Expanded First-Time Home Buyer Tax Credit Becomes Law

By: Luke Mullins
Posted: November 6, 2009

In the hopes of sustaining the real estate market's recent momentum, Uncle Sam has made more than two-thirds of current homeowners and nearly all first-time buyers eligible for thousands of dollars in tax perks when they purchase a house. President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009 into law Friday, a day after the House of Representatives approved it by a 403-to-12 vote. The legislation includes language that significantly expands the popular first-time home buyer tax credit that was enacted in February. The development represents a big victory for the real estate and home building industries, which had to overcome concerns about the measure's costs while rallying support for its enactment.

 1. For first-time home buyers: While the value of the credit remains as high as $8,000, the new law pushes back the deadline by which qualified first-time home buyers must make their transaction in order to claim it. (The legislation defines "first-time home buyers" as anyone who has not owned a principal residence in the three years prior to making the purchase.) Under the previous law that went into effect in February, buyers needed to close the transaction by Nov. 30. However, under the terms of the new law, home buyers must have a signed sales contract before May 1, 2010, but they have until the end of June to actually close the transaction. At the same time, the new law raises the annual income limits from $75,000 to $125,000 for singles and from $150,000 to $225,000 for married couples. The changes make nearly all first-time home buyers eligible for the credit, according to Goldman Sachs economist Alec Phillips.

 2. For current home owners: In addition, the new law makes most current homeowners eligible for a tax credit of up to $6,500 when they purchase their next primary residence. Under the terms of the legislation, current homeowners must have lived in their home for five consecutive years over the previous eight to be eligible. Qualified home buyers can obtain the credit on homes purchased between Nov. 7 and the end of April 2010. That means they need a signed sales contract on a home before May 1, 2010, but they have until the end of June to close the sale. The income limits for current homeowners are the same as those for first-time home buyers. About 70 percent of current homeowners are now eligible for the credit, according to Phillips.

3. Additional specs: The credit can only be claimed on primary residences purchased for less than $800,000. And as long as they use the property as their primary residence for three or more years after the purchase, buyers don't have to pay it back. Furthermore, buyers can claim the credit on their 2009 taxes, even if the purchase was made in 2010 by filing an amended return.

4. Fighting fraud: The first-time home buyer tax credit became the subject of controversy in late October, when a Treasury Department inspector general told Congress that his office had identified hundreds of millions of dollars in questionable claims. The suspicious cases included taxpayers who claimed the first-time home buyer credit even though it appeared that they had owned residential property within the previous three years, as well as taxpayers who claimed the credit before actually purchasing the home. Hundreds of taxpayers younger than 18 years old—and at least one who was just four—also claimed the credit. And by expanding the initiative to include more than two-thirds of current homeowners, the potential for incorrect or fraudulent claims has only increased.

To that end, the new law includes measures designed to limit its abuse. Anyone claiming the credit must now provide documentation—such as a copy of their HUD-1 Settlement Statement—to prove that the sale has closed. In addition, it also bans anyone younger than 18 years old from claiming the credit.

5. Price tag: First-time home buyer tax credits have cost the government around $10 billion in lost revenue through Aug. 22. The expanded credit program is projected to cost an additional $10.8 billion or so. Amid mounting concern over massive government spending—the federal budget deficit for fiscal year 2009 was $1.4 trillion—some economists have questioned whether additional home buyer subsidies are really the best use of taxpayer cash. The financial blog Calculated Risk, for example, estimates that the February first-time home buyer tax credit cost the government roughly $43,000 for every additional home sale it generated.

Economists at Goldman Sachs have estimated that the February first-time home buyer tax credit would trigger an additional 200,000 sales by the end of the year. Mark Zandi, the chief economist at Moody's Economy.com, puts the figure closer to 400,000 by the end of November. Nevertheless, Goldman's Phillips argues that the new law won't have a game-changing impact on the housing market. That's because only 14 percent of first-time home buyers who had been ineligible for the credit can now participate thanks to the higher income limits. Meanwhile, the credit's expansion to current homeowners may increase sales activity. "However, these sales would not result in a reduction of the inventory on the market, since every buyer taking advantage of the move-up credit would necessarily be a seller (of their existing principal residence)," Phillips said in a report. Nevertheless, the expanded credit could boost home prices by about 1 percent, Phillips says.

5% of Americans plan to buy a home next year

 

By J.W. ELPHINSTONE, AP Real Estate Writer J.w. Elphinstone, Ap Real Estate Writer


NEW YORK – Just one in 20 Americans say they plan to buy a home within the next year, and they're most likely to be 34 years old or younger and living in the South or West, according to a survey released Wednesday.

Roughly a quarter of potential buyers said the No. 1 reason they would buy now is because prices appear to have bottomed out. That reason topped bargain-priced foreclosures, worries about rising interest rates and a wide selection of homes.

The survey, conducted for Move.com, a real estate listings site, reveals how Americans are responding to a nascent and fragile housing recovery after three years of staggering price declines. The percentage of buyers thinking of jumping into the market was down slightly from a March survey, but up about 1 point from a poll in June.

Home prices rebounded this summer at an annualized pace of almost 7 percent, according to the Standard & Poor's/Case-Shiller home price index. But with high unemployment and foreclosures clouding the picture, economists debate whether prices will dip again.

Recent housing figures and homebuilder earnings support a stabilizing housing market, and concerns about the expiration of federal homebuyer tax credit are moot after Congress last week extended and expanded the credit.

Buyers who have owned in their current homes for at least five years are eligible for tax credits of up to $6,500, while first-time homebuyers — or anyone who hasn't owned a home in the last three years — would still get up to $8,000. To qualify, buyers have to sign a purchase agreement by April 30, 2010, and close by June 30.

The survey was conducted before the credit extension.

Those surveyed widely favored federal policies that kept interest rates low and helped troubled homeowners avoid foreclosure over those that helped first-time homebuyers purchase a home. And, overall, 48 percent of those polled didn't think the government was doing enough to stabilize the housing market, whereas 42 percent thought it was.

Forty-five percent of Americans worry that they or someone they know will face foreclosure in the next year. And almost 30 percent of those with a mortgage have contacted their lender in the past year to reduce their payments.

One of the survey participants, Joe Handley of Harrington, Del., called his lender last December to consolidate a second mortgage and cut his interest rate from 6.75 percent to 5.25 percent.

"We wanted to build up our savings for emergencies," the 37-year-old said.

His timing was prescient. In July, Handley, who works in the information technology department for the State of Delaware, took a pay cut and the $400 monthly savings from the new loan has helped cushion the blow.

Almost a quarter of Americans who refinanced their mortgages have used the savings for living expenses or paying down debt, the survey found. Less than 9 percent are putting the savings toward investment or retirement.

The telephone poll, which included about two-thirds homeowners and one-third renters, was conducted in October by market research firm GfK. It had a margin of error of plus or minus 3 percentage points.