Spurt of Home Buying as End of Tax Credit Looms

Nine hundred days after putting their house on the market, Andrew and Jane Palestini were beginning to think they might be stuck in Iowa forever.

The looming expiration of the government’s housing tax credit pushed them into action. They dropped their price by an additional $10,000, to $235,000. Somewhat to their shock, a buyer emerged. The house is now under contract.

“I can’t feel happy,” said Mr. Palestini, a retired administrative law judge with the Social Security Administration. “Just relieved.”

After several disastrous months for home sales across the country, when volume dropped by 23 percent, the pace appears to be picking up again. The number of Des Moines homes under contract in February rose by a third from the January level. The number of pending contracts jumped 10 percent in Naples, Fla., 14 percent in Houston and 21 percent in Portland, Ore.

These deals will be reflected in the national sales reports when they become final, this month or next. There is no evidence that prices have begun to move in response to the higher volume. Indeed, so many homes are coming on the market that prices might well fall further.

Real estate agents say buyers and sellers are hurrying to take advantage of the tax credit, which is worth up to $8,000 for home buyers. But the last-minute rush is also prompting some foreboding about what will happen to the market on April 30 when the credit ends — and whether it is too risky to let it end at all.

James M. Poterba, an economist at the Massachusetts Institute of Technology, calls this “the exit strategy problem.”

“If you have a short-run program to stimulate demand, it’s always tricky to figure out how you gently remove it without going off a precipice,” he said.

Arguments for extending the tax credit a second time are just beginning. Robert Shiller, a professor of economics at Yale and co-developer of the Standard & Poor’s/Case-Shiller housing price index, is an early advocate. He thinks the credit was a bad idea that nevertheless the market cannot do without.

“You don’t make drug addicts go cold turkey,” Mr. Shiller said. “The credit interferes with the market in an arbitrary way, but ending it now would be psychologically powerful. People will be in a bad mood about buying a house.” He advocates phasing it out gradually.

In some states, worries about the housing market are trumping fiscal considerations. They are adopting or extending tax credits or other supportive measures in hopes of bringing the market to life.

California last week renewed a $10,000 credit that proved popular last year, allocating $200 million for it despite a state budget crisis. New Jersey legislators just introduced a bill that would give buyers a $15,000 credit spread over three years. South Carolina recently announced a $7,000 down payment assistance program for teachers, police officers and firefighters.

As it has been for several years, housing remains the most coddled and the most troubled sector of the economy. Outside the realm of real estate, many of the government banking programs created to deal with the crisis have ended, and credit markets have largely returned to normal. On March 8, the Federal Reserve held its final auction in a two-year-old program that offered banks emergency short-term loans.

A few days earlier, however, government regulators extended a refinancing program for homeowners whose properties had plunged in value. Originally due to expire in June, the program has been renewed to the middle of 2011 “to support and promote market stability,” the Federal Housing Finance Agency said.

On Monday, just three days after substantially expanding its antiforeclosure programs, the Obama administration announced another $600 million to finance innovative measures to help defaulting families in five hard-hit states: North Carolina, Oregon, Ohio, Rhode Island and South Carolina. The first round of financing, announced last month, provided $1.5 billion to states including California and Florida.

Supported by an array of government programs aimed at both reducing foreclosures and encouraging traditional sales, housing was supposed to be on the road to a solid recovery.

An earlier version of the tax credit created a rush to buy in the fall, when people thought it would expire Nov. 30. The housing industry argued that sales would fall off a cliff if the credit were not extended and broadened, so Congress went along.