Last week, the U.S. House of Representatives passed the Housing and Economic Recovery Act of 2008. The Bill is expected to be signed by the President this week. This is a pretty significant event for the housing market. Here are a few provisions in the bill.
1.) Tax incentive- (Updated on 08/05 :In order to qualify for the first-time home-buyer tax credit of 10% of the home purchase price (up to $7,500), buyers must not have owned property within the last three years and must make their purchase between April 9, 2008 and July 1, 2009. The credit phases out for individuals making more than $75,000 or joint filers making more than $150,000 a year. The credit functions much like an interest free loan from the government. It is not a tax deduction and must be paid back in equal installments over 15 years.)
2.) Increasing limits on Fannie Mae and Freddie Mac-backed loans from $417,000 to $625,000. (varies by area). In Seattle, the estimated limit for FHA and conventional loan will be $522,100.
3.) Creating a line of credit to Fannie Mae and Freddie Mac, enabling them to continue backing existing loans.
On top of that, the bill will also include creating an independent agency to regulate Fannie Mae and Freddie Mac.
This obviously won’t address the oil prices and non-housing macroeconomic challenges but no doubt will provide some relief to the housing market woes. It’s welcome news for distressed owners and first-time home buyers. The last time Congress passed legislation like this was in the 1970’s (subsequently, the housing market saw a significant increase in activity). I think it is about time for us to hear some good news instead of the constant media attention on national foreclosures. Read more here.
What about a tax incentive/tax credit for us homeowners who bought responsibly? Where’s the incentive to stay within your means and pay down your mortgage? All this new Act reinforces is poor choices and lack of personal financial responsibility and accountability.
Some reports http://calculatedrisk.blogspot.com/2008/07/senate-passes-housing-bill.html
are that the tax credit would be a zero-interest 15-year loan. Aside from the liquidity advantage, The present value of not paying that interest is around $2K at current interest rates … and then there’s the increased tax-prep burden over the coming years.
So a drop in the bucket if you’re looking at a $350K Seattle condo whose price just dropped 20K and which will likely keep dropping over the next year or so.
But it might be a bigger deal if your income is low and you live in an area with much cheaper housing.
Colin, a zero interest loan is worth more than $2K. Moreover, I was unable to verify your claimes that the $7,500 is a zero interest loan anyway.
According to the Wall Street Journal, “First-time homebuyers purchasing a home between April of this year and through June of next year would receive a tax credit for 10% of the value of their home, up to $7,500, while current homeowners who do not itemize their tax returns would be able to deduct up to $1,000 for property taxes.”
It’s true, not only does it have to be paid back at about 7% every year, but if you sell your home before the 15 years are up the unpaid balance of the tax “credit” is due right away (the next time you file taxes I assume). There are other caveats too, e.g. the phaseout schedule (starting at an income of $75k for singles), which is another reason that this bill doesn’t have as much impact in Seattle – per capita income here is relatively high, and home prices are even more relatively high!
And you can’t say a zero-interest loan is worth more (or less) than $2k, it all depends on what kind of investment you have. Based on low risk/fixed income investment instruments at current rates $2k sounds about right.
Greg the claim was not mine but referenced *in my comment* to the blog Calculated Risk.
If you want to do research why not look at the actual legislation? http://thomas.loc.gov/cgi-bin/query/F?c110:3:./temp/~c110Y2OJoz:e668448:
is the most up-to-date version I can find, detailing the “recapture of credit.”
Value: Adi is of course right about comparisons, and if you work it out using low-risk instruments, the NPV of the foregone interest is about $3K. So it’s a small subsidy, or more accurately a transfer to me, if I use it, from other taxpayers. More importantly perhaps it’s a little liquidity kicker for one group of consumers.
Sorry, should be “Amir.”
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