First Time Homebuyer Credit May Become a True Credit and Not a Payback Deal

Late yesterday – the House passed the $819 billion stimulus plan, which included a modified first time homebuyer tax credit. The Senate may vote on its version of the bill sometime next week.

The bill is changing the terms of the $7,500 tax credit that was issued as a part of the Housing Recovery Act, which Congress passed last summer.

Previous legislation required that the tax credit be repaid over 15 years, making it more of a no-interest loan. Not surprisingly, the measure had little impact on the market. The stimulus bill now under consideration would make that tax credit a true credit that doesn’t need to be repaid.

NAR estimates that there could be a 10% increase in home sales if it’s implemented – giving people who are sitting on the fence or who have inadequate funds for closing costs an incentive to act now.  NAR thinks that a 10% increase would yield an extra half million sales this year.

To be eligible, buyers cannot have owned a home for the past three years, and the new home has to be used as a primary residence. The credit phases out as income rises above $75,000 for singles and $150,000 for couples, and disappears entirely at $95,000 and $170,000, respectively.

Applying for it is easy, or at least as easy as doing your income taxes. Just claim it on your return. That’s it. No other forms or papers have to be filed.

Both the Senate and the House versions of the new act remove the requirement that buyers repay the credit. The Senate bill applies retroactively to any purchase completed between January 1, 2009 and the end of August. The House version is also retroactive to the start of the year, and expires at the end of June. As long as buyers don’t sell for at least 36 months, they keep the money.

And the credit is refundable, meaning that it can be claimed even if the amount of the credit earned exceeds the buyer’s tax liability. So even if your total tax bill comes to just $5,000, you can still qualify for a full $7,500 refund.

THe theory is that First time buyers who purchase from existing homeowners free those sellers to trade up to bigger, better houses.   But many exsiting homeowners are not trading up anymore.

Buyers should be aware that they won’t actually receive any refund for a home purchased this year until after they file their 2009 income taxes in April 2010.

Some argue that the credit is poorly targeted because it goes to every first-time buyer, not just the ones who wouldn’t buy without it. So, it merely provides a windfall for many people who would have purchased anyway.  I believe that interest rates are still too high to stimulate things as much as they need to be stimulated.   6 months ago – there was talk that the government was going to figure out a way to get rates to drop in the 4.5% range or less.  That hasn’t happened.  Rates are still in the 5’s.

I believe that patchwork stimuluses in this multi-billion dollar package isn’t the answer – though this well help.  Getting rates to drop is the answer – and answer that we’ve all been waiting for for a long time now.

The $7,500 tax credit, regardless of the details, does nothing to address the issue that’s holding some buyers back – the suspicion that prices are going to keep falling. That said – when we negotiate on a home for our buyer clients – we build in a large buffer factor for to cover that very issue.  I’m having one of my busiest January’s in a long time…Though I kinow that other agents are suffering.  My clients aren’t holding back at any rate…. I’ve written up a couple of purchase contracts this week – and we are in negotiations for some serious price-off…

I suggest that the government may want to think about making it available to all homebuyers, not just first-timers. And  have the credit last through the end of the year, at least. But the biggest thing that could be done is to drop rates.  As we all know – rates are inversely related to prices.