It’s official. Today President Obama will sign a bill into law that extends the $8,000 First Time Home Buyers’ Tax Credit, recently set to expire on November 30, until April 30 next year. The tax credit, originally part of the American Recovery and Reinvestment Act of 2009 was intended to stimulate the real estate industry, and Congress has been talking about extending the credit for months.
1.8 million home buyers have qualified for the $8,000 first time home buyers’ tax credit so far or will qualify by the end of November. According to the National Association of Realtors (who have a vested interest in seeing the credit be extended and expanded) says 335,000 of those home buyers would not have purchased a new house if not for the credit.
With house prices still lower than their highs and not much activity in the market, the industry wants more stimulation. And the industry is getting more than the $8,000 stimulus. Formerly, the tax credit was available only to home buyers who hadn’t owned a house in the past three years. The new bill adds a $6,500 tax credit for current home owners who buy a new house, and who have lived in their current house for at least five years. The extensions comes at a cost of $10.8 billion over 10 years according to the Joint Committee on Taxation
In order to qualify for either credit, the purchase contracts need to be signed by April 30, 2010 and the closing must take place by June 30, 2010. The value of the purchased house must be less than $800,000. There is an income limitation as well, but it has been increased with the passing of this bill into law. If your adjusted gross income is above $125,000 (single filers) or $225,000 (joint filers), the maximum credit you are allowed to claim is phased out.
The extension of the home buyers’ credit was included within H.R. 3548 (Unemployment Compensation Extension Act of 2009), a bill which increases unemployment benefits for Americans for up to 20 weeks.
Do you think this extension is a good idea or with the economy beginning to improve, should we cease creating more stimuli?
Photo credit: pnwra
The $8,000 tax credit for first-time home buyers is set to expire at the end of November, but lawmakers don’t want this benefit to end. While there have been some positive signs in the real estate market, the current credit hasn’t done much to stimulate house prices or the economy overall. All year, some senators and representatives have been suggesting improvements designed to further jump-start the real estate industry, none of which have been passed yet. Here are some of the enhancements they have been considering.
- Extending the deadline from November 30, 2009 to May 30, 2010 or November 30, 2010.
- Expanding the credit to all home buyers rather than just those who have not owned a house in the past three years (otherwise known as “first-time” home buyers).
- Increasing the credit from $8,000 to $15,000.
- Eliminating the income cap for qualification of $75,000 (or $150,000 for married filers).
These changes, if signed into law, would redirect the focus of the credit from the average consumer who needs a little boost to purchase a primary residence to investors and speculators. Flippers would still be discouraged because the bills currently under consideration in the House and the Senate both call for paying back the credit if the house is sold within two years or if the purchaser is not a primary resident sometime within two years.
For many people, $8,000 is not a big enough incentive to buy a house if they aren’t financially ready to do so. I don’t think increasing this to $15,000 would change much. This credit, if the changes become law, is a bailout of the housing industry, just like Cash for Clunkers was a benefit for the auto industry.
My wife and I enjoy our apartment, but we’re preparing for the day when we can make the jump to a house. We could use the extra space, and we’re ready to get away from some of the ticky-tack regulations and rules that landlords love to use.
Financially, however, our preparation is lacking. It isn’t because we’re not trying, but we’ve decided that we’d like to have a sizable down payment and know exactly what we’re getting into. We haven’t had much debt in our marriage so far, and so in some ways, we’re reluctant to dive in.
For this reason, buying a foreclosed home is something that has been very interesting to us. I was first sucked in by hearing radio commercials announcing homes for sale for just $12,000 or $22,000. I naïvely thought, “wow – $12,000? We can swing that. We’ll be in a house in no time!”
Turns out, such was not the case. While properties going for those prices are available, most foreclosed homes can be found going for between 20-40% off the value of the home, according to AOL Money. While this isn’t rock bottom, it’s still quite a bit more affordable than a full-priced home.
According to the same AOL Money article, there are five tips that can make buying a foreclosure a realistic choice for many potential home buyers.
1. Find a property. The article recommends checking two sites: Foreclosure.com and RealtyTrac. Both charge a fee, but they each list thousands of properties. The best places to look are areas that are places that have a high grouping of “distressed properties.” Doing a bit of research about the local economic situation can help as well – you’ll obviously have better luck in areas with more foreclosures.
2. Skip the auctions. At an auction you’re usually buying a home without seeing it first. Before you make any serious offers on a property you’ll want a full inspection, and that’s hard to do with properties that are auctioned off by a court. You may also be responsible for back taxes on the property, something that might not be disclosed during the action. The best thing to do is to wait for the bank to put the home back on the market. They’ll usually pay off any taxes or debts, and fix the home up a bit to attract potential buyers. This is a much safer way to buy.
3. Know local home values. As the article states: “Just because a home is being sold b the bank, doesn’t necessarily mean it’s a bargain.” If you find a property your interested in, use a site like zillow.com to compare values of the homes around it to make sure that you’re not getting ripped off.
4. Get Financed Before You Shop. Apparently many banks won’t make a loan for you to buy a ‘distressed property,’ so it’s a good idea to get pre-approved for a mortgage before you start seriously shopping for home. Other banks base their loan on the condition of the property, so to avoid any problems, get your financing set up first.
5. Get an Inspection. I’ve already mentioned this earlier, but an inspection is key. You want to know as much as possible about a house, and paying for a professional inspection is worth it. Homes in foreclosure can be hiding serious problems, since the previous owner probably didn’t have money to make major repairs, or even perform routine maintenance.
With an inspection you’ll know not only the condition of the home, but what kind of repairs are needed and how much you can expect to pay for them.
While we’re still a while from seriously shopping for a home, we’re planning on checking out foreclosures for sure. Any money we can save on a home would be a leg up financially, and put us that much closer to being debt free again.
What thoughts or experiences do you have with buying a foreclosed property?
A few years ago, a coworker formed an investment partnership in speculative real estate. He promised investors a 10 percent annual return and was using the capital to invest in Florida real estate, earning 15 to 20 percent overall. As most of the real estate had not even been inhabited or built yet, the investments were pure speculation. I haven’t been in contact with this individual, but I am wondering how this business is doing in this real estate market.
If you have a mortgage on a house you purchased recently, there is a good chance you now owe more on this loan than your house’s market value. These chances are even greater if you bought into the speculative markets in Arizona, Nevada, or Florida like my former coworker.
Owing more on your loan than the house is worth is not the worst financial situation, but it is risky. If you need to sell your house, you would still have to raise more money to pay off the remainder of the loan. If, on the other hand, you are lucky, you can remain in your house long enough to continue paying off the loan and to wait for home prices to return to the average rate of appreciation of about 3 or 4 percent. Eventually you could come out ahead.
If you find yourself in this position and you care not to be, you can make the time work harder for you rather than against you by increasing the payments towards your mortgage. A pure analysis of the numbers might say that it’s better to invest in the stock market rather than pay off your mortgage faster, but that doesn’t account for the risk of staying in a house whose loan is under water, and that risk can be measured differently by different families in different situations.
Robert Kiyosaki popularized the idea that a house is a liability. He is, of course, technically wrong. A house, and anything you own is an asset, while a mortgage, and anything you owe, is a liability, despite any marketing materials that try to redefine the words. But when your mortgage is higher than the market value of your house, you have negative equity, and that asset is not looking so helpful on your balance sheet.
This negative equity is mostly a result of speculative investing. The news that so many homes are under water invites criticism of home owners who bought a larger or more expensive house than they could afford and have now suffered the effect of a downturn in the real estate market or interest-only mortgages than have now adjusted to include principal payments. But that is only a small problem in this market, it is the speculative investing that accounts for the under water loans.
The areas that were identified as the largest contributors to the total number of home loans under water were the locations that saw some of the biggest increases in home prices as investors gobbled up as much property as possible. These investors intend on selling more frequently than a typical home owner, so they are more vulnerable to the market downturns that result in negative equity.
Are you under water with your home loan? Are you doing anything about it now or are you waiting for home prices to return?
Almost one-third of home loans under water, Emily Glazer, MarketWatch, August 13, 2009
Photo: respres
“Now is a great time to buy.” That has been the advertising mantra of the National Association of Realtors regardless of the state of the housing market. The NAR certainly has a purpose; its mission and vision is clearly displayed on the organization’s website: “The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful.”
The NAR looks out for its due-paying members. Notice that the mission of this non-profit organization is not to help consumers either find bargains when buying a house or to help sellers find the highest bidders. Real estate brokers, particularly those who qualify as Realtors (which according to the organization, should be represented in all uppercase letters, include the registered trademark symbol, and be pronounced in the unnatural American English combination of phonemes “REAL-TORE”) stand to be more “profitable and successful” by increasing the number of transactions they broker.
From what I understand about commissions, a 6% commission is often split between the buying agent and the selling agent, and if the agent is part of a realty company, the 3% is split with the company. A real estate agent holding out for a buyer’s asking price of $250,000 rather than $220,000, a difference of $30,000, stands to increase his income approximately $450. That seems hardly worthwhile if it takes several months before the asking price is met. The $450 is hardly an incentive for the broker; he could do better by closing the deal and moving on. On the other hand, the $28,200 (the $30,000 in price difference minus the 6% paid to the agents) is a significant difference for the seller. This just illustrates that real estate agents have little incentive to work hard for either the seller or the buyer except to create a good relationship in order to foster referrals.
That’s not the point. The point is that the National Association of Realtors’s only goal is to encourage more real estate transactions, and this is why they have been saying that, “Now is a great time to buy,” no matter what’s going on in the world around them. This is also why any data provided to the public by the NAR should be regarded as marketing rather than a true gauge of the economy.
For a well-accepted measure, media generally turn toward the Case-Shiller Price Index (CSPI), measured by Standard & Poors (a company with its own conflicts of interest as well). The CSPI shows that home prices increased for the first time in May. Other positive data include June numbers: new housing starts and existing home sales were both up 3.6% and sales of new homes were up 11%.
Is this a sign that the housing crisis is over? It must mean that there is increased confidence in the ability to find the right price as well as increased availability of loans.
There are some problems, though. Unemployment continues to rise, so consumers may find themselves in financial trouble. That could result in fewer purchases and more mortgage defaults. The increase in purchases may be due to speculators trying to snag deals rather than families moving from apartments to houses. Even if we are at a bottom, the numbers could mean that real estate is leveling without significant increase for some time.
What do you think? Are we headed for a recovery or are there still dark clouds ahead?
Looking for a Housing Recovery, Casey B. Mulligan, New York Times, July 29, 2009.
The real estate recession doesn’t discriminate. While foreclosures have soared to one out of 84 households over the course of the first six months of 2009 and the Obama administration is considering more aid to help families in this situation, the threat is also affecting famous properties.
The owner of the famous Watergate Hotel in Washington, D.C., Monument Realty, has defaulted on its loan. The lender, PB Capital, wasn’t able to agree on new terms for the loan, and the city’s foreclosure notice expires today according to the Washington Post. The property, made famous by President Nixon, is going up for auction next week.
Are you bidding? I see a lot of potential in this property, despite the fact it has been empty for a while, due to its iconic status. And if I see the potential, there is a good chance a number of savvy real estate investors do as well, driving up the price on the auction block. But who has the money?
Photo credit: brownpau
The Senate is considering a number of changes to the $8,000 first-time home buyers credit. Spurred on by Sen. Johnny Isakson from Georgia, the adjustments being considered seek to expand the credit to spur the real estate industry.
Here are the changes some Senators would like to make to the original law.
Expand the maximum credit from $8,000 to $15,000. When the first-time home buyer credit was first suggested as an amendment to the Senate’s 2009 Stimulus Bill, home buyers would stand to receive a credit worth 10% of the purchase price of the house up to $15,000, and the credit would be distributed over a course of two years. This amendment did not end up in the final law. The limit was reduced to $8,000.
Eliminate income limits for the credit. In the current law, the amount of the credit phases out when the taxpayer’s modified adjusted gross income is over $75,000 (single) or $150,000 (married) and fully eliminated when income reaches $95,000 or $170,000.
Make the credit available to all home buyers. Home buyers qualify within the “first-time” label if they have not owned a home in the past three years. The current credit is limited to the first-time home buyers, but the new legislation making the rounds would change the rules so any home buyer would receive the credit.
These changes will benefit many people who are deciding whether to buy a house in this market. It should continue to increase activity in the real estate industry and provide more work for real estate agents. It could, however, encourage buyers to spend more for a house than they believe it is truly worth.
Real estate investors (speculators) will also like these new rules for the tax credit if they become part of the law. Overextended consumers and real estate speculators led us to overpriced real estate values, a bubble was formed, and eventually deflated or collapsed. Will these changes to the law, if enacted, just put the real estate industry back into a precarious position or will they put is back on the right path?
The latest data show again that you shouldn’t expect to make more money from buying and selling the house you live in than you would from investing in stocks. In fact, you could do better with government-issued inflation-protected bonds. This isn’t just a result of the recent decline in home prices, 19% over the past year. The long term figures show that real estate barely beats inflation.
This doesn’t consider the annual expenses you pay to maintain and live legally in your home, like insurance, association fees, and taxes. In order to compare return from the sale of your home with that from a sale of any other investment, you need to consider the total cost, including the above as well as closing costs, broker fees, and the amount you pay the people who stage your house with fake furniture when you sell. People I have talked to like to take their selling price, subtract their buying price, and state that as their real estate profit, ignoring all the costs they wouldn’t have had if they hadn’t purchased their house.
Gurus have long touted real estate as the best method for “getting rich,” but this concept does not compute if your only purchase is the home in which you live unless you get quite lucky. And unless you rent when you sell your house or downsize to a smaller house or a less expensive location, you won’t be able to enjoy the profit, if any.
Rather than looking at your own home as an investment, consider it a cost center that you should try to reduce as much possible to make the most of your purchase.
Is Your Home A Good Investment?, Brett Arents, Wall Street Journal, May 27, 2009
Case-Shiller shows slowing in home-price decline, Reuters, May 26, 2009
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