In February, Congress passed the American Recovery and Reinvestment Bill of 2009, otherwise known as this year’s stimulus bill. One small part of this bill allows first time home buyers (anyone who hasn’t owned a home in the past three years) to qualify for a $8,000 tax credit.
For individuals or families hoping for some help to move into a house within their reach of affordability, this is an amazing offer. Not only does it help home buyers, it will in theory help stimulate the real estate industry by keeping housing prices from falling further and allowing more people to afford to buy homes.
Even better, this year’s credit does not need to be paid back to the government unlike last year’s $7,500 credit for first time home buyers. The rules for claiming the home buyer credit are not as helpful as they could be, however. If you qualify for the credit, you need to buy the house first, using funds you have or a loan, and then later apply for the credit either in an amended 2008 tax return or your 2009 tax return.
The U.S. Department of Housing and Urban Development wants this benefit to assist home buyers differently. HUD is pushing for the rules to be changed to allow lenders to borrow against the tax credit. If the buyer qualifies, he or she can receive their tax credit up front to be used for completing the down payment or paying closing costs.
If HUD models the first time home buyer’s loan after similar programs offered by a select number of states, the loan would be interest-free as long as it is paid back within a reasonable amount of time. I imagine the grace period would be determined when the rules are set if HUD is successful in getting the rules changed.
Six or seven years ago, a couple I knew married each other and bought a house right away. I can’t claim to know their personal financial details, but I am sure the value of the house was well beyond three times their combined income. The husband explained to me that house values never go down, so the purchase was a good investment.
It’s true that for many years, the New Jersey county they lived in has seen incredible increases in average housing values. And according to the Housing Price Index (HPI) offered by the Office of Federal Housing Oversight, it’s quite possible that prices in their area continued to increase, although data on their town is not available. A nearby locality has seen consistent price increases from 1997 through 2006, followed by decreases in 2007 and 2008.
The methodology for determining this index is not perfect. This area has seen almost constant development in the past ten years with larger and more expensive homes being built. The HPI only counts single-family residential properties that have had two mortgages originated by Freddie Mac or Fannie Mae. Eventually, these new homes would increasingly have two mortgages as described, some sooner than others. When these larger, bigger homes enter the index, they skew the numbers higher.
While part of the index represents actual increases in house values, some of the increase is due to newer construction and the tendency to build bigger.
Meanwhile, another housing price index, the S&P Case-Shiller index, has posted the biggest decrease ever, 18% down from the same time last year. This is the 27th consecutive month showing a year-over-year decrease.
Home prices post record 18% drop, CNN Money, December 30, 2008
I really enjoy good “data visualization”, which is a fancy, but more succinct way of saying “a way to look at information as more than just numbers.”
Last year, before most of us were aware of the “mortgage crisis,” some enterprising individual took a list of average housing prices in the United States since 1890, adjusted them for inflation, and then plotted them as if they were altitudes on a roller coaster ride. Watch the video, and you won’t be so surprised why the housing market took a downturn:
Earlier this week, a few real estate market survey results were announced in the media. This could be good news for house shoppers. In January, prices of homes on average were 11% lower than prices of homes at the same time last year. These results are based on the S&P Case/Shiller index, which collects actual sales prices.
Here are the metropolitan areas included in the survey and the associated 12-month sales decline (or increase in some cases).
| Metropolitan Area |
1-Year Change |
| Atlanta |
-4.8% |
| Boston |
-3.4% |
| Charlotte |
1.8% |
| Chicago |
-6.6% |
| Cleveland |
-8.5% |
| Dallas |
-3.3% |
| Denver |
-5.1% |
| Detroit |
-15.1% |
| Las Vegas |
-19.3% |
| Los Angeles |
-16.5% |
| Miami |
-19.3% |
| Minneapolis |
-10.0% |
| New York |
-5.8% |
| Phoenix |
-18.2% |
| Portland |
-0.5% |
| San Diego |
-16.7% |
| San Francisco |
-13.2% |
| Seattle |
-1.3% |
| Tampa |
-15.0% |
| Washington |
-10.9% |
In addition to the national price decline, more people were buying houses in February. According to the National Association of Realtors, an organization whose members would benefit from any positive spin on the housing market, sales by homeowners increased by 2.9% from January to February.
I live in the New York metropolitan area. According to the numbers above, our price decline was less than the average, which has me thinking that there may be more declines ahead. Unfortunately, I can’t predict the future. I’m not shopping for a home right now, so I’m not plugged into the market. I don’t have the desire to lock myself into one location for the long-term and furnish and maintain a home, especially on my own. I’m wondering how much longer I’ll feel this way, however.
When I made the decision to settle down, it will not be a financial decision based on market trends. I will buy when and if the right time arrives for me. I’ll try to make the best buying decision at that time while taking the market into account.
Most people moving from one house to another are buying and selling at practically the same time. This negates the basic effects of the market; the disadvantage you have on one side of the transaction is the advantage you’ll have on the other side. If you’re buying your first house, you don’t have the benefit of the flat market, so perhaps the state of the industry should play a bigger role in the decision.
Would you wait for more positive market signs before buying a house — particularly if you’re buying your first house?
Home prices: Down record 11% [CNN Money]
Home sales rise on biggest-ever price drop [CNN Money]
For some reason, I will never get out of my mind someone once told me shortly he purchased a house he couldn’t afford (and knew he couldn’t afford) with a risky mortgage. He said, “I’m not worrying. Real estate prices never go down.” I wasn’t about to get into an argument; he was a former football player and I was a former clarinet player.
The National Association of Realtors (NAR) said on Thursday that the median price of homes sold in December fell nearly 6 percent from a year earlier to $208,400. The three biggest declines in prices ever recorded have now come in the last four months.
That sounds to me like we’re in a downward trend. Anyone else agree? Merrill Lynch does. The company forecasts a 25% to 30% decline over the next three years in home prices. With predictions like these, I’m glad that I’ve had no reason to purchase a house in the last few years, particularly a house I may need to sell within a few years of buying.
Timing the housing market, like timing the stock market, can lead to financial ruin more often than not. When it comes to finally getting around to buying a house, I’ll do it when I’m ready, finding the best deal for what I want. Even though I’ll have to be aware of market conditions, when the time comes, I may not have the option of waiting for the market to begin improving.
On the one hand, your own home should not be viewed as an investment or worse, counted on to fund your retirement. It’s easy to forget that one spends an incredible amount of money to maintenance and upkeep expenses when you own a house. When people talk about the money make when they sell their house, they simply subtract the purchase price from the sale price, conveniently forgetting about all the expenses they paid, which should be added to the purchase price to determine the real profit.
On the other hand, a home is a major purchase. When spending so much money, it is prudent to consider market conditions, if not to help time your purchase, to at least be aware and prepare for risks that lie ahead.
Sometimes it can be better financially to continue renting than to buy. Would you (or did you) delay or rush the purchase of your home due to perceived market conditions?
Image credit: ♥ellie♥
Homes see first annual price drop on record [CNN Money]
Merrill Lynch says U.S. nationwide home prices may fall 30% [MarketWatch]
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