Tuesday, January 26, 2010

New Home Buyer Credits by the Numbers

Lately, Congress has been obsessed with encouraging people to buy houses. The Economic Recovery Act of 2008, the American Recovery and Reinvestment Act of 2009 and the Worker, Homeownership and Business Assistance Act of 2009 all included tax credits for people who buy a home, each one more generous than the last.

The most recent credit, passed last November, would give any person who hasn't owned a home for the past three years a tax credit equal to 10% of the purchase price, up to $8,000, so long as 1) the contract is signed before May 1 of this year and 2) the buyers subsequently live in the house as their principal residence for at least three years.

Of course, this is all subject to income restrictions. The full credit is available to single taxpayers with income of less than $125,000; joint filers earning up to $225,000; it phases out altogether at incomes above $145,000 and $245,000 respectively.

There's a smaller $6,500 credit for anybody who has owned and lived in the same home for five consecutive years during the eight years before buying a new residence. This credit might be appropriate for families who are looking to move into a larger home, or retired persons who might want to downsize their residence. (They, too, must live in the purchased house for the next three years in order to claim the credit, and the same income restrictions apply.)

There seems to be a rule in Congress that no tax initiative can ever be simple. To qualify for the credit, you can't buy a house from a relative, and you can't claim the credit if you can be claimed as a dependent on another person's tax return. The buyer or buyer's spouse must be at least 18 years of age, and the price of the home being purchased cannot exceed $800,000--which won't be a problem for people living in Youngstown, OH (median home price: $70,700, according to the National Association of Realtors) or Saginaw, MI ($61,400 median price), but might cause discomfort for some people living in San Jose, CA ($566,000) or White Plains, NY ($450,000). Another complexity: if you qualify for the credit, you can claim it on your 2010 tax return, or jump in the time machine and and claim it on your 2009 return.

If there is more than one buyer, and they are not married, the IRS allows them to give the full credit to whichever buyer qualifies for it. Thus, parents who earn more than the threshold income can buy a house for their son or daughter. If the kids pay something toward the purchase price, they'll be able to claim the full credit on their tax returns.

If you extend this trend a year or two, it's easy to imagine that eventually Congress will be buying everybody a nice house with taxpayer dollars. But is further stimulus necessary? Mortgage rates are near record lows, and home mortgage interest is still deductible. The National Association of Realtors, which tracks home sales, found that existing home sales were up 5% in 2009 over 2008; overall market activity is up 21% from the bottom. According to statistics from the Department of Housing and Urban Development and the U.S. Census Bureau, a supply of 7.2 months worth of new homes is available for purchase--close to the 6 month level that is normal for a healthy market. The average sale price dropped 12% last year, but gained 1.5% in December, which means your home may finally be gaining in value again, as buyers finance their purchases with tax dollars.

1 comment:

Unknown said...

And one has to wonder, how many people out there are willing to buy a home under this credit that weren't under the previous two? Is that really a significant number? I'd have to believe they are people that weren't ready to buy then, are now, and would purchase now anyhow regardless of the credit. This is just icing on a cake they already had on order. What it does to all of us that own property is keep prices down by the amount of the credit, which is certainly preventing me from refiing, cashing out and buying another investment property, which if I were able to do it, would benefit the housing economy genuinely without the negative aspect of keeping prices down.