Yes – But Only in Certain Circumstances
The U.S. Senate is considering extending and expanding the home buyers' tax credit to help prop up the still-reeling housing market.
Under the proposal, the $8,000 credit for first-time buyers would be extended to cover purchases into next spring – buyers must sign contracts by April 30 and close within 60 days. Currently the credit is due to expire at the end of November.
The Senate plan would also expand the program by offering a tax credit of up to $6,500 to current homeowners willing to buy a new home, provided they have lived in their current home for five consecutive years out of the last eight.
It would also raise the income limits on those qualifying for the credit, from $75,000 to $125,000 for individuals, and from $150,000 to $225,000 for couples.
What does this mean for home buyers?
First, many more people will now qualify. After all, two-thirds of American families own their own home, and most earn less than the income limits. If you fall into that category, and fit the residency requirements, you may be eligible.
But forget about using the credit to sweeten deals for a vacation home. While you do not have to sell your current home to qualify for the new credit, you cannot use the money to buy a vacation home. "It's only for a primary residence," said Regan Lachapelle, a spokeswoman for Sen. Harry Reid (D-Nev.), who helped engineer the deal.
If you're thinking of moving soon, the credit is a helpful gift. Anyone else should think twice before letting the tax credit drive their decision. For one, the credits are not large in relation to other costs typically associated with buying real estate.
These range from brokers' commissions to legal fees, title insurance and so on. (Brokers' commissions alone typically come to around 6% of the purchase price—while they are paid by the seller, they factor into home prices).
And moving is expensive beyond that—you should factor everything from moving costs to new décor, not to mention all the time and effort.
The credit will be most useful in markets where real estate is really cheap.
For example, it may provide a helpful shot in the arm for the stricken real estate market in Nevada (where Sen. Reid faces a tough re-election battle next year) more than in high-priced coastal markets like Silicon Valley and New York City.
Nevada's market needs all the help it can get. Prices in Las Vegas have fallen 30% in the last year, according to the latest Case-Shiller price index.
According to Zillow.com, the median home price in Las Vegas right now is just $139,000. That compares to $562,000 in San Jose, California and $795,000 in Manhattan.
So the maximum $8,000 credit will cover about 6% of the median price in Vegas, but barely 1% in the most-expensive areas.
Prospective home buyers may reap bigger benefits from two other developments: The collapse in prices, and the slump in mortgage rates. As I've written here more than once, 30-year fixed-rate mortgages can be found below 5%, a steal by historic standards.
By Brett Arends, The Wall Street Journal -Investing
Published: October 30, 2009
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