President Obama signed into law on Friday the extension of the first time home buyer’s tax credit, putting in our hands $24 billion of stimulus money. This is huge any way you slice it (and it can be sliced a couple of ways), but first the particulars:
First Time buyers can get up to a $8,000 tax credit if they buy a home before April 30, 2010. The salary limits have been raised from $75K / $150K (individuals / couples) to $150K / $225K. That alone qualifies many buyers that were not eligible before. Existing home owners who have lived in their home for five years are also now eligible for up to a $6,500 tax credit. That, too is a significant change. Only homes under $800K are eligible.
What does this mean? Let’s look at a $500K house (which in my market is a first time buyer). $8,000 can certainly help with closing costs, or improvements. Those are good things.
If we do some math however, we see that $8,000 is just over 1.5%. If I were to borrow an extra $8,000 for 30 years at 5%, I would be paying $43 more a month. I’m not looking at $43 a month gift in the mouth. I’ll take it, but I’m not buying a house I wouldn’t have otherwise because of it.
Is the value more psychological? If it is, I don’t discount its impact, I just put it in a different category. Those of us that have been frustrated at expensive deals falling apart over much much less than $8,000, know how much can ride on stubborn positions and clients that just have to beat the other guy.
Move up buyers can benefit as well (to to $6,500), but they are already in great shape. They are presumably buying a home that has depreciated more than theirs has, and are getting an interest rate that’s likely lower than they already have. Let’s assume our trade up buyer is buying a $700,000 home, the tax credit for him or her is less than 1%. Again, not nothing, but is anyone in their right mind walking away from their dream home for less than one percent when they are already getting a great relative value with amazingly low interest rates?
The 800 pound gorilla in the room are move down sellers; either empty nesters or people simply wanting or needing less. If they bought at the height of the market, their home will need some time to appreciate there again. Clearly if they don’t have to sell, that might be their best option, but I would have liked to see some relief for those folk, too. They may not be able to claim capital losses (depends on their particular situation) and they have the homes that trade up buyers want. If they bought seven years ago, they’re golden (even with the downturn), but if they bought more recently...
I don’t want to be a wet blanket on the extension, and I don’t agree with the naysayers that it won’t have a positive impact. It’s going to provide for a very interesting spring market for many buyers and sellers. That said, I disagree with all those 'free government money' claims. It's not free if our tax dollars have to cover it or we dump the debt on our kids.
It’s important to keep this in perspective though so that people make the best choices for their particular situation taking all the factors into account with the appropriate importance. I put the tax credit as a solid C plus in importance behind home price, taxes, INTEREST RATE, and the single most important thing: Is this your dream home and is this the right time for you?
Agents out there, you know where to send your hate mail.
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