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.
What do you think? Will the extended home buyer tax credit help?
I agree that in some situations this may not be a financial boon; however, there are many states with housing prices far lower than that of NY. In the end, making informed decisions will outweigh emotional enticements. I just hope more people take the time to do the math.
Absolutely! For many the tax credit s a real nice help. I’m amazed when I hear how much cheaper housing is in other parts of the country. But as you say a potential buyer needs to make an informed choice. The tax credit in of itself may not be a good incentive for buyers of more expensive homes.
If only I’d been in my home longer…Ah well. Around here, you can get something decent for right around $200,000. One thing I was wondering was whether home prices really need stabilizing at this level. And whether the housing market will come to rely on tax credits to support demand…
.-= Miranda´s last blog ..Book Review: The New Rules for Mortgages by Dale Siegel =-.
Maybe the question should be – Why are we stabilizing home prices that were allowed to inflate so much over the years? This credit supports prices driven up by bad mortgages and financial instruments.
The price of housing in my area has remained pretty steady despite the housing market. I have however, know a few people that are buying houses just to get the credit without thinking about long term repercussions. I fear that this type of quick fix in giving people a tax credit will only end in another bubble, when those people still can’t actually afford the house a few years down the line.
I was planning to put my house in Hood River, Oregon on the market in February in preparation for a move to Elk Grove, CA in early summer.
Now I’m going to put it up for sale in early December so it will be available if anyone is looking to take advantage of the credit.
I’m also hoping it will sell in time for me to use it.
I wouldn’t have advocated for the tax credit because of many of the reasons listed in other comments, but you can darn sure bet I’m going to take advantage of it since I was already planning to sell and buy during the time period!
Cindy
That’s an interesting aspect to it. If you are selling then these credits can help keep prices higher and may allow a buyer who wouldn’t have had the money otherwise.
why look at it as a % of the purchase price, why not as a % of the total money you’ll spend on the house or on the downpayment only. Its arbitrary to compare the $6,500 to the purchase price. Its not like that’s exactly the amount many people pay for a home.
If we took the total money you’d spend on the house then the $6500 is even less. My point is that for an existing home owner the available credit works to keeps prices stable, whereas without the credit prices could very well drop further than what the credit is worth. This is especially true of more expensive homes. Just because a tax credit is out there doesn’t mean it’s good for you to chase after.
I’m going to wait for a year or so after these credits expire to upgrade. There are a lot of good deals around lately, and I’ve been tempted to jump on them. However, they are flying off the market. This is no dobt sue to the first time buyer credit and now this one will keep it going a bit. I don’t qualify for either credit, since I purchased my current home 2 1/2 yrs ago. It was a dumb move. I thought with the way prices were going in this area I’d better buy now, or I would never be able to afford anything. Then it all crashed. I wish I still had the money I had saved for the down payment. I could afford so much more in today’s market. I’d say that about a year after these credits are gone, the market will be prime for me to buy something at a great price without relying on this “free” money.
Oh, and I couldn’t do anything with “cash for clunkers” either. I’m just never in the right situation for this stuff. We are all paying for these incentives, yet only a select few get to cash in. Don’t get me wrong, I would jump on the cash. But I hate paying so that other people get deals I don’t have access to.
I hear you! My wife and I feel like our timing is always off also. But in the long run you buy a home because you need one not because you want to take advantage of a tax credit.