all but run it’s course and proven to be a complete failure. The foreclosure backlog is still growing. And, most importantly, the unemployment is getting worse, not better.

Actual economic data is proving far worse than economists expected, and certainly far worse than a real recovery would bring.

Recently, 58 out of 58 economists blew manufacturing estimates by a mile. Bloomberg reports:

The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 7.7 this month, the lowest reading since July 2009, from 5.1 in July. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Economists forecast the measure would rise to 7, according to the median of 58 projections in a Bloomberg News survey. Estimates ranged from minus 6 to 10.

In other words, everyone has been riding a wave of blind optimism for the last year – optimism that the economy, jobs, and the housing market would be getting better – but we were kidding ourselves. We spend trillions of dollars we didn’t have to make things feel better for a bit, but now were back to where we started and with a heck of a lot more debt.

Without the hope-to-cling-to that prices will soon rise, there are fewer reasons for buyers to take action.

What Buyers Are Left?

It’s not just that the first-time homebuyers already bought, it’s that there simply aren’t as many who can qualify at current Bay Are prices. Today’s 20-and-30-somethings are saddled with other debts and face a tough job climate. Moreover, the culture of today’s young adults is changing to where traditional family life and homeownership are less of a priority.

Consider that, to actually afford a $400,000 house you should have a six-figure income. And, mom and dad probably can’t help you with the down-payment anymore because their home equity loan is tapped. What’s more, $400,000 is still entry-level here in the Bay Area. People buy entry level homes to live in for a while and build up some equity before moving to another house. If prices don’t go up, entry-level homes become permanent ones…and what 28-year-old wants that?

There are fewer move-up, move-down, and move-sideways Buyers because that requires equity – enough to sell, cover your costs, and put down on the next place. I wouldn’t be surprised if half the homes in the Bay Area were effectively underwater when you account for selling and moving expenses. These people may be Sellers, but probably not Buyers for a while.

It could be a decade or more before this segment of the Bay Area housing market returns to normal. Prices have to finish going down and then climb back up again.

So who’s left? Job transfers? That’s a drop-in-the-bucket.

If the first-time buyers are exhausted or uninterested and repeat buyers are stuck underwater, who is left to buy all these houses?