Many people have noticed an interesting phenomenon in the housing market: tons of would-be buyers are flocking to low-priced homes. Some speculate that the first-time buyer credit is the cause. But is this really true? Is the new car tax deduction having the same result?

Does the First-Time Buyer Tax Credit Motivate You to Buy?
I think the answer here is: it depends. My husband and I are happy to accept the tax credit if the government is going to give it to us, but it didn’t change our target price range or goad us into buying this year. We’d always planned to buy this year. We have, however, seen more people out looking. At the same time, prices in Los Angeles have fallen precipitously, to the point where first-timers can now afford to buy, so I’m not sure if the credit is fueling sales as much as the low prices.

You also have to consider that the tax credit isn’t anywhere close to 10% of the purchase price in Los Angeles. Here it’s no more than 5%, and it’s probably closer to 1-2% of the price for first homes in the popular areas.

However, if we were buying a place like Kansas or Michigan, that extra $8,000 could be a very important consideration. There it could potentially be 8-10% of the purchase price. Since the FHA is also now allowing buyers to use the money as part of the down payment, it’s suddenly become possible for people in lower-priced regions to put down a substantial down payment. It’s also made it easier for people shopping in the low-end of higher-priced regions to make it to the required 3.5% down.

Apparently Congress believes the credit has been effective enough to warrant boosting it to $15,000, but that may be more of a gambit to boost home prices for current owners who want to sell. There’s been speculation that prices have risen as a result of the credits.

Does the New Car Tax Deduction Motivate You to Buy?
It certainly doesn’t seem like people are rushing to buy cars the way they’re rushing to buy homes. That could partly be because most people don’t need new cars – most cars on the road are less than three years old, which is hardly dire. It could also be that the deduction is worth a few hundred bucks at most – hardly the thousands that could actually alter your finances.

The deduction is unrelated to my reason for buying a new car. In my case, my car will be twelve by the time I replace it. It’s time. The deduction is just a nice bonus for something I already planned to do, like the new home tax credit.

Does the Cash for Clunkers Program Motivate You to Buy?
Since my clunker doesn’t qualify for the voucher, I certainly wouldn’t consider this a motivation to buy a new car. For some people, it might, but the majority of people who qualify under this program have cars that will fetch more than $3500 or $4500 as a resale or trade-in. It might get some of those 1970s-1980s boats off the road, but many of those have already died.

What do you think? Will you trade in your SUV for a more efficient car because of the Clunkers program? Will the new car deduction motivate your purchase? Has the first-time buyer tax credit caused you to rethink your home purchase plans?

From my point of view, they shouldn’t. If you want to buy a home and can afford to buy a home, then buy a home. If you want a new car and can afford a new car, then buy a new car. However, stretching your limits to take advantage of tax credits may lead you down a dangerous road.


3 Responses to “Is a Tax Credit Your Motivation to Buy?”

  1. Kerri on June 24th, 2009 6:15 am

    I would say Yes and Yes to the new car tax deduction and Cash for Clunkers, but I think I’m among the .01% of people for whom these two programs are a complete benefit.

    1) My car has 100,300 miles on it. Fine if it’s a Honda, but it’s a 2002 Chevy SUV so it’s probably close to its last legs anyway.

    2) I live in Texas where we don’t have state income taxes so it’s a no brainer to claim the sales tax deduction.

    3) My current car qualifies for the Cash for Clunkers program and all the new cars I was considering anyway fall into the mpg range that would get me the max $4,500 voucher.

    Being a Boglehead, I was looking only at used cars but with both of these combined I can get a new car for the same price as used cars with 5k-10k miles on them. So, unless I’m missing something, is there a reason I wouldn’t buy a new car this year?

  2. Aryn on June 24th, 2009 10:02 am

    Kerri, if I were in your position and already planning to buy a car, I would do exactly what you’re doing.

    I considered buying used, but the cars I like cost almost the same used as new.

  3. Carnival of Personal Finance #211: Burn Notice Edition on June 30th, 2009 5:03 am

    [...] Sound Money Matters looks into the new tax credits available and asks, Is a Tax Credit Your Motivation to Buy? [...]

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