Fifteen Thousand Dollars

Is it a credit? Loan? Gift from above?

The effect of this bill/amendment/law/stimulus/thing will be a matter of perception – perception by buyers as to whether they just gained $15k and be sellers as to whether they should hold out for a higher price because the buyers now have $15k more.

Two of the best posts I have seen (please feel free to point out others) -

Jay in Phoenix

If the bill passes both the House and Senate, and is signed into law by the President (which is expected, currently. Possibly by the end of the week) then an amount equal to 10% of a home’s purchase price, not to exceed $15,000, could be applied as a tax credit.

Ardell in Seattle

This is like every SELLER getting a $15,000 price reduction, complements of Uncle Sam and President Obama! Big NEWS for both buyers AND sellers of homes. Watch the news VERY closely in the coming days.

Read the whole thing at OpenCongress – somehow I doubt any of our elected representatives have … what with 276 amendments and all.

Amendment 106 (which is key), passed.

S.Amdt.106 Pass To amend the Internal Revenue Code of 1986 to provide a Federal income tax credit for certain home purchases.

Senate Amendment 145 was offered:

S.Amdt.145 Offered To improve the efforts of the Federal Government in mitigating home foreclosures and to require the Secretary of the Treasury to develop and implement a foreclosure prevention loan modification plan.

Senate Amendment was passed:

S.Amdt.161 Pass To provide $2,000,000,000 from the HOME program for investment in the low income housing tax credit projects.

Update 07 February 2009: It appears that the bill will come to a vote Monday or Tuesday.

Update #2 07 February 2009: Calculated Risk has as clear an explanation of an as-yet-not-understood-or-really-agreed-upon bill as I’ve seen. Read the whole thing.

First the details (as far as I can tell):

# The tax credit is 10% of the purchase price up to $15,000.

# The tax credit is for one year (from date of enactment).

# The credit is available for both new and existing home purchases.

# This is for primary residences only, and the home must be owner occupied for two years after purchase.

# There is no income cap (the $7,500 tax credit had an income cap of $150,000 per year).

# Unlike the $7,500 tax credit, the new credit does not have to be repaid over time.

# The credit is limited each year to the amount of taxes paid in any one year (with the $7,500 tax credit, buyers received the entire credit and a refund if the $7,500 was greater than taxes for the year)

# Buyers can split the $15,000 into two separate tax credits to be taken in successive years.

Update 11 February 2008: It’s dead. In the words of the Real Estate Bloggers:

And now we have a double whammy. Potential homebuyers have been sitting on the sidelines waiting to see if the government meant for us to get the $15,000 to buy a home. So instead of making offers in February they have been led on a dance by politicians.

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About Jim Duncan

A Charlottesville Realtor who tries to stay on the bleeding/cutting/functional edge of technology and real estate trends. I have been selling real estate for the past 10 years, lived in C'Ville for twenty+ and am married to one of few Charlottesville natives left.
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  • http://www.realestateiii.com/gregslater Greg Slater

    Jim-

    I just had a written offer stopped by the purchaser to wait and see when this bill passes and what the credit implications are. I have not had a chance to look closely at the details, but I would assume the timing is based on closing date, not contract date. What else do you know?

  • http://www.realcentralva.com Jim Duncan

    Greg –

    The amendment is here (pdf).

    ‘‘(1) DATEOFPURCHASE.—
    The credit allowed under subsection (a) shall be allowed only with respect to purchases made—

    ‘‘(A) after the date of the enactment of the American Recovery and Reinvestment Tax Act
    of 2009, and
    ‘‘(B) on or before the date that is 1 year after such date of enactment.

    My reading of this is that the answer to your question is “it depends” on what they mean by “purchases made” – is that contract or close?

  • jim vanguard

    What do you think this mean to buyers who have closed in January? Under the current tax credit they are entitled to $7500 credit (not the true tax credit as it is to be reclaimed over 15 years) which they may take on either 2008 or 2009 tax year. With the proposed legislation of $15000, if you purchased in January would you be able to claim the $15000 or not since the new Act was not passed yet? If the $15,000 credit does not apply would the amendment to waive the $7500 repayment still apply to those buyers before the Act? Sorry. hope that makes sense.

  • Mark

    Who would pay $15k in taxes in one year? I have three kids and a mortgage and I pay zero taxes. In fact, the Fed will be giving me money in the form of the “additional child tax credit.”
    I hope you can spread it out over a number of years.

  • http://www.raincityguide.com ARDELL

    Jim,

    The current credit is must close on or before the start date of 4/9/08, so I expect this to be the same and the start date to be when it is signed, which they are hoping will be by President’s Day.

    There are some change tonight in the package, so let’s give it a couple of more days to see where the compromises are.

    Mark, the talk is you get the money not just a credit against taxes due, and it can be spread over two years. The current credit has a $95,000 income max and other requirements, first time buyer or hasn’t owned a home in the last three years, etc. So we do expect some kind of limitations.

    Hopefully the next 72 hours will reveal more.

  • jim vanguard

    Thanks Ardell,

    And yes Mark, the credit specifically outlines that you receive the full credit you are eligible for regardless of taxes due and it is payable back over time (in the current $7500 case its $500/year over 15 years). Regardless, lets hope the payback is waived and it is indeed a true credit.

  • http://www.raincityguide.com ARDELL

    CHANGES! Looks like the new credit is NOT “regardless of taxes due”. This breaking news Bloomberg post has two pieces of info:

    1) NOT only for 1st time buyers in the new bill
    2) NOT to exceed the total tax amount for the year

    I don’t see the “can be spread over two years” provision in the Bloomberg post that I saw elsewhere, but that doesn’t mean it isn’t in the bill.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a30KUnGy1VEM&refer=home

  • http://www.realcentralva.com Jim Duncan

    Thanks, Ardell. This bill is a moving target, to say the least.

    I have buyers who are absolutely using the bill’s outcome as a determining factor in price range, but not necessarily whether to buy …

  • http://www.raincityguide.com ARDELL

    It really should affect their price range, Jim. They won’t see that money when they buy and they shouldn’t use it to buy more house. It’s more of a safety cushion down the road.

  • Cville Buyer

    The misinformation in this comment stream is astonishing. Why don’t “professionals” wait until they have hard info before posting?

    Just a thought.

  • http://www.raincityguide.com ARDELL

    Cville Buyer,

    I can’t speak for Jim, but my post, which is linked in his post, is a warning to buyers who might be contracting to close a few days BEFORE they are eligible for the $15,000 credit.

    If we wait until it is law…someone will close escrow a day beforehand and be “a day early and $15,000 short”. So announcing something in advance may leave out the details, but WILL help those buyers who may not have seen it coming.

    Many buyers cancelled or extended their closings as a result of our posting the coming of this credit. They are not complaining that the details are a bit fuzzy. They are saying THANK YOU!

  • http://www.realcentralva.com Jim Duncan

    Cville Buyer –

    I agree that we should wait to definitively make any determinations; all that anybody has now is educated speculation. What I do know is this – no one knows what is going to happen with this credit, other than something and that the market is going to react to it somehow.

    That’s why the first line of the post is a question and the second says that the consumer’s perception will be crucial.

    The winners in this are the accountants, IRS and politicians.

  • http://www.realcentralva.com Jim Duncan

    Cville Buyer –

    A question – what do you think about this part of the stimulus bill/package? For? Against? Indifferent?

  • Cville Buyer

    Ardell, comments like ‘the talk is you get the money’ from yourself and a similar one from Jim Vanguard, both in response to Mark, are the ones that create confusion. The amendment was linked here. If one doesn’t know how to interpret the language of an amendment, one should ask a lawyer or prof before weighing in IMHO.

    Jim, Agree w/calculated risk. Important to stimulate the economy right now. This tax credit will not impact our decision to buy…we have our taxes figured out. A buyer would have to be innumerate to let this solely impact a financial decision, as would a seller. IMHO, a buyer shouldn’t be so close to the edge that this kind of tax advantaging makes a big difference.

    What would be more important, and a better use of the money IMHO is if there was a 30 yr fixed at 4% for everybody.

    The biggest issue in this area is the pricing. The askings are still bubbled up whether the house has been owned for twenty years or two. This has to account for why there are so many properties on the market. And our family has seen no convincing evidence that if we buy now the value will hold. It will drop. No way it can’t, when it’s happening in the rest of the country. We’re looking for a good, fair deal, not padding the pockets of somebody who still believes it’s 2006.

    And like other buyers we’re willing to wait b/c we save money renting.

  • jmcnamera

    This is just putting the bill for home speculation onto the tax payer, or their children. We should let home prices fall back to where they should be rather than boosting them this way.

  • Nalle

    Absolutely agreeing that this is all speculation and acknowledging counting on the government before its in writing is a very poor decision. . . . its still fun to speculate.

    It seems to me that this credit could have a large impact on house prices. I’ve read a few posts (here and elsewhere) that insinuate that a $15,000 (or 10%) tax credit would increase the value of the house by the same amount. If your selling a house in a certain range (and thus guaranteeing that buyers will receive, over 2 years, the full $15,000 (because of their tax load) then you are potentially increasing the value of the house by much more then $15,000. We don’t, in this country, buy houses in cash. . we buy them with mortgages which means that we use leverage. So with 20% down, that $15,000 really equates to $75,000. I’m not saying that folks will pay that much more, but they could although they would be paying higher mortgage payments, but hey mortgage payments are low and with the probability of inflation (with these new tax breaks, new TARP and new stimulus plan, we will have to print a LOT of money) then having a locked in rate of sub 5% is going to be a phenomenal deal. CalculatedRisk and others are discussing the huge cost to the government in terms of lost taxes. Those rough calculations do not appear to take into account that the government is losing a lot of tax on plunging house values ($3 Trillion in house value was lost last year) plus the plunging house values are driving foreclosures which are devaluing all the asset backed securities (ABS) that the government now owns thanks to TARP. It might be expensive but this stuff is a win-win in some ways. . . the biggest downside that I can see is that this (like so many “economy boosting” incentives) really targets those who are doing pretty well since it only really kicks in if you are paying a lot of tax.

  • Mark

    At the end of the day this is just robbing Peter to pay Paul. Peter is our kids and we are Paul.
    And lest we forget, this is our money being bandied about cavalierly…”do we spend $800 billion or $1.2 trillion?” Whatever the amount, it’s money our kids will eventually have to pay for through dollar devaluation or some cataclysmic crisis we’re just delaying because God forbid any of us should have to eat a $20,000 loss on our house. Price fixing never works.
    I know the Dems were quick to (and very successful at) condemning capitalism and the free market in order to gain power, but let me just radically propose that the government just stand aside and let the free market decide the value of houses, at the very least. Don’t worry, you can still trick us into increasing the deficit so your banking friends can stay in business!

  • jmcnamera

    We are simply spending our kids money to help the people who caused this mess. No one should get to stay in their house if they lied about their income to get the loan – nor should the bank that gave the loan be assisted over it – finally, the broker who allowed it should be prosecuted.

    Too many people lied, cheated, and stole and now we’re rewarding them. Let house prices sink and finally the “affordable housing problem” will be solved.

  • Nalle

    -jmcnamera

    What about the folks who did not lie about their incomes, have safe 30 year fixed mortgages, but purchased houses at market value only to have the price of houses fall past the value of their mortgage? What if the same folks are losing their jobs and the plunging value of their house just adds to the misery? Should we hang them out to dry? Its not a simple problem, the prices of houses were grossly over-inflated and loans were being given out way to freely. Unfortunately, a lot of the people who were lured in at precisely the wrong time are those who can ill-afford the consequences. Regardless of government action to stop the slide in house prices, people will have to stay in their homes for much longer then anticipated (which is not a bad thing) and will have to learn to cut corners with their finances in order to maintain the lifestyle that they achieved through cheap credit. Its not going to be easy. . . it rarely is.

    Also, I feel like the “affordable housing problem” is and will remain a moving target. The prices of houses are falling, yes, but at the same time, and completely related, access to loans is becoming more difficult (especially for those with low-incomes) and wages/jobs are falling and being lost. In a town like Charlottesville with great income disparity this problem is difficult to solve with a free market solution.

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  • jmcnamera

    Nalle,
    Yes, if someone buys more than they can afford, they should bear the consequences.

    This is my attitude to the banks as well for giving out loans that could not be repaid. Frankly, we should be prosecuting the people who gave out the money and those who took it if they knowingly realized that the loans were made with falsified information.

  • downtownenvy

    No one made people buy overpriced houses. If you paid for a house that had risen in value around here by 150% in less than two years, you were obviously taking a huge gamble. It doesn’t take a college course in macroeconomics to know that the kind of prices were were seeing were unsustainable. I don’t think anyone predicted how hard things would fall, but there has been precedent in this country before in previous economic cycles.
    Buying a house is not like buying a new coat, it is the biggest investment that you will probably ever make, and frankly a lot of people don’t do the necessary research before they purchase. If you have read Jim’s blog for a while he counsels all of his readers and buyers to perform due diligence. Unfortunately, not all realtors have his philosophy, and for too long, people in this country did not take buying a property seriously enough. I hate to see anyone face hard financial times, but to keep throwing good money after bad at this problem will not straighten out the cycle to its logical conclusion.

  • jmcnamera

    I agree with downtownenvy. In addition, builders, banks, and underwater home “owners” want the government to bail them out – but they were happy to take their profits when things were good. Heads they win, tails we lose?

    In truth, people who couldn’t afford what they signed contracts for aren’t home owners, they are renters except with additional legal protection.

  • Nalle

    These last points are good ones and I would have to agree. Any investment comes with inherent risk and for some reason folks stopped thinking of houses as having any risk. I personally purchased a house three years ago but made a number of decisions (location, condition, price, ability to rent) which allowed for downside protection. It is also certainly true that there is a lot of pressure to bail out builders and homeowners who are under-water due to this lack of risk assessment. From this perspective alone it seems inconceivable that tax-payers should be on the hook for individual’s (and companies’) poor decisions.

    I agree with jmcnamera and downtownenvy that we need and can survive a house cleaning. The question becomes, how much pain is the country (government) willing to absorb? Here in Charlottesville we aren’t going to see half of how bad its going to get in many places in the country. For better or for worse our politicians respond to the immediate needs of the people and much of the bailout plan is focused on reducing this immediate pain through mortgage adjustments and plans to increase house prices.

    I would continue to argue that as unsavory as it is to provide tax relief (such as the $15,000 credit) to help prop up house prices. It has the potential of being a win-win in as so much as it has huge upside for a consumer who is able to take advantage and also upside for the economy and the government (who now has a real $$ interest in banks which was purchased through our tax dollars). I don’t think that this is merely sticking our head in the sand (although jmcnamera will disagree, possibly correctly) as there is a lot of pressure to increase restrictions on loans etc and it should be possible to avoid the mistakes of the past (although we rarely manage that I suppose). Would it not be okay if the prices of houses dipped to a reasonable resting spot and then resumed a more slow and normal growth?

  • jmcnamera

    The government is simply borrowing money that we will need to repay in the future so home prices can be propped up temporarily. They will settle to their natural level again, this only delays it.

    Worse, the benefits go to some but are paid by all and especially paid for by those who bought homes they could afford. This is a clear example of moral hazard and rewarding bad behavior.

  • Nalle

    Why is it especially paid for by those who bought homes they could afford? I would assert that in a place like Charlottesville the home prices are going to adjust to their normal level with or without the government intervention. Ideally help would be focused on keeping people in their homes and paying the mortgages that they entered . . . one way to make that happen is to slow the decline in house prices.

    What is really frustrating, as someone who bought a home they could afford, is how the price of my house is being negatively effected by foreclosures and other stressed sales of houses because of the amount of people who bought houses they could not afford. Aren’t we, “good buyers”, also negatively affected on that end?

  • jmcnamera

    You are affected if you’re selling. However the bill for these bailouts and mortgage modifications have to be paid by someone. I prefer it to be the owners who mad bad choices, the holders of the mortgage paper who should take the loss of their investment just like they would’ve gladly taken the profit, and finally the bank shareholders and bondholders should take the hit.

    My children shouldn’t be saddled with higher taxes to pay this off.

  • Pingback: $15,000 Home Buyers Tax Credit Smoke And Mirrors : The Real Estate Bloggers()

  • Anonymous Coward

    Well, the tax credit has been substantially cut back in the final bill. It now is for a maximum of 8000, good only for houses purchased this year, and phased out for individuals w/incomes above 75k/couples filing jointly above 150k.

    It’s pretty much spitting into the wind, at a large cost to the U.S. Treasury, and, ultimately, all of us. The effect, in my view, will be to delay for a time the inevitable — prices in C’ville have to fall, in my view by at least another 20%. Why do I say this? B/c this area is now shedding jobs — I predict unemployment in this area will tick up by 2-3 percent over the next 18 mos., with an accompanying rise in foreclosures. UVA is frozen, and soon the freeze will turn into dis-employment by attrition. There are no other sources of employment to pick up the slack, at least not in the short and medium term. Retirement purchasers have ground nearly to a halt because the would-be C’villians can’t sell their houses. And yet in the face of all this, and despite a huge overhang of inventory, many C’ville sellers are listing houses at absurd bubble prices. Time for people to face facts.

  • Nalle

    The new version is also ONLY for first time home-buyers. This makes a lot more sense as it keeps folks from merely switching homes to take advantage of the tax credit. I imagine that house prices will continue to fall and that this will merely allow some people to move who might have to for jobs etc.

    The only think that I can see keeping house prices afloat is the fact that all of the major builders have stopped building. I’ve also been hearing about developers moving their current houses into the rental market, which seems to make sense. However, this sort of increase in rental properties (due to people not having to sell houses) only increases the ability of people to wait until prices in houses fall before buying. Hard to say exactly how its going to shake out but its probably safe to say that if job losses increase and the economy continues to shrink. . . prices on houses will have to come down. I just hope that small local builders who are concentrating on quality over quantity are able to get through this. . but its going to be tough.

  • Anonymous Coward

    One additional point — I’ve been following the rental market and rents in C’ville are under pressure and are beginning to drop. That means that the purchase price/rental ratio will get further out of whack unless house prices fall more.

  • Ted

    I wanted to see if I could clarify who qualifies for a First Time Home Buyer. I understand by the articles I have been researching that if you have not owned a home in the last 3 years you would qualify for the $8,000 tax credit.

    I sold my last home in August 2005 and I am considering making a new purchase next month. Please let me know if that would qualify me to take advantage of the First Time Home Buyer credit that is on the table.

    Cheers