The Gift that Keeps on Giving
In the shadows of the Unemployment Rate reaching 10.20% in October, its highest level since 1983, the Senate and House both approved an extension and expansion of the government’s first-time homebuyer tax credit (FTHB). President Obama immediately signed it into law. The program had been scheduled to expire on November 30th.
While media coverage keeps telling us the recession is over, the measure achieved a rare unanimous vote in the Senate (98-0), and an overwhelming majority in the House (403-12), indicating widespread belief the economy is still is in need of governmental efforts to continue the recovery.
The tax credit and the broader bill containing it are part of a series of Democratic led initiatives aimed at helping the economy and people who have lost their jobs.
Since its enactment in February of this year, the FTHB tax credit has been given credit for boosting home sales and for helping to revive a slumping housing market. But for the first time since March, new home sales fell unexpectedly in September (3.60%), causing many economists to blame the anticipated end of the program to be the major reason for the decline.
With home purchases typically taking about 30-60 days to close, it’s likely that uncertainty about the credit being extended beyond the deadline prevented many prospective homebuyers from signing a contract in September. That trend is expected to continue for October’s figures, yet to be announced.
Regardless, it would be difficult for critics of the credit to deny the economy has been boosted, at least in part, by the presence of the bill. The National Association of Realtors has estimated that approximately 1.4 million FTHBs qualified for the credit thru August, and that 350,000 of them would not have purchased their homes without the credit.
Under the extension, FTHBs would receive a tax credit of up to $8000 (or 10% of the sale price) if they sign a contract to purchase a new home by April 30, 2010. The closing then must occur by June 30th.
The program also includes two significant changes, both of which means many more people may now qualify for its benefits. First, the program will now be expanded to include buyers who already own a home. The incentive is a tax credit of up to $6500, provided they are buying a new primary residence and have owned their current home for at least five consecutive years during the last eight years.
But the new provision now limits the purchase price to $800,000, and the purchase of a second home or investment property would not be eligible. No price limit was stipulated in the original credit.
The other major change involves income limits. Under the current bill, the maximum income an individual can earn to qualify is $75,000, while a married couple filing a joint tax return can earn up to $125,000. The passage of the new bill extends those limits to $125,000 for an individual and $225,000 for a couple, with a partial credit given for incomes of up to $145,000 and $245,000, respectively.
It’s also important to note that the measure was attached to a bill that would provide 20 additional weeks of unemployment benefits in more than two dozen states whose jobless rate now stands above 8.50%. It would extend those same benefits up to 14 weeks in remaining states.
Without this extension, more than one million people would lose their unemployment benefits, according to the National Employment Law Project, a nonpartisan group that tracks job-related statistics.
More than 15 million Americans are currently out of work and that number is expected to increase into 2010. More than a third of them have been unemployed for more than six months.
Another provision of the broader bill will allow businesses that had operating losses in 2008 and 2009 to seek refunds for taxes paid on profits over the previous five years. Under current law, they can only offset profits from the last two years.
Although the legislation in its entirety gained broad support on both sides of the aisle, it had been caught up in partisan ramblings for weeks, as both parties tried attaching amendments opposed by the other side. In the end, leaders from both sides fortunately voiced support for the core measures, including the tax credit.
In its purest sense, the goal of the tax credit renewal is simply to bring new buyers into the market and to jump-start the economy into 2010. As I put this column to rest for the season, I’m filled with optimism that this news will resonate with those who’ve been on the fence considering the purchase of a new home.
I’ve said it several times this year but it is still a good time to buy. Despite all the uncertainties, mortgage interest rates have remained historically low and they’re expected to stay that way for some time. Plus, home sale prices and inventory levels continue to be in the buyer’s favor. But who knows for how long. That’s the million dollar question.
The reality is that no one knows what lies ahead. But until at least half way thru next year, we’ve been given a second chance to reap the generous tax benefits of this law.
I’ll take that gift over a fruitcake anytime.
Chris Beagle is a Senior Loan Officer at Fairway Independent Mortgage Corporation. Contact him at 302-260-7090.