By Timothy DeFeo
The federal tax credit program has been the most compelling piece of upbeat financial news for Realtors® over the past year. Whether its extension last fall was a result of political goodwill or economic necessity, the result has been a boon to the real estate industry as potential homebuyers have benefited from this highly unusual tax break. And several other new programs that could facilitate the sale of properties should be on Realtors®’ radar and in their playbooks.
Homebuyer Tax Credit
The First-Time Homebuyer Tax Credit was extended on November 6, 2009, with the passage of the Worker, Homeownership, and Business Assistance Act. It originated in 2008, under the Housing and Economic Recovery Act. The deadline currently stands at April 30, 2010, for a signed purchase or a binding offer, and a closing date on the residence on or before June 30, 2010. Taxpayers can put the tax credit toward either their 2009 or 2010 return.
The extension into 2010 continues the First-Time Homebuyers’ Tax Credit of $8,000. But the credit was not only extended, it was also expanded. It makes available a $6,500 credit for curren t homeowners to purchase either a new or existing home. This expansion may encourage some buyers to enter the market who are interested in a new residence, but who have to date remained on the sidelines.
Realtors® and buyers should be aware of several stipulations and regulations in the tax credit program. There are income level (modified adjusted gross income) restrictions starting at $125,000 and phasing out at $145,000 for individuals, and beginning at $225,000 and ending at $245,000 for couples. Eligible homeowners are defined as those who owned and occupied their principal residence for five consecutive years over the past eight years. The upper limit of the purchase price is $800,000. And, if the property is sold within three years of the purchase date, the credit amount must be repaid, with some exceptions.
For those who don’t believe that the tax credit has had a major impact on home buying, the numbers from both across the country and within Massachusetts tell a different story. There was clearly increased sales activity last fall as the November 30 deadline for the tax credit approached. MAR data confirmed a record 63.1% jump for November single-family sales compared year-over-year. Condo sales spiked at a record 76.2% for the same period. And pending sales had been rising for several months as more buyers became aware of the program and the clock began to tick down to the deadline.
The national real estate data also bore out the same conclusion. The National Association of Realtors®’ Pending Home Sales Index, which is a forward-looking tool, showed a sharp decline based on contracts signed in November, dropping 16% to a 96.0 rating from October’s 114.3 rating. (The November 2008 rating was 83.1.)
Obviously, there was an expectation that sales would decline if the stimulus credit was not extended. While it is difficult for economists to definitively establish a correlation to the tax credit, it was, by most estimates, strongly influential.
“It will be at least early spring before we see notable gains in sales activity as homebuyers respond to the extended and expanded tax credit,” said Lawrence Yun, the NAR chief economist. “We expect another surge in the spring as more homebuyers take advantage of affordable housing conditions before the tax credit expires.”
Rick Healey, owner of Foster-Healey Real Estate, based in Leominster, doesn’t feel that the public is as informed about the tax credit program as it could be. But he believes the panic that set in last fall may be beneficial to the program’s second go-around.
Healey makes the comparison to the cash-for-clunkers program, when the approaching first deadline helped to educate the public and then enhanced participation when it was extended.
MassHousing Tax Credit Loan Program
New programs that could help to facilitate the sale of properties are available, especially for low- and mid-income buyers. The Massachusetts Housing Finance Agency, or MassHousing, launched an initiative in July of last year called the Tax Credit Loan Program. Its intent is to magnify the impact of the federal tax credit program by turning an income tax credit, which is earned after a return has been filed, into cash in-hand to help facilitate more real estate purchases. The money can immediately be applied toward the downpayment and/or the closing costs.
There are several stipulations for borrowers to access this program. First, only first-time homebuyers obtaining a first mortgage in conjunction with a MassHousing approved lender are eligible. Second, there are also qualifying income limits that are determined by county. The income limits, for example, start at $90,315 for Berkshire County and peak at $118,935 for Essex, Middlesex, Norfolk, Plymouth, and Suffolk counties.
The loan limits vary depending on the number of families that a residence accommodates; the limits are consistent across all the counties. A single-family home has a limit of $417,000; a two-family a limit of $533,850; a three-family a limit of $645,300; and a four-family a limit of $801,950. The borrower has until June 1, 2011, to repay the loan without any accrued interest charge. If the borrower fails to make this deadline, the loan is amortized over a 10-year period at the same rate as the first mortgage.
Approximately 200 homebuyers have used the tax credit loan program, which represents 10% of MassHousing loans since the policy was launched, and dozens more are in the pipeline.
“It has been a real boost for our lending,” said Thomas R. Gleason, executive director of MassHousing. “It is being used all across the state,” he added. “This is making a real difference for getting people off the fence.”
Opportunity Knocks Homebuying Fairs
MassHousing has teamed up with MAR, as well as other public and private entities, to continue the Opportunity Knocks program, which is a series of homebuying fairs begun two years ago. This will mark the third round of public fairs, which have been very successful in drawing potential buyers and educating the public on the homebuying process and the tax credit.
The events bring together MassHousing staff, approved lenders, Realtors®, and homebuying counselors in several locations for prospective lowand moderate-income buyers. The upcoming fairs are scheduled for April 10. In
conjunction with the Opportunity Knocks Homebuying Fairs, Realtor® associations from across the country have teamed up for a weekend of open houses April 10-11 with the Realtor® Nationwide Open House. This fi rst event of its kind hopes to encourage those who are thinking of buying a home to take advantage of the unique home market factors and the Homebuyer Tax Credit. Realtors® are encouraged to list their open houses, as publicity nationwide will direct consumers to view homes for sale that weekend. For more information on Opportunity Knocks and the Realtor® Nationwide Open Houses, visit marealtor.com.
On the Upswing
The mortgage industry has dramatically slashed many of the creative products it had produced over the past decade. The more standardized offerings currently in the market will remain for the foreseeable future, according to industry sources.
“If there is a steady availability of capital for those mortgages and safe, sustainable fixed-rate product—that is what people are looking for right now,” said Gleason. “The real tide has turned. People aren’t looking for variable rate debt anymore or anything like that,” he added. “They really want to know: ‘What am I going to pay for the life of my mortgage?’”
Many economic forecasters believe that the Fed will not consider raising rates until there is an established improvement in the employment numbers. This leaves homebuyers with historically low interest rates to date and very likely throughout the remainder of 2010.
“The informed consumer is really saying, ‘Yes, I have to take advantage of this…I have to buy a house now,’” said Healey. And he believes the likelihood that the tax credit program will be extended for a second time is quite low, especially if unemployment shows any indications of improvement.
While there is a different strategy for each buyer and each seller, Healey offered a few broad pieces of advice. First, get the potential buyer involved in the financing process as early as possible, especially if credit problems exist.
“The underwriting criteria has become much more stringent,” said Healey. Buyers need to find out where they stand financially, as early as possible. “Getting them to a mortgage broker—a mortgage broker you can trust and who will do the right thing—as a blanket strategy, is one of the few things that is really critical,” said Healey.
He also suggested that the pricing of a property in the market is critical. This is a long-term recovery, and there are many factors that will keep prices from rising rapidly, including foreclosures and short sales. Sellers have to be convinced that a property will not be taking a 10-20% spike in price at the first signs of a recovery. Many sellers are retaining an inflated estimate of their property’s value. They may miss out on the buying activity created by the credit program and a reviving economy if they hold on to unrealistic expectations. Healey cited the last market shakeup, when it took six to seven years to regain the peak levels of ’89-’90. “Realtors® need to moderate people’s expectations in terms of prices,” he concluded.
Timothy DeFeo is a freelance writer residing in New York.