Tax credit: Home buyers get a second chance

  • Article by: KARA MCGUIRE , Star Tribune
  • Updated: November 6, 2009 - 6:28 AM

Under the extended, expanded tax credit, people will now have until April 30 to buy a first home or trade up.

House hunters will get an early holiday gift from Congress. Hoping to keep the fragile housing market humming along through the winter months, Congress voted to extend and expand the home buyer tax credit. President Obama is expected to sign the bill today. The credit, which was set to expire on Nov. 30, will allow first-time home buyers with higher incomes to qualify for the $8,000 credit in this round. Existing home owners who have been in their house for at least five consecutive years also will be eligible for a $6,500 credit.

To squelch fraudulent tax credit claims, buyers will also have to attach documentation proving purchase to their tax return.

Minnesota real estate agents say the first home buyer tax credit helped to clear out inventory in the lower price ranges dominated by foreclosures. Supply in the under-$120,000 category is down 58 percent in November compared with the same period last year, according to data from the Minneapolis Area Association of Realtors. Nearly two-thirds of all 2009 sales took place in the under-$190,000 price range.

RE/MAX Home Realty agent Pete Kiron is hopeful that offering the $6,500 to existing homeowners will help whittle down inventory in the $200,000 and higher price range. "It's going to get a lot of people off the sidelines in the higher dollar amounts," he said. Interest rates averaging below 5 percent for 30-year mortgages are also coaxing buyers into the water. Experts expect rates to tick higher in 2010.

"I think people are seeing there may never be a better time than right now," Kiron said.

For Coldwell Banker Burnet agent Todd Walker's more skittish clients, the $6,500 will give them the confidence to set foot in the marketplace because "they know there's a little bit more protection against some possible soft prices that still exist in different areas of the metro and at different price points," he said.

For other move-up buyers, the credit will make it possible to sell their first home and trade up, even if they have little equity left after the housing downturn. Although Minneapolis-St. Paul area home prices have risen two months in a row, median home prices in August were still 13.7 percent below August 2008 levels according to the Standard & Poor's/Case-Shiller national home price index released last week.

Ronny Loew, a LandmarQ Lending mortgage consultant, pointed out that the $6,500 credit can be "the difference between being able to pay seller-paid closing costs or not, it's the difference between being able to pay Realtor commissions or not on a decent-sized home."

The extension will also give buyers stuck in short-sale limbo as well as buyers who couldn't close by Nov. 30 a second chance. Because the existing credit was set to expire the Monday after Thanksgiving, closers had been reporting schedules jam-packed with first-time home buyer deals throughout November. Loew's company stopped scheduling mortgage refinances after mid-November to get as many buyers as possible through the tax credit bottleneck.

Under the extension, home buyers with contracts as of April 30, 2010, can receive the credit so long as they close by June 30.

The downside

Not everyone is thrilled that the credit is continuing.

With sales in the Twin Cities metro area picking up from a year ago, St. John's University economics professor Louis Johnston doesn't see why we need more financial incentives for housing ownership. "We already have the mortgage interest deduction to encourage people to buy houses rather than rent. This is just putting another tax credit in the pocket of people who would be buying houses anyway," he said. "My fear about this tax credit is it's just a way to avoid the pain or push the pain off a little farther."

Other economists argue that the credit will artificially keep home prices high, preventing prices from truly hitting bottom.

Expanding the credit will cost an estimated $10.8 billion, according to Congress' Joint Committee on Taxation.

University of Minnesota economics professor Chris Phelan says incentives like these train consumers to wait on the sidelines until someone sweetens the pot. Think of car buyers waiting for auto dealers to offer zero percent financing or shoppers holding out for sale prices at the mall.

"As soon as it looks like there's going to be a housing slump in the future, anyone in their right mind would say, 'Why should I buy a house now? If I wait three months, the government's going to give me $8,000 to buy a house,'" Phelan said. "What that means is that the mere thought of a housing slump causes a housing slump."

Walker, the real estate agent, doesn't disagree. "It's potentially a huge problem," he said. He figures buyers who would typically wait until after the Super Bowl or until school ends next spring to start their housing hunt will try to find a house before the tax credit expires April 30. Will there be any buyers left in the typically busy spring and summer months? That's anybody's guess.

Neighborhood stabilization

Others say simply looking at the benefit to home buyers and sellers is missing the point. The tax credit could create jobs and improve neighborhoods.

"Building homes is not just an employment base for those who actually build them; it's an employment base for all of those that make all the materials that go into them," said George Karvel, a real estate professor at the University of St. Thomas.

Said Chris Galler, chief operating officer for the Minnesota Association of Realtors: "The neighborhood stabilization piece of this has been very underestimated. I think all you have to do is talk to people in neighborhoods where values are falling, and we're starting to see a lot more people that owe more on their house than the house is worth ... because all of these foreclosures are dragging the prices down so much."

Karvel's message to the critics: "Everybody should be glad that we're going to do it. Not because we like giving out subsidies, not because we like having a bigger deficit, but our mutual best interest is going to be served if we can get past the stage of having too many houses built and available for purchase."

Kara McGuire • 612-673-7293

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