You may have heard that that First Time Home Buyer Tax Credit was extended until April 30th, 2010. In that extension a new group of home buyers were included – Existing Home Buyers! The credit is a maximum of $6,500.
For existing home buyers:
- They had to live in their home for five of the past eight years
- The home must be a primary residence
- Income limit for single buyers is $125,000 and for couples $225,000
- The home cannot exceed $800,000.
Sounds good, right? Many argued that existing home buyers should have been included with the original stimulus for first time home buyers. After all, why should existing owners basically foot the tax bill for new home owners? And if the government really wanted to make an impact then they should include a larger group of potential buyers.
But is this tax credit good for existing home buyers?
It depends. Let’s look at someone who is going to upgrade to a home that costs $100,000. The $6500 tax credit is 6.5% of the total price, which is pretty decent. That’s a nice chunk of change towards a down payment.
I know there are areas that have homes in that range but where I live, NYC, it’s very unlikely to find a decent home anywhere near that price. Let’s consider a home that’s $250,000. That can buy you a co-op in parts of NYC and maybe some homes. The tax credit is only 2.6% of the total. I’m not going to turn away $6500 but it’s not quite the same incentive to go buy a house as it was for the person buying the 100k house! As the price of the home goes up the tax credit is a smaller and smaller percentage.
Let’s look at another angle: A big reason for the economic stimulus/tax credits is to help stabilize home prices. By offering the tax credit it gives people an incentive to go buy a house at a time when housing prices are tumbling downwards. The more buyers the more demand which means that prices stabilize. With me?
So let’s assume that the tax credits are working to stabilize home prices. Let’s also assume I’m looking to upgrade and buy a home outside NYC on Long Island for about $400,000 (not an unreasonable price). The tax credit is a little more than 1.6%. Again, I’ll take $6500 anytime it’s handed to me but a 1.6% break in a home isn’t a whole lot!
Keep working with me - Let’s say that there are no tax credits and home prices go down 5%. The $400,000 home I was looking at is now $380,000. The home has dropped in price by $20,000! You see where I’m going with this? I’m much better off if house prices are allowed to drop rather than use the tax credit!
The example gets more extreme as the home price goes up and market prices drop further.
Bottom line – If you are an existing home buyer and you are considering buying a new home don’t look at the $6500 tax credit as a great thing. If you were going to buy anyway then it’s a nice little bonus. But depending on your price range the credit may be hurting you in the long run rather than help you. Play with the numbers and see what works for you. There’s a good chance that running out to get a home before the tax credit expires may not be in your best interest. If housing hasn’t bottomed out yet, something many believe to be the case, then waiting to upgrade your home may save you more than the tax credit offers.