Big Tax Credit for First Time Homebuyers

With the Stimulus package signed into law this week, we have learned more about the tax credit being offered to homebuyers.

The credit extends to first-time homebuyers, which also includes those who have not owned a home for more than three years. According to the National Association of Realtors most recent survey of home buyers and sellers, the tax credit could benefit as many as 40% or more of the home buying population.

The credit will be up to $8,000 or 10% of the home's value, whichever is less. It applies to primary residences purchased from January 1, 2009 and prior to December 1, 2009. The former law limited the tax credit to $7,500 and applied to purchases made prior to June 30, 2009. The tax credit is also set up as a "refundable" credit, which means that even if the tax payer does not owe $8,000 in income taxes he or she will still get the full benefit of the credit. In other words, a taxpayer could get a check back from the government for the amount the credit exceeds taxes due.
Besides these great features, perhaps the biggest distinction with the former tax credit law is that the new law does not require repayment of the tax credit as long as the buyer holds the property for at least three years.

If this tax credit applies to you or someone you know, be sure to contact a tax advisor to learn more about how to take advantage of this opportunity. This fact combined with lower home prices and unusually low interest rates makes the current market a great time to be a buyer.

Congressional Compromise Gives Tax Credit to First-time Home Buyers

First-time home buyers will receive up to an $8,000 tax credit if a home is purchased by the end of August 2009. The credit was the result of a compromise reached during the congressional conference committee's work to settle differences between each chamber's version of the economic stimulus package.
As the economic stimulus package made its way through Congress, a couple of variants of the home buyer tax credit were passed. The House had limited the scope and amount of credit far more than the Senate version of the Bill. The House version would have granted up to a $7,500 tax credit for first time buyers (or someone who has not owned a home for more than three years).

The Senate offered a broader tax incentive. Its version had a $15,000 tax credit for all home buyers purchasing a primary residence.

The $8,000 credit that came out of the conference committee raises the existing credit by $500.

Fewer homes coming on the market

With home prices around Thurston County continuing to moderate, we are seeing some positive trends that indicate our market is heading for better times. One of the biggest involves the supply of homes. As prices have come down, more buyers have entered the market to absorb the excess supply of homes on the market.
That is good news because one of the big forces driving home prices is the number of listed homes competing for a buyer. When there are too many homes on the market, prices come down. When there are not enough homes for sale, prices jump up more than during a balanced market.

As we have previously commented, Thurston County home prices have come back to levels that have more buyers jumping back into the market (See our 1/12/09 and 1/18/09 postings on price). In January, home sales increased nearly 5% from a year earlier. This is the first year over year gain in sales since December 2006 bested December 2005.In 2005, near the height of our seller's market, we averaged about 900 homes actively for sale at any given time. Prices escalated 21% that year. That rapid price escalation priced many buyers out of the market. At the same time, construction activity continued at its same pace. The combination of those factors meant supply built up. Throughout much of 2008, a year that saw a 23% drop in sales, there were over 2,000 homes on the market. With supply outpacing demand, it was not surprising to see prices drop 5% last year.
And while we don't expect to see prices appreciation jumping back to the unprecedented levels seen from 2003-2006, we see some positive signs that are needed before we will see prices return to more normal patterns.

Perhaps the biggest factor is the pace of new construction. You have seen yourself, there was a large volume of new construction happening around the county during the past 5 years. Over that time, new construction grew to account for almost 39% of the total number of homes for sale. Prior to 2003, new construction represented 25% or fewer of the homes for sale. Builders have eased up on the gas; and new construction now represents just 29% of our market's active listings. That combined with the fact that we have 15% fewer total listings (new and resale) than a year ago, means supply is coming back to better balance with the current levels of demand.

Going forward the supply picture looks even better. Permits issued for new homes have dropped 54% from the peak in 2006. That year, 2,386 permits were issued throughout the county. In 2008, only 1,194 permits were issued. This drop in construction will be one of the factors that helps bring us back to a place of more normal, sustainable price appreciation.

Statistics compiled by Coldwell Banker Evergreen Olympic Realty, Inc. from the NWMLS database. Statistics not compiled or published by NWMLS.

Tax Credit would be Great for Buyers and Sellers

In past postings we have indicated that the pace of home sales will be dictated by prices. In December 2008, Thurston County had a 6% increase in buyer activity. That activity is the direct result of home prices coming back 9% from December 2007.

Fortunately, Thurston County has not been hit as hard as other parts of the country in terms of price declines. See our posting on January 18, 2009. Our market has had a softer decline than virtually all other areas of the country. It is those more severely impacted markets (California, Florida, Nevada, Arizona, and Michigan) that are generating all that attention in Washington, D.C.
Yesterday, the U.S. Senate passed a key housing amendment to the economic stimulus package that is making its way through Congress. If this provision becomes law, it will provide a powerful incentive for buyers to get back in the housing market.

The provision is a $15,000 tax credit (or 10% of the home's price, whichever is less) that would be offered to all buyers who purchase a primary residence within one year of enactment.

This is a significant enhancement to the existing law that provides up to a $7,500 tax credit for first time home buyers. Not only does this new provision double the tax credit, but it also provides that it does not have to be repaid (as long as the home is owned for at least two years). The current law requires repayment over time. And unlike the current law, the credit would be available to all purchasers of primary residences.

The current tax credit, while a nice option, does not reach a broad enough segment of the housing market to make the kind of impact Congress is hoping for. The latest version would have a much better impact.

We will continue to watch this provision as it makes its way through Congress and report on its status. It certainly will be a helpful provision in housing recovery. But as we've said in the past, prices will continue to be the leading force in returning the market to more sustainable levels. After all, we continue to see well-priced homes sell everyday - without the tax credit. By the same token, it is unlikely that a tax credit will help sell an overpriced home. What it will do is invite more buyers to consider jumping back in to look at all of the great values that exist even today.

Statistics compiled by Coldwell Banker Evergreen Olympic Realty, Inc. from the NWMLS database. Statistics not compiled or published by NWMLS.