For those who want to take advantage of the $8,000 tax credit, time is running out – unless of course, it gets extended…….which doesn’t appear to be a slam dunk, because of that pesky little problem of having to pay for it too.
Should the tax credit not get extended, don’t be surprised if the market loses some of its current luster, as frustrated buyers pack it in for the holidays. Heck, just the bidding wars and tsunami threats have to be making buyers think about taking a break anyway.
From yesterday’s U-T:
An excerpt:
It now appears likely that there will be an $8,000 tax credit available a year from now — at least for some purchasers. Which raises the question: Why not leave it in place for all first-time buyers?
There’s growing support for that on both sides of the Capitol, but there are also some complicating issues. In the Senate, the most outspoken advocate for months has been a Republican, Sen. Johnny Isakson of Georgia, a former real estate broker. He wants not only to extend the credit to Dec. 1, 2010, but to raise the maximum to $15,000, and make it available to all home buyers next year.
But recently, key Senate Democrats produced their own version of an extension, limited to six months, retaining the ceiling at $8,000 and targeting only first-time purchasers. The bill’s primary sponsor is Sen. Benjamin Cardin, D-Md. Democratic co-sponsors include Majority Leader Harry Reid of Nevada and Debbie Stabenow of Michigan. Republicans John Ensign of Nevada and Isakson have signed on as well.
In a statement, Cardin raised what may prove to be the crucial issue affecting the scope and duration of any credit extension: Cost. “A six-month extension is a fiscally responsible way to provide adequate time to nudge even more prospective home buyers off the sidelines,” he said.
Estimates of the revenue costs of the current credit vary widely, from $3 billion to $8 billion and up. How do you pay for any extension without worsening the budget deficit?
The new Rangel bill includes the answer: You raise taxes somewhere else — you “pay as you go.” The Rangel bill pays for most of the servicemen’s credit extension by increasing IRS penalties on taxpayers who fail to file partnership or “S” corporation returns.
This would raise an estimated $327 million over the next 10 years. Where and how to raise taxes to cover the far larger cost of a six-month or 12-month extension of the current tax credit could prove much more controversial.
“A six-month extension is a fiscally responsible way to provide adequate time to nudge even more prospective home buyers off the sidelines,”
How in the world is spending more government money “fiscally responsible”?
Let prices fall. I promise you people with money will buy them. It’s how markets work. The more government tries to intervene the worse problems will become.
The $8k tax credit infuriates me. Apparently I’m too poor to buy a home, but too rich for assistance. Thank you socialist government. Can I at least get some cheese?
Why are people so ignorant about basic economics? When you give out free $8k, it really doesn’t help anyone, the prices of all homes just go up by $8k. For example, if they gave out $100k, the price of all homes would go up by $100k as people try to outbid each other with the free $100k. Are people this ignorant about economics or is it just the politicians?
Of course they will extend it. I bet they’ll increase it.
Uncle Sugar is going to do everything they can to prop up the housing market. It’s in their best interest. These banksters have to get the sheeple spending in order to keep their fiat ponzi scheme going.
However, it’s only a matter of time because ALL fiat based monetary systems collapse eventually.
It’s just corruption that benefits a particular industry dressed up as helping poor people take on long term debt obligations that many won’t be able to live up to.
The other thing it does is get the government to step into the zero down lending that devistated private lenders previously. People are able to use the $8k to pay a downpayment on a 3% FHA mortgage.
gotta love congress. we’ll pay $3B now for $0.3B spread over the next 10 years.
The problem with congress is that they run the US checkbook like their own households: buy now, pay later.
Everyone there needs to be shown a certain SNL skit.
This is known as bread and circuses. Handing money out through legislation is nothing new, nor is it illegal or even generally considered corrupt over the last 200+ years of our history. Rather, it’s up to you to vote them out if you don’t like it. The problem with Democracy is you usually get only two choices (if any at all).
The $8K credit is gift to the seller, not the buyer. It enables the seller to prop their price up higher than otherwise possible. The bigger gift to the seller is, however, the Fed buying $1 trillion in mortgages, which is set to run its course in March. The Fed has purchased approximately 80% of the mortgages being sold right now, which has kept rates down.
Hypothetical scenario:
With 5% mortage rates, a $342K fixed-rate mortgage has a monthly payment of roughly $1840.
With 6.25% mortage rates (which is low compared to historical standards), a monthly mortgage payment of $1840 translates to roughly a $300K mortgage.
Add in the $8K tax credit, and you can make a reasonable argument that gov’t intervention enables the seller to sell the hypothetical house for $50K more than without the intervention.
If mortgage rates rise because banks demand a higher risk premium than the Federal Reserve to hold mortgages, next year’s spring selling season could face a bigger headwind than the $8K tax credit not being extended.
It is my understanding the the $8,000 tax credit may be added to the borrowers 3 1/2% down payment to increase that downpayment, but not as a part of the 3 1/2% downpayment
The $8k tax credit infuriates me. Apparently I’m too poor to buy a home, but too rich for assistance. Thank you socialist government. Can I at least get some cheese?
Genius | September 28th, 2009 at 10:24 am
Somebody making more than $75k if single, $150k for a couple (the income limits before the tax credit phases out; slightly higher incomes can claim partial credits) most certainly can afford to buy a house.
Now, they may not be able to afford to buy a house in the city where they want to, but believe me, out here in Riverside, and in thousands of other cities throughout the country, there are millions of houses one can afford to purchase on such a salary.
I must be missing something… can someone explain to me why an $8,000 tax credit would raise the price of the house by $8,000? The way I understand it to work is that the credit can be used immediately towards a down payment, or you can apply it when you file your taxes, and is applicable only to people who make less than 75k (married < 150k). I understand that if you add more buyers into the market, then there will be more demand for houses in the neighborhoods where these people will be buying, but I think that this pricing effect is marginal compared to the amount of houses that actually need to be purchased (including shadow inventory).
The down payment on a $342k house would be $68,400. So, when you apply the tax credit to this, you would only have to pay $60,400 out of pocket, and the government would front the rest as a tax cut to it’s receipts. If someone does buy a house using this tax cut, they need to stay in the house for at least 5 years, or else they need to pay it back. I’d surmise that the reason for the five years is that the government will recoup the tax credit in future property taxes. I’m not sure what the property tax rate is, but one half percent on a house valued at $342,000 would be something like $1,700. Multiplied by five, that puts it at slightly over $8,000.
Personally, I don’t see the correlation between why an $8,000 tax cut to a small (this is a total guess on my part as to the size) demographic of people (income requirements, first time home buyer, etc) would drastically raise the house prices across the market compared to other market inefficiencies such as those perpetrated by the banks. I personally think that banks withholding shadow inventory goes a lot further into artificially propping up prices then a tax cut to a smaller subset of people.
Given the massive credit retraction going on right now, the intent of the housing tax cut (or tax credit if you will) seems to be something that puts more money into the hands of the people (granted, a potentially small group) instead of in the hands of the government, and seems to be fiscally responsible in that it pays for itself around five to ten years later, and turns a profit thereafter so long as prudent lending practices are used…and that’s the biggest IF in that entire equation. I wouldn’t classify this as “government cheese” at all though if lending practices are prudent.
Sorry for the length of this post. It wasn’t my intent to hijack Jim’s comments.
– JP
Jeff,
Good question. This is a topic about which many could use some clarification.
First, regarding the tax credit being used toward the down payment:
Today’s announcement details FHA’s rules allowing state Housing Finance Agencies and certain non-profits to “monetize” up to the full amount of the tax credit (depending on the amount of the mortgage) so that borrowers can immediately apply the funds toward their down payments.
http://www.hud.gov/news/release.cfm?content=pr09-072.cfm
With 3.5% FHA financing, and the $8,000 tax credit, the $8,000 can be used as the full down payment on a ~$228,000 house. It’s very common to have a seller kick in 3% (or more, if done outside of escrow) toward closing costs, which gives a buyer another $6,840. This should definitely cover the costs on a $228K purchase.
Essentially, the govt has enabled 100% financing again. While the FHA loans do require a borrower to actually qualify for the loan, the terms are still pretty loose compared to private market loans under similar conditions — which is why the FHA exists in the first place.
The fact that these programs suddenly “qualify” people who were totally unable to qualify in the private market means that A LOT of new demand has been created out of thin air, no different than during the bubble. This increases prices by far more than the $8,000 credit, and the govt knows it.
While these loans might be somewhat safer than their no-doc, neg-am counterparts, these borrowers are VERY weak, and have NO skin in the game. My guess is that 30% or more will default within the next 5-10 years (at least that’s CA renter’s prediction). 😉
Hi CA Renter,
I think you are mis-interpreting the rules of the tax credit. According the the rules in the link you’ve provided, you can apply the tax credit as follows:
Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent down payment on the purchase of their home. Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today’s announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate.
This backs what Desert Realtor had indicated in an earlier post, that the credit can only be applied after a 3.5% down payment from the buyer. Although it isn’t as much skin as 20%, it’s still some skin, and it certainly isn’t government backed 100% financing.
FHA loans definitely have more of a lax lending standard on the down payment aspect, but I don’t know if I would say it’s far more lax than private banks. For instance, FHA loans require that you cannot spend more than 31% of your monthly income on mortgage + property tax + insurance. Additionally, you aren’t allowed to have more than 43% of your income on total debt payments of any kind, which means that you can only have about 43% – 31% = 12% of your monthly income tied to debt prior to getting an FHA loan. That’s a pretty stringent requirement for most Americans, who carry around something like 30% of their income in debt of the worst kind like credit cards.
Overall, I still don’t think you’ve proven that the tax credit is necessarily a bad thing, but I thank you for your input just the same.
From the same link:
Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their downpayments via secondary financing provided by the HFA or non-profit. In addition to the borrower’s own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the downpayment.
IOW, they can still use the credit toward the 3.5% down payment, even if they might have to obtain a bridge loan or other interim financing to do so.
BTW, someone who earns $100K or less is in big trouble if their debts alone (including mortgages) are taking up 48% of their gross income.
Correction: 43%, but it still applies, IMHO.
Keep the conversation going! I find this discussion over the $8,000 credit fascinating. I don’t consider myself a “first-time homebuyer” but I do fit the parameters in the legislation that expires November 30th. We’ve owned three homes, but I have rented since late 2002 in CA.
Personally, I’m not a fan of bailouts. Re: the credit, yes, I already have 20% DP, stellar credit, and no debt, but I’d be a fool to walk away from any tax credit that I’m legally offered. I’ve paid so many taxes over the years (who hasn’t?). I’m just trying to make heads or tails out of it all.
I’m waiting to see what happens in October with Congress’ activity or not. For me, $8,000 can help pay for moving costs, window treatments, a lawnmower and other necessary items any home buyer may need.
OT, Jim, did you see this article over on MSN Real Estate? There’s no date, but would love to hear your two cents. Its entitled: “Ten Things Your Real Estate Broker Won’t Say”. http://realestate.msn.com/article.aspx?cp-documentid=21755590
Hi CA Renter,
I’d like to go over your follow up link a little closer:
Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their downpayments via secondary financing provided by the HFA or non-profit.
My interpretation of this statement is that a buyer will be able to use the $8,000 tax credit whether they are using a state HFA program or not. To me, this point isn’t really germane to the discussion of the $8,000 credit because that is a federal program whereas HFA’s appear to be state programs.
In addition to the borrower’s own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the downpayment.
This portion confirms that the borrower has to pay 3.5% of their own cash normally. If the person is able to secure that from their parents, I still think the buyer has skin in the game unless they really hate their parents. If they can secure the 3.5% payment from private financing, then the person lending them the money needs to do their due diligence or they deserve to get burned.
My Grandfather used to tell me that a good rule of thumb is to not buy any house that is more than 3 times your gross income. This seems to be the same rule that FHA loans go by as well.
Also, a debt load of 43% doesn’t make it worse or better if you make $50,000, $100,000, or $200,000 a year. It’s a proportion of your income, no matter what you’re income is. Given the high average price of homes in San Diego, I’d be willing to bet that 43% is on the lower end of most people’s debt load spectrum when you consider student loans, mortgage payments, insurance, car payments, credit cards, etc.
Consider that the median household annual salary in San Diego County is $52,192, and the median house price in the county is $425,000, you are already over the three times income rule of thumb on average for the entire county. The mortgage payment on a $425,000 house would be around $2,800 per month. A $52,192 salary pays $4,350 a month, which produces a debt ratio of 64%. In my opinion, I think more people than you realize are at over above the 43% debt threshold in the county.
Great discussion by the way!
I’m truely amazed by all these debt = wealth comments. 3.5% is a silly downpayment amount. Not only are FHA buyers going to be stuck paying more intrest on their mortgages. (if they don’t default) As boomers retire we’re going to end up paying more and more of their expenses. Because old people vote.
Shadash,
I’m not sure where you are getting the debt = wealth idea from. I was merely stating that I thought the $8,000 tax credit wasn’t all that bad overall. Given that most of the comments here appear to be generally conservative, I would’ve thought that a tax cut would be considered a positive, but it appeared to garner a lot of negative comments.
CA Renter was using the FHA loans in his examples of why he thought the tax credit was bad, but the main subject of our discussion wasn’t a down payment amount per se, it was whether the tax credit was generally a good or bad thing.
‘A LOT of new demand has been created out of thin air, no different than during the bubble. This increases prices by far more than the $8,000 credit, and the govt knows it.’
I couldn’t agree more.
I’ve lost track of how many I’ve been told, or overheard a variation of the following phrase:
“You should hurry and buy before the $8,000 credit expires!”
Two of my friends purchased recently, and I heard it from both of them as well.
I can’t even imagine how many conversations there have been between spouses, where one says it’s okay to bid more because of that credit. I can only imagine it’s been added fuel on all these bidding war fires.
Jeff P.,
Drop on by Calculated Risk and you’ll learn a bit more on the subject, like the fact that the $8K credit ends up costing the government $43K per additional home sold. Is that such a good deal for taxpayers?
‘I would’ve thought that a tax cut would be considered a positive, but it appeared to garner a lot of negative comments.’
A lot of people here have been waiting for this madness to end so they can buy a home they can afford without having to compete against a bunch of people with funny money.
These incentives are allowing people who yet again cannot afford these purchases to make them, and in doing so drive some prices up and delay corrections in others.
Just for a little added insult to injury, I’d wager most people who post here don’t qualify for the credit.
These same people probably think a 3.5% down payment is asking for serious trouble and/or gaming the system yet again. A 3.5% down payment might just get you 1-2 years of free rent these days!
At least that’s my viewpoint on it, because I fall into that category. 🙂
Jeff,
It looks like the tax credit was initially permitted to be used as a down payment, but that policy was changed, requiring the borrower to come up with the 3.5% outside of the credit — though it could come from family, etc.
Even so, after the transaction is closed, they can pay back the loan (to family member, etc.) with the tax credit, effectively making the 3.5% FHA loan a zero-down loan. It’s much easier to borrow 3.5% than 20%, and the 3.5% doesn’t have to be seasoned — it explicitly states it can be a “gift” from a family member or non-profit, etc.
This is where my confusion came from. Initially, it was permitted to be used for the 3.5% down payment, then HUD quickly changed their policy (rightfully so, IMO).
http://www.thetruthaboutmortgage.com/homebuyer-tax-credit-modified-to-require-down-payment/
Irrespective of where the down payment comes from, giving every new buyer $8,000 for “free” simply pushes up prices — not only because of the credit itself, but because it introduces new demand from people who would not otherwise be qualified to “buy” with a private-market mortgage. Additionally, many buyers who were previously hesitant to buy will jump in because of the perception that they are getting something for nothing (most people don’t realize it pushes prices up, negating any benefit). It does not benefit the buyer in any way.
Again, the credit is bringing in new demand from very weak borrowers during a recession. This is exactly what caused the “crisis” in the first place.
Personally, I think that any subsidies which artificially prop up the prices/costs of basic necessities (housing) are a very bad thing.
———————-
Also, a debt load of 43% doesn’t make it worse or better if you make $50,000, $100,000, or $200,000 a year. It’s a proportion of your income, no matter what you’re income is.
I would respectfully disagree. A family earning $100K per year, and allocating 43% of gross income toward debts is at a greater disadvantage than someone earning $200K and allocating 43% toward debts. The $100K earner would have $57K pre-tax to live on, while the $200K earner would have $114K to live on. When you consider that basic necessities account for a fairly static dollar amout for two equally-sized families, the higher earner is much better off when the DTI ratio is equal (or even higher).
I appreciate your perspective and input, Jeff. 🙂
The 8k credit is just an old retailers trick of sending out coupons for 5% off a product that is marked up 30% above what the product should cost. Sorry for the negativity, I’m having bi-polar bull bear fits in my head. Hey Jim it’s 3pm here and in two hours I’ll drink a Bintang for ya.
It’s impossible to disentangle the effect of lower interest rates and the $8k incentive. But between the two, they’ve raised prices in my neck of the woods (in the DC area) by about $40k over last fall.
If you want to judge how many buyers were spurred on by the $8k, look at what dropping the $10k for new home purchases did in CA. Permits fell off a cliff.
http://www.reuters.com/article/gc03/idUSTRE57N5QZ20090824
Hi Guys,
sdnerd: I don’t qualify for the credit either, and wouldn’t recommend anyone purchase a property with less than a 10% minimum down payment (preferably 20% of course). I tend to be fairly conservative personally, but I realize that there are a lot of people in California who like to have nice things, even if they can’t really afford it.
CA Renter: I obviously agree with you on every day life costs that someone making $200k will be better off than someone making half of that, but the salary ceiling for the credit is $75k per person. This flattens out disposable income disparity somewhat, but you’re correct that it still obviously favors someone making more money, which leads me to…
The Calculated Risk blog post referenced by TJ. For those that haven’t seen this post, it estimates that 5/6 of the credit is going to people who would’ve already bought without the credit, resulting on roughly a $43,000 cost per buyer based on NAR projections. While NAR projections tend to fairly dubious on average, I now see where there would be added costs from this credit, and Calculated Risk provides an excellent reason as to why most tax credits don’t work that well in that they aren’t targeted properly. The hidden costs stem from buyers that use the credit, but have households that are “doubled up” on occupants while they wait out the economic storm.
This is the information I was digging for, but didn’t really hear about from anyone as to the downside risks of the credit. I like to see numbers and data instead of opinions generally (Thanks TJ).
Thanks a lot for the input everyone. It’s amazing how screwed up this whole situation has become, and we still appear to have a long way to go before we get out.
The tax credit (bullshit bribe) boosts prices by more than 8000 dollars. It creates a flood of artificial demand that drives prices up by the TENS of thousands of dollars. It in no way is a direct infusion to the sold price, just a bunch of idiots eager for their prize money bidding up the prices on already-overpriced houses. $350k will get bid up to $375k, and the dumbass buyer thinks he struck gold because the taxpayers gave him an $8k bribe. People are unbelievably stupid, you know.
$8K is a psychological construct, and any movement in RE it causes will only serve to stanch the economic bleeding that will continue into 2013 and affect the housing market for at least a decade.
$8K will pay for about half of the annual private health insurance costs for a family of four, for about one ten thousandth of a second of the occupation of Iraq, and is about 8 x 10e-13 of the cost of the tax cuts given to corporations and the upper 1% earners over the past eight years.
No, this isn’t much help to CV RE investors and Oside flippers. So?
As I predicted a month ago. “fiscal conservatives” have suddenly found a budgetary conscience. I’m sure it’s a coincidence that this suddenly appears when a trickle of tax dollars dribbles toward the lower middle class and the poor. I just hope the R’s filibister it. That would be awesome.
I want to preface this statement by saying, I really do feel bad when I hear the sales price or interest rate that people pay for things sometimes.
If you look at the income restrictions, it seems the $8,000 tax credit preyed on people who really couldn’t afford homes.
It was the same bad credit sales pitch you get at the car dealership. Bad credit? No Problem! Trade in your car. We’ll give you a 10% rate and get you the car you need. Oh and there may happen to be some extra fees upon financing.
FHA closing costs are insane. People are paying $17,000 in closing costs. Now they are stuck with a huge house payment they can barley afford.
It really is kind of sad that our govt is becoming a used car salesman.
Oh wait it actually did that too with cash for clunkers.
tax credit what for? There is no bigger incentive than the right price. Get the REO´s rollin & let the market settle it. Its government (bailout) money anyway, which would be redistributed…
Yes, price is the greatest incentive for those that actually know the market. Most buyers are clueless. They don’t know where prices were before the credit started and demand flooded the market and created bidding wars. Their realtor likely won’t tell them this either, why ruin a good commission? No, the stupid buyer thinks that these prices are all discounts and now the loser taxpayers are going to give them 8000 bucks to buy them.