After waiting with bated breath for what seemed like a considerable amount of time, the Homebuyer Tax Credit Extension/ Expansion was recently passed overwhelmingly by Congress and signed into law by President Obama. So what does that mean to our local market and the economy overall? Ideally, the plan will transform the dream of homeownership into reality for many more credit-worthy homebuyers and will increase consumer confidence nationwide.
The basics of the legislation are two-fold. First is that the First-Time Home Buyer Tax Credit of up to $8,000 has been extended until April 30, 2010. The property needs to be under contract by this deadline, but the purchaser has until July 1, 2010 to close the transaction. To be considered a “first-time home buyer”, the purchaser or his/her spouse cannot have owned a home during the three years prior to the purchase at hand. Secondly, there is an addition to the legislation that grants up to $6,500 in tax credit to current homeowners who purchase a new or existing home between November 7, 2009 and April 30, 2010. Current homeowners who qualify for the lesser credit must have used the residence that is being sold or vacated as their principal residence for five consecutive years out of the last eight years. For both of these credits, the home being purchased must be a single-family home, condo, townhome or co-op which is the primary residence. As before, the buyer is not required to repay the tax credit so long as he/she occupies the property for three years or longer. If the home is sold during this three year time frame, the credit will be repaid in full from the proceeds of the sale.
During the annual National Association of REALTORS® (NAR) conference last month in San Diego, Chief Economist, Lawrence Yun, highlighted many ways in which these tax credits prove essential to preserving the middle class economy. The impact of the 2009 housing stimulus package is estimated to have boosted home sales by 350,000 to 400,000 above normal for first-time home buyers in 2009. In many areas, inventories are decreasing and prices are stabilizing. We have also witnessed eight straight months of rising pending sales. The first-time home buyer market and sales under $200,000 are the properties that are predominantly driving the real estate recovery. The aggregate national home inventory levels have declined to an 8 month supply. The historic average is 6 months. Yun further notes, “the pent-up demand is significant. In 2000, there were 11 million renters who were credit worthy and could afford to buy a median priced home. In 2009, there are 16 million renters who are credit worthy and capable of purchasing. They are creating demand for entry level housing. In 2010, there may not be a net change in inventory levels, but months of supply will continue to decline.”
One especially noteworthy point that Yun brought home is that the tax credit is essential to preserving middle class wealth. For most Americans, their home is their single largest asset. Even though from a homebuyer’s perspective there is no considerable difference between an $8,000 tax credit and an $8,000 price reduction, on a $200,000 purchase price, it represents a 4% savings either way. However, if property values are to decline an additional 4% from current prices, home values for all homeowners are reduced, whether they are actively trying to sell their home or not. This translates to a $730 billion destruction of housing wealth which in turn affects consumer confidence and spending. From a home seller’s or a home owner’s perspective, it is extremely significant. Plus there is a substantial difference for the economic health of the middle class and the mindset of consumers, especially home owners.
Both the leadership of NAR and tremendous effort by REALTORS® across the nation were instrumental in keeping this action moving forward. With a Senate vote of 98-0 and the House vote of 403-12 (including positive votes by Montana Senators Max Baucus and Jon Tester and Representative Dennis Rehberg), it is clear that those in charge of making our laws were confident that this extension/expansion was important to the American economy and recovery.