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Extended Gov’t Tax Credit
The $8,000 credit was scheduled to lapse on Dec. 1 but will now be in effect through the end of June.
Homebuyers must sign a contract before April 30 and close by June 30. The income limits were also raised: Single buyers can now earn up to $125,000 and still get the full credit while a married couple can earn $225,000.
The bill also made more homeowners eligible to claim the credit on their taxes. First-time buyers — those who have not owned a home in the past three years — still qualify for an $8,000 rebate. But now people who want to trade up can also qualify. Those who have owned and occupied a residence for at least five years out of the past eight can claim a $6,500 tax credit if they close on a purchase by the end of June.
The new version of the tax credit has the potential to stimulate the housing market even more than the old version due to the fact that more people will qualify under the new rules.
Who qualifies?
Here’s four scenarios illustrating how the tax credit rules for existing homebuyers will apply:
1. Harry owned a home in 2001 and 2002 but sold it to relocate for a job. He would qualify for the $8,000 first-time-buyer credit because he has not owned a home in the past three years.
2. Sue purchased a home in 2004 and has lived there since. If she decides to buy a new home, she would qualify for the $6,500 tax credit because she has lived in the same residence for five consecutive years in the past eight.
3. Jane purchased her home in 2002, lived there for five consecutive years before she rented it out in 2007. She would qualify because she was an owner/occupier for at least five consecutive years in the past eight.
4. Mark purchased a home in 2006 and lived there for the past three years. He would not qualify because he is neither a first-time homebuyer nor someone who lived in the same primary residence for five consecutive years out of the past eight.
How it helps the economy
Legislators and industry experts expect that the credit will encourage buyers such as Jane and Sue to move up their purchase plans.
“This bill will shift demand from the second half of 2010 into the first half,” said Pat Newport, a real estate analyst with IHS Global Research. “As a result, home sales and prices will get a boost in the first half of 2010, with payback in the second.”
That’s not a bad thing, according to Bill Kilmer, vice president of advocacy for the National Association of Home Builders. It’s important to stabilize real estate markets quickly to help bring the economy out of its tailspin.
The original $8,000 tax credit appears to have helped accomplish that goal: Home prices have inched up the past few months, according to the S&P/Case-Shiller Home Price Index.
Would it have happened anyway?
But critics still see the program as being ineffectual because it rewards buyers who would have purchased a home anyway. Newport estimates that fewer than 400,000 of the 2 million who have claimed the original credit made their purchases solely because of the tax advantages.
Furthermore, buyers do not, in reality, receive the entire benefit. “The credit helped prices stabilize,” said Newport. “So the credit has been split between seller and buyer. The sellers are getting higher prices and buyers paying more than they would have without it.”
The housing industry, however, is pleased with the extension, although the credit has not been quite as effective as they hoped.
The industry thought the credit would provide a ripple effect, with sales to first timers triggering as many three additional “move-up” sales.
That did not happen, according to Lawrence Yun, NAR’s chief economist.
“It did not have the chain reaction impact it was supposed to,” he said. “Instead, many first-timers turned to vacant, foreclosed or other distressed properties the sellers of which were unlikely to be move-up buyers.”
So, the tax credit helped prop up the low end of the market without having much impact on the rest of the spectrum. Expanding the benefit to existing homeowners should boost those segments. That should produce additional benefits, according to Yun.
“Preventing further price decline or even nudging prices up a bit stabilizes housing wealth, which makes homeowners more comfortable in their spending,” said Yun. “They’re more likely to go out to the stores or buy a new car. That provides a boost to the overall economy.”
Is That Crashing Sound Your Homeowner Association?
The housing market has been taking huge hits over the past few years because of economic conditions, but one segment of real estate will have more than its share of problems… condos!
If you have a home with a Home Owner’s Association, or contemplating buying a home (condo, townhouse, etc) with a HOA, you need to investigate its financial viability.
Questions to ask your HOA representatives:
1. How many units are presently in arrears in paying their dues?
2. How many units are in foreclosure, or have Notice of Defaults against them?
3. What is the condition of the HOA reserves?
4. Are there any potential HOA fee increases, or special assessments scheduled?
5. Is there any pending litigation against the complex?
6. What is the percentage of non-owner occupied units in the complex?
7. Is the complex FHA approved?
Hopefully your HOA is in great shape, but don’t take it for granted that even though it’s been fine in the past, you don’t have to stay on top of it. Reality, many HOAs have substantial financial pressure being put on them due to homeowners’ non-payment of dues, bankruptcies, or units going into foreclosure. As the financial condition of the HOA deteriorates, the underfunding of the reserve accounts can become critical. This will put more pressure on the homeowners that are still paying their dues, to cover a higher percentage of the complexes overhead. Expect higher HOA dues and special assessments to recapitalize the depleted reserve account.
To make matters worse, no matter what you hear in the media about the government helping with real estate financing, the loan underwriting guidelines have tightened substantially on condos. Instead of the old standard 80% loan to value, lenders now demand higher interest rates for condos over 75% LTV. Fannie Mae won’t purchase mortgages in complexes in which more than 15 percent of the owners are 30 days late paying their association fees. Also Fannie requires that 70 percent of units in a new building be presold – up from the previous 51 percent standard. All these factors discourage lenders from approving condo loans.
Piggy-Back secondary financing is gone. PMI (Private Mortgage Insurance) needed for condo financing over 80% LTV for condos in “soft market” counties like Los Angeles, has become non-existent. Only if the condo complex is FHA approved is a high LTV loan possible.
If a complex is in trouble and a buyer can’t get an attractive loan, the resulting smaller buyer base will contribute to the values dropping more than they would if it was only market driven.
If an existing owner is over encumbered, or can’t refinance into a more attractive rate, while being pressured by the HOA to pay higher dues, they may default, perpetuating the negative cycle.
Ask your HOA representatives questions asap so you can make informed decisions.
Author is Ron Henderson, President/Broker of Multi Real Estate Services, Inc. California License #00905793. Contact Ron at ronh@mres.com
