Racing Home: Buyers Try to Get Real Estate Tax Credit Before It Expires

Young and unmarried, Wesley Davis didn't have much of a reason to buy a house.

Davis, 28, a behavioral therapist who helps children with autism in Modesto, Calif., was renting an apartment with his girlfriend and didn't think he could afford to take on a mortgage.

But then Davis learned he could pocket an $8,000 cash bonus from the government if he jumped into the homeowner pool. For him, it was a no-brainer, and last week he closed on a two-story, three-bedroom house with a playground in the backyard.

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"The credit put the thought of buying a home into my mind," says Davis, who says he'll use the money to pay off a credit card bill and do some remodeling. "Any chunk of change is nice."

More Americans have started to follow in Davis's footsteps. Data released this week by the National Association of Realtors shows that the first-time home buyer credit, which was extended to help fuel a housing recovery and is set to expire on April 30, may have started to spur buyers into action.

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Pending home sales, a number that measures intent to buy based on the number of contracts signed, rose 8.2 percent in February compared to January, and jumped a whopping 17.3 percent from a year ago. A rise in pending home sales usually means a comparable gain in closings a month or two later, according to the NAR.

"The rise in buyer contact activity may signal the early stages of a second surge of home sales this spring," says NAR's chief economist, Lawrence Yun.

Procrastination Woes

The data came as a surprise to market observers; economists polled by Thomson Reuters had predicted pending home sales would slide in February.

Video: Homebuyers rush to take advantage of the tax credit.
Home buyers rush to get tax credit

Americans are notorious for procrastinating to take advantage of tax credits, and experts have had trouble predicting accurately to what extent the looming deadline will boost demand. The uncertainty is exacerbated by a technicality in the law: while buyers must have signed purchase agreements by April 30 to qualify for the credit, they have until June 30 to close.

"Buyers always wait until the end," says NAR's Yun.

The home buyer tax credit was first introduced in 2008 as a way to prop up the crumbling housing market. It offers first-time buyers -- technically, those who haven't owned a home in three years -- a bonus worth 10 percent of the purchase price, up to a maximum of $8,000. It was originally set to expire on Nov. 30, 2009, but due to popular demand Congress extended it to April 30, 2010. At the time, lawmakers also expanded it beyond first-time home buyer, to include a $6,500 bonus for repeat buyers who have been in their existing home for more than five years.

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Home Buyers: Boost in May?

In the first round, the credit fueled most of the demand at the very end, pushing existing home sales up by 44 percent in November compared to the previous year, according to data from the NAR. Economist Yun says we can expect a similarly large jump this summer.

The question is whether demand will stay after the tax break is gone.

Earl Lee, president of real estate services at Prudential, one of the country's largest realtors, says many Americans simply aren't ready to buy yet.

"There is still a fair amount of fear out there," says Lee, adding that consumers are nervous that a glut of "shadow inventory" could hit the market once prices start recovering.

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