New Stimulus Housing Credit

First-Time Home Buyer Tax Credit: 6 Things to Know

February 17, 2009 06:19 PM ET | Luke Mullins | Permanent Link | Print

While the proposed $15,000 home-buyer tax credit died in negotiations between the House and the Senate, the $787 billion stimulus bill that President Barack Obama signed into law Tuesday includes a similar--albeit smaller--measure designed to help revive the real estate market. Here are six things you need to know about the freshly-enacted $8,000 first-time home buyer tax credit.

1. Eight grand, new buyers: The tax credit included in the economic stimulus legislation is much narrower than the $15,000 proposal. This credit is equivalent to 10 percent of the purchase price of the home--although it's capped at $8,000--and applies only to first-time home buyers and principal residences. But unlike an earlier $7,500 home buyer tax credit, this one does not have to be repaid.

2. First time buyers defined: For the purpose of this legislation, a "first-time home buyer" is someone who hasn't owned a principal residence for three years before buying a house. (The date of purchase is considered the day that the title is transferred.) That means if you've owned a vacation home--but not a principal residence--within the past three years, you would still qualify for the credit.

3. 2009 buyers only: Only those who purchase a home on or after January 1 and before December 1, 2009 are eligible for the credit. Anyone who bought a home last year won't be able to take advantage of it.

4. Income limits: The tax credit is subject to income limitations. Single buyers need a modified adjusted gross income of $75,000 or less to qualify for the full credit, that's $150,000 for married couples. Those earning more than these thresholds may be eligible for reduced credits.

5. Refundable: Because the tax credit is "refundable," qualified buyers can take advantage of it even if they don't have much tax liability.

6. Recapture: Buyers have to own the home for at least three years in order to capitalize on the credit. If they sell the home before then, they will have to return the credit to the government. (Exceptions will be made in certain cases, such as death or divorce.)

The housing and foreclosure crisis

A friend recently asked me who this foreclosure crisis affects the most in our area. Angry about the bailout going towards large companies and reading things about relatively wealthy speculators who've already spent much of the sub-prime cash-out REFINANCES now being foreclosed on, he was wondering if this bail-out was really directed towards a crisis in the real middle class of our country or towards investors and the more well to do. This was my discussion:

From what I have seen, the vast, vast majority of the problem in our area seems to be with the more moderate and lower priced properties (read: lower income buyers), particularly in the minority set, even more so in the Hispanic set. I cannot tell you how many houses I see where the last name of the defaulting owner is a Hispanic last name - it's tragic. It is SO overwhelming in this area that it's hard to comprehend. Even sadder are the conditions of the home (sometimes heartbreaking conditions with multiple families living in them with tons of kids, sometimes just not kept up, sometimes purposely ransacked by the angry owners before foreclosure (missing appliances, feces etc.). (See the Washington Post article by Nick Miroff, March 23rd, 2008, "N.Va. Foreclosures Form 'Ring of Fire'; Chain of Housing Crisis Hot Spots Indicates Disparity in Market Downturn" for some interesting demographics.)

As far as high value properties go? Generally not so many, though they do exist. When that's the case, it is often either investors or second home owners.

Now, what I care even more about....who to blame?

I personally think that they whole run-up of easy financing was a bigger factor than out and out fraud by the buyer. There are some people who knew very well what they were doing (like those who overstated their income so they could qualify for a loan). These tend to be the savvier buyers....people who have done it before and people who tend to have higher incomes (and often higher purchase prices). These people know what they have to do and say to get the money they want, and they went for it with gusto. I have a colleague who was helping a couple buy a 1.8 million dollar home who called her 2 DAYS before settlement to say they didn't think they'd be able to close.... And why? Their 1.6 million dollar home was being foreclosed on, and they couldn't afford it. This man LIED, LIED, LIED and was in such denial. But I digress, this is not the norm....

From what I've seen in the last 5 year, I tend to think that the majority of fraud and outright chicanery came by way of the lenders.....banks who wanted to make money with little regard for the people to whom they lent money. Their detachment from the process after the loan closes only exacerbates this (see also: slicing and dicing of loans). In many cases, the worst hit are lower income buyers and those with lower financial acumen. Many of these don't even understand our language well. You add that to completely different lending/mortgage process in their home countries, and you have easy prey.

I cannot believe how easy it was to get a mortgage for those who could barely afford it, for those who would have no cash reserves left after their purchase etc....I mean really, some things are just common sense. But even my better-educated clients who were going to be in homes for longer periods of time seemed to think that ARMs and interest-only adjustable loans and the like (don't even get me into negative amortization loans) were good ideas because they didn't understand what would or COULD happen if the real estate market turned away from the rosy side. And nobody seemed to be trying to explain any of it to them. There certainly weren't (and aren't) any regulations on disclosure of payment hikes after teaser or temporarily fixed periods ended, and I find that incredibly unethical.

I would also go to settlements and see people looking over their 'applications' - ones they were asked to sign again at settlement, and they would have totally different and made up information on them, filled in by the lender. And then, if they didn't sign it or if they corrected the information, they wouldn't get the loan and would set themselves up for litigation from the sellers for non-performance. Part of the problem is that it was in a bank's interest not to provide Good Faith Estimates from the get go, as they are required to do by the RESPA laws. The GFE provides buyers with very basic information regarding what their loans will cost, what their rate and payments are etc. I think most lenders never did this (leading to the VERY hilarious standard form in every loan package now requiring you to WAIVE your right to get the GFE within 3 days of your application - can you say CYA?). The bigger problem is that even this very basic piece of information didn't have the next most important piece of information.....in the cases of interest only loans and negative amortization loans (which no one ever understands), what will the payments be when the loan adjusts? What are the minimums and max amounts? No bank ever provided this information because they wouldn't want to scare the loan applicants with really, really big numbers. It is crazy. This is where Ralph Nader and his consumer protector laws come to play.......we DO need some really basic regulation with our banks - somehow regulating the whole process of application, disclosure and education, and this needs to be provided in an easily understandable format, in an applicant's native language if possible (some of the WORST fraud happened with immigrants who had NO IDEA what they were signing), and this needs to be done way before closing. Of course, we do have some of the RESPA laws now, but the problem is, it isn't enforced.

Now, going back to demographics: I doubt the rest of the country's foreclosures differ than much from our area is because, first, interest rates haven't changed that much - they really haven't. Even those with adjusting mortgages haven't been hit as hard as they could be. That said, who will small changes affect the most? Those with no reserves, those on the lower end of the income scale. As our economy worsens, this is particularly true for those that depend on work in the construction industry and those who don't have permanent jobs - again, back to the immigrants. When they lose their jobs, they can't pay their mortgages (and let's face it, they weren't in stable positions to begin with). It's not that much the rise of the interest rates....it's the worsening/instability of the economy for this sector of workers.

Second, in the past, borderline less well-to-do folks just wouldn't get a loan, certainly not a loan for a house, and now instead of simply having to move to a smaller apartment or in with family when bad times hit, they get foreclosed because they actually have their own house.

Second, people with more money often tend to understand what they're getting into better (generally, if you assume higher income = higher education) and thus tend not get themselves more easily into things that they can't handle. But even there, some smart people get caught on hard times. We've recently just seen this happen to a friend of ours (who has a couple kids and a not-so-fancy primary house). Part of this person's problem was not a lack of smarts but a lack of financial savvy. It is just too complicated. If you aren't in the industry, it can be a very confusing scenario for a lot of people.

Don't get me wrong, I am a huge believer in personal responsibility - there was definitely fraud out there, and there were definitely people overextending themselves. I just happen to have seen the most egregious misbehavior and fraud out there with the lenders. Don't even get me started on the whole appraisal industry (a subset of the lending industry). That's another part of the process that needs serious overhaul. And let's face it.....an owner is responsible only for their own home and well-being, not the financial well-being of massive companies, thousands of jobs, the general health of our economy.....

In the end, I don't think that we will ever recover and prevent this from occurring again without real regulations and oversight with teeth.

Is now a good time to buy?

Is now a good time to buy? This is a question that many buyers, particularly first-time homebuyers, are contemplating. As a decent rule of thumb, if you are planning on owning a property for less than 3 or 4 years, I would not buy right now. In the end, no one has a crystal ball and no one (no matter how many articles you read) will be able to predict what will happen in the next few years. There are too many moving targets (general economy, interest rates, etc.). On the positive side, we are still at a 30 year historical low of interest rates. That makes borrowing money relatively cheap. This, combined with the great tax break from writing off interest, real estate taxes and depreciation, can save you hundreds of dollars a month (or more) in real terms vs. throwing money away on a rental. But, as it costs nearly 3% in closing costs to purchase a property and about 7-7.5% to sell a property (closing costs + agent fees), you will need to recoup about 10% to break even when you sell. Don't buy property for short term gain right now. It probably won't be worth it. Four+ years? You'll probably be ok. Just remember, location, location, location!

Bargian hunting season

It is bargain hunting season. In this market, sellers really need to prepare themselves for what will come when they put their home on the market. The general feeling from buyers right now is "Why should I pay full list price? I want a deal!". Even when properties are fairly priced to begin with, many buyers just want to see how low a seller will go. It doesn't help that foreclosures (where banks price the properties low to get out of them as quickly as possible) are dragging down prices of seller-owned properties. The fact that many of these short-sale or foreclosure properties are in terrible condition often doesn't factor into a buyer's mentality about what better-looking homes are worth. The bottom line in this market is that an offer is reasonable if it is within 10% of the asking price. Just be prepared to negotiate. It's all a give and take. This may also mean pricing the home reasonably to begin with, but not rock bottom, or offering a closing cost credit to the buyer to generate interest. Sellers should also be prepared for up to 1% of the sales price to be spent on repairs after an inspection is done on a property (less for a condo).

Are you a seller in today's market?

Are you a seller in today's market? If so, one of the most important things that you can do to sell a property is to stage it well. There is so much inventory out there that sellers really need to make their homes shine....this means decluttering, putting things in storage, covering old, worn furniture with slipcovers, painting, making minor repairs around the house and more. Your real estate agent can help to make suggestions for what to do, but consulting a qualified stager will be well worth the investment!

What does the Fed Rate drop mean?

Why Fed Rate Cuts Do Not Equal Lower Mortgage Rates
By Barry Habib, CEO

Last Updated: April 23, 2008

The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent six Fed rate cuts. This is difficult to explain to consumers who have watched a 3.0% reduction by the Fed with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.

It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.

The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.

Now let’s take a look at what happened with the Fed’s most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a “knee-jerk” reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. So far this year, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp. Within 13 days from that 50bp cut, mortgage bonds lost 269bp. On March 18, 2008 the Fed cut by 75bp and mortgage bonds lost 113bp in 6 days and 214bp in 22 days.