Tuesday, August 19, 2008

Signs of change for the good in Real Estate Housing!

Pending sales for the week ending August 9 were a startling 21.0 percent higher than one year ago, posting 900 sales as compared to 744 a year ago. While one week of such robust increase doesn't justify the opening of stored champagne bottles, it is another welcome sign of reviving buyer demand. While a highly productive number in its own right, the year-over-year increase is somewhat amplified by just how slow August of last year was, as that is the specific month in which tightening lending standards began to take root.

New listings declined by 11.3 percent for the same time period comparison, and the total number of active properties for sale is currently 6.4 percent lower than it was one year ago. With foreclosure and short sale activity increasing, the declining supply underscores just how many traditional sellers are waiting this market out by not placing their homes up for sale.

This information supports a 3 month trend we've seen in the local housing market where sales have been even with last year or up a small percentage with the inventory of listings shrinking. I've been reluctant to send out weekly or even monthly reports because of the possibility of these trends being temporary. Fortunately they have continued for a 3 month cycle.

The new dynamic coming at the end of September is the newly legislated rules and tax incentives for home buyers using the new 1st time homebuyer credit program to purchase their home. If the program works, it will continue to support the postitive trend happening in our local market.

Here's a summary and commentary from the National Association of Realtors Economist on the program:

Homebuyer Tax Credit
By Danielle Hale, Research Economist
Buy a home and you get a tax break!

As part of the Housing and Economic Recovery Act of 2008, a First-time Homebuyer Tax Credit is now available. However, this limited-time tax break ends in mid-2009. A homebuyer tax credit has been available for first-time homebuyers in Washington, D.C. for many years, and now first-time homebuyers nationwide can take advantage of a similar benefit. In this commentary, I'll give a quick overview of the credit-something every Realtor® should know. For further details, you can consult a longer PDF available here (328K PDF) or consult a Q&A put together by NAR's government affairs team (161K PDF).

Who is Eligible?
First-time homebuyers who purchase a principle residence on April 9, 2008 and before July 1, 2009 are eligible for the credit. A first-time homebuyer is someone who has not owned his/her principle residence for a 3-year period before the date of purchase, and someone who has never taken advantage of the DC first-time homebuyer credit. In the case of married couples, both must be first-time homebuyers. For other groups purchasing a home, the statute is unclear. Purchasers should consult a tax advisor.

How does it work?
The credit directly reduces the total amount of taxes owed and is refundable. When the buyer files his/her taxes, for the year he purchased his home (2008 or 2009), he will be able to subtract the amount of the credit from his Federal income tax liability, increasing his refund or reducing the amount he owes.

How big is the tax credit?
The tax credit is equal to 10% of the purchase price of the home up to $7,500. The full credit is available for single buyers whose adjusted gross income is less than $75,000. If the buyer's adjusted gross income is greater than $75,000 and her home purchase qualifies her for the full credit, the credit phases out according to the chart below.
For married couples filing jointly, the credit begins to phase out at an adjusted gross income of $150,000 per this chart.

What about Repayment?
The tax credit is not completely free money for buyers to keep. It has a payback provision that makes it similar to an interest free loan. Two years after the credit is claimed, buyers begin repayment so that the credit is paid back in full over the course of 15 years. For those qualifying for the full credit, the payback amount is $500 per year. Those getting less than the full credit pay equally over the 15 years (which is a rate of 6.67% per year). If a qualifying home is resold before the credit is repaid, the seller will have to immediately pay the outstanding balance of the credit. If the home is sold at a loss, then nothing more is owed.

What's valuable about a credit you have to repay?
Money today is worth more than an equal amount of money in future, which economists call the time-value of money. First, money loses its purchasing power over time due to inflation. Second, you can use the money today to earn interest and repay the principal later-all the while keeping the interest for yourself. For this reason, multimillion-dollar lottery winners prefer taking a lower lump-sum amount than the multimillion dollar amount spread out over many years. Real examples in the PDF will help you illustrate this point to potential buyers.

Are there other conditions I should know about?
Buyers cannot claim both the DC and the national First-time Homebuyer tax credit
Purchases by non-resident aliens and purchases financed by proceeds from a qualified mortgage issue are not eligible.
Any single family residence located in the United States that will be used as a principal residence is eligible. Generally, this is the place where an individual spends most of his/her time. This includes single-family detached housing, condos or coops, townhouses or any similar type of new or existing dwelling.
The credit will not result in an individual owing additional federal taxes under the Alternative Minimum Tax.
Home purchases between relatives and other gifts of residences are not eligible for the credit.
Other tax benefits of homeownership are still in place. Mortgage interest deduction, capital gains tax exclusion, and property tax deduction are some well-known examples.
For more specific questions about the tax implications of the credit, please consult a tax professional.

Buying a first home is a big step!
Buying a first home is a big step. Fortunately, Realtors® are willing and able to help buyers through the process. In addition to the many benefits of homeownership, the homebuyer tax credit and more affordable prices make now an especially opportune time to purchase for the buyer who is mentally and financially prepared for the commitment.
Other Resources for First-time Homebuyers:
For more information on the housing bill, read more >
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.


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