One of the fastest responses to the real estate slump was a new homebuyer credit. The plan, of course, was to stimulate new home purchases. It may have already had an effect — housing starts have jumped lately, and the property market has stabilized — but that may not be enough. If the National Association of Realtors gets their new plan enacted, the credit will be nearly doubled, and the “First-Time” part of “First-Time Home Buyer Credit” will be dropped.
The First-Time Homebuyer Credit: How It Works Now
The credit gave new homeowners 10% of the purchase price of a new home, up to $80,000. This credit was restricted to buyers with less than $75,000 in income (subject to some adjustments), with reductions for incomes up to $95,000. For married homeowners, the full credit applied to incomes of up to $150,000, with reduced amounts available for incomes up to $170,000, and nothing available beyond that. The credit expires at the end of the year.
The credit thus targets people who are likely to buy a home, but also likely to be suffering too much from the current downturn to afford a new one. Although the tax credit has encouraged new home purchases, it hasn’t been as effective as it could be: most foreclosures are in a few states with far higher median home prices, which are still high enough that this credit is an extra 5% — enough to make a difference in which homes are bought, but rarely enough to be the difference between buying a home and not.
The New Housing Credit: How It Might Work
The new plan being advocated goes something like this:
some business groups say the amount of the credit, now capped at $8,000, should be raised to $15,000 and applied to anyone who buys a home.
Other possibilities include a $3,000 credit for refinancing, or an extension of the credit to the end of 2010 and an end to the income cap. This would have a larger effect on the housing market, but in a more gradual way: a credit with a deadline encourages people to buy homes they might have bought a year or two later instead, while a credit that keeps getting extended will start to feel permanent.
Now is not the time for the average homebuyer to react to this potential plan. There’s still a lot to be decided, from the exact amounts to the income eligibility to the deadline for the credit. In fact, the current discussion should remind taxpayers that this kind of deadline doesn’t always stay firm. The best plan is still to be cautious with homebuying, and to base decisions on what homes are affordable, not just which ones have tax incentives attached.