Unfortunately, both tax credits expired at midnight on April 30. It’s been nearly a month, then, since their demise. How has the end of the tax credits impacted housing sales? It’s too early to tell definitively, but the Chicago Tribune last week reported on at least one grim omen that suggests that the demise of the credits might have a negative impact.

According to the story, the Mortgage Bankers Association reported that mortgage loan applications for the week ended May 14 fell 27 percent from the number of applications completed one week earlier. According to the bankers, applications for the week reached their lowest level in 13 years.

In even more disturbing news, the bankers reported that mortgage loan applications have dropped nearly 20 percent for the month of May.

The Tribune story also pointed to a report earlier last week from the U.S. Commerce Department. According to that story, while housing starts did rise in April – that’s good news – the number of building permits dropped 11.5 percent. That represents the lowest that number has stood since October of last year. This is significant because housing permits represent future activity.

Of course, you can’t blame all of these potentially negative signs on the end of the housing tax credits. A lot of people have bought homes in the last six months; maybe it’s time for a bit of a natural slowdown.

If I had my way, though, Congress would have extended both credits. The housing market’s recovery, both in Chicago and across the nation, is still a tentative one. Anything that can give it a boost, including the first-time and move-up-buyer tax credits, should be used as a tool to keep the housing recovery’s momentum going.

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First-time home buyers and move-up buyers must be under contract by April 30th in order to receive their respective $8000 and $6500 tax credits.  A lot of people are taking advantage of this and it has stirred up a lot of activity, particularly in the first-time buyer category.  Prices have dropped over the last few years, rates are at historic lows and the government wants to give buyers a big check. It’s a perfect scenario for buyers right? But there are still some people out there sitting on the fence and wondering if buying in the current economy and real estate market is a good idea. I’ve crunched the numbers on what I consider to be 6 likely scenarios.

The Cost of Waiting

Let’s look a pretty typical first-time buyer scenario. $250,000 condo purchase using the popular 3.5% down payment FHA 30 year fixed mortgage at 5.125%. The monthly mortgage payment would be $1314 per month, the down payment would be $8750 and Uncle Sam would be sending a check for $8000. Let’s also assume that the buyer remains in the home for 5 years.

What if #1 -   1 year from now real estate prices remain the same and mortgage rates remain the same

Cost of waiting = $8,000…no check from Uncle Sam.

What if #2 -  1 year from now real estate prices remain the same but mortgage rates are 1% higher

Cost of waiting = $17,120. The mortgage payment would be $1466 per month. Over 5 years this is an additional $9120 in payments and the $8000 check is missing.

What if #3 -  1 year from now real estate prices are 5% lower and mortgage rates are the same

Cost of waiting = $3603. The mortgage payment would be $1248. Over 5 years this saves $3960 in payments. The down payment is $438 less. But the missing $8000 still makes the cost of waiting an expensive decision.

What if #4 -  1 year from now real estate prices are 5% lower and mortgage rates are 1% higher

Cost of waiting = $12,302. Even with a smaller loan amount, the increase in rate would increase the monthly mortgage to $1393. Over 5 years this adds up to $4740 more in payments. The down payment would be reduced, but only by $438. Add in the loss of the $8000 and again the cost of waiting is not good.

What if #5 -  1 year from now real estate prices are 5% higher and mortgage rates are the same

Cost of waiting = $12,338. The loan amount would be larger resulting in a monthly payment of $1379. Over 5 years this adds to $3900 more in payments. The down payment is $438 higher and the $8000 is not in the picture.

What if #6 – 1 year from now real estate prices are 5% higher and mortgage rates are 1% higher

Cost of waiting = $21,938. The higher loan amount and higher interest rate result in a monthly payment of $1539. Over 5 years this adds up to $13,500 more in payments. Add the missing $8000 and the $438 more in down payment and this becomes quite costly.

Written by Michael Wallace 03/27/2010

Contact Michael Wallace
(312)738-6051
michaelw@chicagobancorp.com

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But now another deadline for the two credits is looming: Buyers have to act fast to take advantage of either credit. In fact, to qualify for either credit, buyers must have their housing contracts signed and accepted by April 30. Settlement must occur by June 30.

The Washington Times has a good summary of the credits and the deadline for buyers who want to take advantage of them. Basically, though, the first-time homebuyer version provides buyers with an $8,000 tax credit. The move-up buyer credit, for buyers who aren’t purchasing their first home, provides a $6,500 credit.

Both of these credits, though, might disappear after the deadline passes.

I think this is a shame. The housing industry, both in Chicago and across the nation, is still in the beginning stages of a steady but fragile recovery. The housing credits are helping to keep that recovery going. I don’t think the disappearance of the credits will break the industry’s momentum, but it might slow it. And that’s not good for anyone.

We all want our economy to continue is own fragile recovery, right? The health of the housing industry plays a big role in this. When home sales are on the rise, the economy’s health is generally better. Why, then, wouldn’t Congress extend the housing tax credits once again? Don’t we want to keep the recovery going?

If you want to purchase a home in Chicago and take advantage of either tax credit, the time to act is now. Finding a home, making an offer and settling the transaction is a process that takes a long time. If you’re to have any hope of qualifying for the credit, you have to kick your home search into high gear now.

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But amid all the press about the first-time buyer credit, you might have overlooked the significance of another housing measure that Congress also approved in early November: the so-called move-up buyer tax credit.

This tax credit provides $6,500 to anyone buying a new house who isn’t a first-time buyer. It’s another great financial incentive for homebuyers.

National real estate writer Kenneth Harney recently wrote an excellent column explaining this new housing credit. It’s a good summary of the credit.

Harney explains that the new credit, which took effect as soon as President Obama signed the bill creating it on Nov. 6, is available to homebuyers who have owned and lived in their current residences for a consecutive five out of the last eight years.

Your adjusted household income can’t exceed $125,000 if you file your taxes singly or $225,000 if you are married and filing jointly if you want to claim the entire tax credit. You might be able to qualify for a partial tax credit if your income is higher than those limits. But if your adjusted gross income is $145,000 and more and you are a single filer, you won’t qualify for any part of the credit. If you are married and filing jointly, you won’t get any credit if your modified adjusted gross income is $245,000 or more.

Harney also points out that the home you are purchasing can’t cost more than $800,000, and that it must become your main residence. However, you should be aware that you don’t have to sell your current house to qualify for the move-up buyer credit. You can keep that house and rent it out if you’d like. Just make sure, as Harney advises, to move out of your current home as soon as you close on your new house or condominium.

Chicago home sales have slowly, but steadily, risen during the second half of this year. That trend continued in the year’s third quarter, according to the Illinois Association of REALTORS®. The local trade group said that 5,821 homes sold in Chicago during the third quarter. That’s up 15 percent from the 4,947 homes that sold in the year’s second quarter in Chicago.

To me, this is proof that the federal tax credit has had a significant impact. And that impact hasn’t only been felt in Chicago. Total home sales across the country rose 11.4 percent in the third quarter when compared to the second quarter, according to the National Association of REALTORS®.

Now that the $8,000 tax credit has been extended, I expect even more first-time buyers to enter the Chicago housing market. Why not? Chicago has some great neighborhoods and amenities. And it’s blessed with a strong housing stock.

Housing here is more affordable than it has been in years. According to the Illinois Association of REALTORS®, the median sales price of an existing home – which includes single-family homes, condominiums and townhouses – stood at $230,000 in the third quarter of 2009. That’s down 20.7 percent from a figure of $290,000 in the third quarter of 2008.

If you’ve been waiting to purchase a condo or single-family home in Chicago now might be the perfect time to act. Home sales historically slow during the winter months. Sellers are often more willing to compromise on everything from prices to closing dates during this time of year.

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As if that wasn’t enough good news, Chicago Tribune writer Mary Ellen Podmolik in the Nov. 6 paper highlighted another new program, this one offered by the state of Illinois, to encourage both first-time buyers and military veterans to buy homes.

The state had already offered its HOME START program, a 30-year fixed-rate amortizing loan insured by the FHA. As of Oct. 30, the interest rate on this loan was just 5.25 percent. Now, though, the state has offered a companion piece to this program, the HOME START down payment assistance loan. This loan allows first-time home buyers to access additional funds to help them make their down payments. The loan is a 10-year, zero-percent, non-amortizing forgivable loan equal to 3 percent of the home’s purchase price. The loan does have a ceiling of $6,000.

To take advantage of the down payment assistance loan, buyers must first qualify for and obtain the Illinois Housing Development Authority’s 30-year HOME START mortgage. Military veterans do not have to be first-time buyers, but all other participants do. The program does require buyers to receive homeownership counseling.

The main benefit of this second down-payment loan is that it can easily become a forgivable loan. Buyers must simply stay in their homes for at least 10 years. Those who stay less will be required to pay back a certain portion of their loan depending on how long they stay in the house. In her story, Podmolik says that a homeowner who purchases a $100,000 house and only stays in it for five years will have to pay $1,500 of the $3,000 down-payment loan back to the state.

We already know, based on national statistics, that the first-time home buyer tax credit did its job, encouraging more buyers to enter the housing market. I’ll be eager to see what impact Illinois’ new housing incentive has. My guess? It’ll encourage even more locals, including those looking for homes in Chicago, to enter the residential real estate market.

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In its press release, the FOMC noted that the U.S. economy “has continued to pick up” since the September FOMC meeting and that housing market activity has increased.

It’s the third consecutive post-FOMC statement in which the Fed speaks optimistically about the U.S. economy – a signal that the recession is likely over.

The economy isn’t without threats, however, and the Fed identified several in its announcement, including:

1. Ongoing job losses for American workers
2. Reduced fixed investment by businesses
3. Ongoing challenges for the financial markets

The overall tone remained positive, however, as inflation appears to be held in check.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period” and to honor its $1.25 trillion commitment to the mortgage bond market.

The Fed plans to wind down its mortgage market support over the next 5 months, reaffirming its March 2010 exit date.  For now, Fed support helps hold mortgage rates down.

Mortgage market reaction to the Fed’s press release is negative overall.  Mortgage rates are rising.

The FOMC’s next scheduled meeting is December 15-16, 2009.

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And across the country, including in Chicago, these first-time buyers have helped spur a steady rise in the sale of condominiums and single-family homes.

There’s a downside to the tax credit, though: It’s not permanent. It’s scheduled to expire on Nov. 30 at midnight. This means that buyers have to close on their mortgage loans by that time to qualify for the credit. In fact, because it can take so long to close a home sale, most buyers today are already excluded from the credit.

Members of the real estate community are lobbying politicians to make the tax credit permanent. This would help keep the nation’s housing recovery going strong, they argue. I agree: The tax credit has already had a tremendously positive influence on my market in Chicago and in many others across the country. Why not extend it?

Fortunately, some politicians agree. One of them even happens to be from Illinois. U.S. Rep. Judy Biggert, R-Ill., recently introduced legislation that, if approved, will extend the first-time homebuyer tax credit for six months. She has also introduced a second bill that would extend the credit for a year. That bill would also open the credit up to buyers who have bought a home before and would boost the maximum amount of the credit to $15,000.

Raising the maximum amount to $15,000 would be a great benefit to Chicago. That’s because Chicago housing prices are fairly high when compared to other markets. Simply put, an $8,000 tax credit in Chicago doesn’t go as far as one in Omaha or Topeka. But a $15,000 tax credit is significant even in the city.

The only improvement that I’d make to Biggert’s bill is that the tax credit should be made permanent. This would provide a constant incentive to buyers who might be waffling on entering the housing market. And the more buyers the tax credit persuades to enter the market, the sooner home sales will again provide a boon to the country’s still struggling economy.

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Considering it can take up to 60 days to close on a home, first-time buyers have 2 weeks at most to find a home.

Buyers not under contract by October 15 have little chance of meeting the November 30 deadline and, therefore, little chance of claiming the tax credit.

This is especially true for purchases involving short sales and foreclosures.

Congress passed the First-Time Homebuyer Tax Credit program as part of the 2009 economic stimulus plan.  IRS Form 5405 outlines the program criteria which include the following stipulations:

• Buyer may not have owned a “main home” in the past 36 months
• The home may not be purchased from a parent, spouse, or child
• Adjusted gross income for the household must be below $95,000 for single tax filers and $170,000 for joint tax filers

The credit is capped at $8,000 or 10% of the purchase price, whichever is less.  And don’t forget — the First-Time Home Buyer Tax Credit is a true tax credit. It’s not a deduction.

This means that a tax filer who claims the full $8,000 and whose “normal” tax liability is $5,000 would receive $3,000 cash from the US Treasury when their tax return is processed by the IRS.

If you can’t close by November 30, 2009, though, you can’t claim the credit.

The clock is ticking. If you’re planning to use the First-Time Home Buyer Tax Credit, the time to act is now.

As you probably know by now, this piece of legislation provides an $8,000 tax credit to first-time homebuyers. Personally, I believe that this credit has been a major factor in the housing recovery we are now seeing. First-time buyers are an important part of any housing market. And the $8,000 tax credit is spurring a greater number of these first-timers to get off the fence and make offers on condominiums and single-family homes.

Unfortunately, this tax credit comes with an expiration date. Any home sale that closes after Nov. 30 of this year will not qualify for the tax credit.

Chicago Tribune columnist Mary Ellen Podmolik addressed the first-time homebuyer tax credit this Sunday. In her column, she mentions that the housing industry can be expected to place pressure on Congress to extend the tax credit past the Nov. 30 cutoff point.

Not only do members of the real estate community – including REALTORS®, mortgage lenders and home builders – want Congress to extend the credit, they want legislators to expand it. They’d like to see them raise the credit to $15,000 and make it to available to all home buyers.

Personally, I’d love to see this. There’s no doubt in my mind that extending the tax credit will add even more fuel to the housing recovery we’re already seeing.

Podmolik does cite some concerns in her column. She wonders if there is still a need for any home-buying tax credit now that the housing market seems to be in recovery mode.

It’s important to remember, though, that this is still a relatively young recovery. Yes, home sales in Chicago have risen for six straight months. But there is still much room for improvement.

Extending or, even better, expanding the first-time homebuyer tax credit is one way to guarantee that the housing rally continues both here in Chicago and across the country.

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