Winding Down the Home Buyer Tax Credit Blog

Posted on September 15, 2010 | Leave a comment

We’ve been delighted to run the Home Buyer Tax Credit information site and this blog, where we’ve answered about 300 questions about the tax credit.  We hope that people found the site and this blog helpful, and we will leave it up to provide information to people who might have questions about the home buyer tax credit.

But given that the application and closing deadlines have passed, we expect that interest in the program will diminish until tax season in 2012 (for the 2010 tax returns), when people might have questions about filing issues.  At that point, we might come back to make some posts about paperwork requires.  As always, of course, we direct you to the sound advice of your accountants…..

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If they’re going to create a new Home Buyer Tax Credit, let’s try to get it right this time.

Posted on August 31, 2010 | Leave a comment

Given that we’ve seen reports that the administration might be consideringproposing a new Home Buyer Tax Credit, I wanted to share some thoughts about how Congress could draft legislation that might create a more effective and simpler program.

Most of these suggestions come from my experience as a broker dealing with the tax credit over the past three years, and particularly my experience breaking down and analyzing the credit on this blog and for the homebuyertaxcredit.comsite.

First, keep the dual-deadline feature, with one deadline for contracts and another deadline for closings. Having one deadline for contracts and a later deadline for closings effectively spurs home buyers right up to the contract deadline, and then gives everyone in the industry time to work through the pipeline of contracts go get everyone closed in time.  The original versions of the tax credit only had one deadline, interpreted as a closing deadline, but the problem was that the credit lost its incentive impact in the last month or so of availability, since very few people can get into contract and close in a month. Congress introduced the dual-date deadline feature in the November 2009 extension of the credit, and it kept the engine running through the April 3oth contract deadline.

Second, give at least 120 days between the contract and closing deadline. The November 2009 extension of the credit required contracts by April 30th and closings by June 30th, only a 60-day window.  What we learned was that buyers procrastinate, with lots of buyers getting into contract just under the deadline, creating a massive pipeline of buyers that could not possibly close within 60 days.  The welcome extension of the closing deadline through September eased that stress, so Congress would be foolish to create a new tax credit with a narrow window between contract and closing.

Third, eliminate the income limitations, but keep the purchase price restriction, if your intent is to limit the tax credit to the middle class. Congress doesn’t want to be perceived as giving tax credits to people with high incomes, but the income limitations are confusing and probably unfair to people who end up just missing them.  Anyone who makes much more than the income limitations is probably going to be buying a home that is more expensive than the $800,000 purchase price limitation, anyway, so you don’t need the income limitations to limit applicability to the wealthy.  (Even better, tie the purchase price limitation to regional home prices, since an $800,000 home in Westchester is basically an average-priced home, while a $800,000 home in rural areas is a mansion.)

Fourth, eliminate the ownership history limitations. The tax credit started as a “first-time” home buyer tax credit, then in November 2009 morphed into an extraordinarily complex “first-time home buyer and long-time homeowner” tax credit.  Just eliminate the ownership history requirements. If you want to avoid applying the tax credit to investors, then just keep the residency requirement.  But the “you have to live in the same home for five consecutive years out of the last eight, or not live in your current residence for the past three years” is confusing and unnecessary.  Give the credit to anyone who buys a home, so long as they’re buying it to live in it.  Keep it simple.  That might put me out of a job, insofar as I won’t need to write up 30,000 words explaining the intricacies, but this job has not exactly paid the light bill so I won’t miss it.

Fifth, phase the credit out gradually, to create a “Methadone effect” of slow withdrawal for buyers claiming the credit. One of the problems with the past versions of the tax credit was the hard stop: if you were in contract as of April 30th, you could get the credit, but if you got into contract on May 1, you got nothing. That tended to drive a of buyer behavior, with people rushing to meet the deadline, then exhaling and dropping out of the market.  Instead, create a tax credit that phases out over time in, say, three month increments: $8,000 if you are in contract by December 31, $6,000 if you are in contract by March 31, $4,000 if you are in contract by  June 31, and so on.  Ultimately, you have to turn it off, but if it phased out you might get a “methadone” effect in which home buyers would not be as addicted to it as they seem to be as soon as the credit expires.

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Posted in Congress, Home Buyer Tax Credit, Legislation

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Stirring in its Grave: The return of the Home Buyer Tax Credit?

Posted on August 31, 2010 | Leave a comment

UPDATE 9.1.10: Donovan has reportedly clarified his comments, saying that the administration has not actually discussed resurrecting the Home Buyer Tax Credit, and has no present plans to do so (as I expected).

Various sources reported yesterday that the Obama administration is considering reviving the Home Buyer Tax Credit. Apparently, the dismal July housing numbers have spooked people in the administration, and raised concerns that federal incentives for home purchase might have expired too early.

The spark for this speculation was HUD Secretary Shaun Donovan’s appearance on CNN yesterday.  When asked about whether the tax credit could be revived, he didn’t rule it out.  He didn’t indicate that the idea is firmly planted in the administration’s economic plan, but he did say that “we’re going to be focused like a laser” in trying to revive the housing market.

It’s probably premature to talk about this as a real possibility.  First, it’s clear that the housing industry is not going to overtly push for a tax credit.  As I understand it, NAR and Realogy, which were the main forces pushing for the extension and expansion of the credit last November, made a promise that they would not go back to the well again if they did get that extension.  So they’re not going to break that promise.

Second, I’m not sure that the current environment in Washington is conducive to getting anything done, much less an extension of the tax credit that could cost up to $30 billion.

And third, I’m not sure that it’s even a good idea. For every commentator that thinks that an extension of the credit would spur home sales, you have lots of observers who think that the credit simply shifts purchases around and doesn’t actually pull people off the sidelines and into the market.  Certainly, the robust April numbers, followed by the weak July numbers, supports the idea that any extension of the tax credit would create a mini-bubble in the market that would effectively distort the normal seasonal rhythms.

That said, we’ll keep our eye on it.  If the credit does return, my hope is that Congress does a better job drafting it this time.

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Did the Home Buyer Tax Credit Distort the Housing Market? Yes, but so did a lot of other things.

Posted on August 26, 2010 | Leave a comment

The July closing numbers were just put out by the National Association of Realtors, and they show a pretty dismal sales month in July. Existing home sales were down 27.3% from July of last year, to a seasonally adjusted annual rate of 3.83 million homes.

This is nothing particularly surprising, given that anyone in the industry knew that the market slowed considerably this summer.  Although the summer is generally an active time in the real estate market, the first summer in two years without a tax credit incentivizing buyers, and coming two months after the deadline for the last tax credit that sucked a lot of buyers into the spring, is unsurprisingly weak.

Again, this is not surprising.  The government provided a strong incentive for buyers to move quickly to purchase a home by April 30th, so a lot of people who would normally purchase in the summer moved their plans up.  That’s making the summer weaker than normal.  On top of that, recent economic news has not been strong, which dampens consumer enthusiasm for jumping into the housing market.

Is this a long term trend?  Probably not.

The housing market has been buffeted by a series of distortions for the past five years:

1.  The subprime market (2004-05).

The first distortion in the housing market was back five years ago, when the appetite for mortgage backed securities on Wall Street created a perverse incentive for lenders to expand their guidelines to allow people to stretch in order to purchase a home. If you look at historical market cycles, we were due for a slowdown sometime in 2004-05, but instead we got two or three more years of significant appreciation.  That appreciation was largely artificial, juiced by novel loan products that did not conform to traditional underwriting guidelines and made homeowners out of people who had no savings and little income.

Those people should not have been buying homes, but the expansion of the buyer pool to include them kept putting upward pressure on prices for two years beyond when the normal market cycle should have ended.  We’ve been feeling the hangover for that particular narcotic since 2007, and we haven’t sweated out all the poison yet.

2.  The Financial Crisis (September 2008-April 2009)

We mark the second major distortion of the market as the financial crisis in late 2008, after the collapse of Lehman that prompted the creation of TARP and a severe correction in the stock market. For the next six months, the housing market was just dead.  At the time, I commented in my company blog about how people were only buying homes out of circumstance, not by choice: they were buying a home if they absolutely needed to, but no one who was not forced to move was choosing to buy something in those difficult financial times.

The subprime market was a positive distortion on the demand side, but the Lehman collapse distored the market the other way — dramatically lowering demand for a six month people while people considered whether we were entering a second Great Depression. That distortion drove prices down much more quickly and aggressively than we would normally see in a market correction, and in some ways accelerated the transition through the change from a seller’s market to a buyer’s market.

3.  The Home Buyer Tax Credit

And finally, the various iterations of the Home Buyer Tax Credit acted as a large-scale distortion of the housing market by propping the market up at a time when it might otherwise have struggled.  I don’t think a lot of people bought a house that otherwise would not have just to obtain an $8,000 tax credit, but i do think that the tax credit changed the psychology of the market, emboldening some buyers who might have been fearful and encouraging people in the industry to keep plugging away.

But the tax credit also acted as a smaller-scale distortion of the market by shifting transactions around to conform to the deadlines and their extensions. Essentially, the tax credit exerted a gravitational pull for buyers, who tended to procrastinate up to the deadline.  When the credit was expected to expire in November 2009, we saw a dramatic increase in activity in the six weeks prior to the expiration.  Then when the tax credit was extended to April 2010, we saw three months of lackadaisical activity where buyers had no urgency.  Then, again, a big surge of activity in late March and April, followed by a few months (including now) of a slowdown.

So although the tax credit on balance helped, I think, the market into a bit of a recovery by encouraging home ownership and giving buyers on the fence a reason to buy, it also created short-term distortions by shifting buyers from  one part of the year to another depending on when the deadlines fell.  So we’re seeing that now — buyers who were going to buy in the summer bought in the spring, and buyers who are looking now feel no urgency, because they missed out on the tax credit and they’ve come to discredit predictions that rates might be rising (after two years of those predictions proving false).

So what’s going to happen now?  My guess is that we’re still feeling the hangover from the tax credit, but that in a few months we’ll return to normalcy — that is, a normal BUYER’S MARKET, which doesn’t necessarily mean a return to “normal appreciation” in the market.

The big issue right now is the economy: if people feel anxious about their job or their income, they are likely to put off decisions to buy a new home.  So the biggest obstacle to recovery in the housing market is the same obstacle to recovery in the overall economy: a reduction in the unemployment rates.

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Posted in Existing Home Sales, Home Buyer Tax Credit, NAR

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My Work Here is Done (?)

Posted on July 15, 2010 | 1 Comment

For the last six months, we’ve tried to establish a helpful consumer-oriented site to help people understand and keep up to date with the Home Buyer Tax Credit. We created what we think is the most comprehensive set of resources explaining the intricacies of the credit on the internet, created the only fully-featured eligibility test to tell you whether you’re eligible, provided links to the actual legislation and IRS rulings, created video tutorials, kept a running news feed, provided up-to-date commentary on this Blog, and answered hundreds of reader questions about eligibility.  We even tried (unsuccessfully, unfortunately) to spark a legislative campaign to eliminate a freakish “marriage penalty” in the tax credit.

For the most part, though, the work is done. We’re well past the initial contract deadline of April 30th, and the closing deadline of June 30th.  Although the closing deadline has been extended until the end of September, which is a great thing for both buyers and the industry, our expectation is that most buyers will not have difficulty closing on time if they were in contract by April. Four months is a good lengthy period of time to get your closing set up. We don’t expect to see a lot of traffic on the site, or get a lot of questions that have not already been answered.

All this is by way of saying that we will not be keeping this blog as active as we’ve been for the past six months.  We’ll check in occasionally if there’s an interesting piece of news or we get a novel question, but otherwise we’ll be focusing our efforts on other things.  So if you do have a question, try to find the answer in our FAQ, our Eligibility Test, this blog, or in the 300 or so questions we’ve already answered in the questions section.

My apologies if you post a question and don’t get a response, but at this point we feel that we’ve covered the full range of possibilities that are out there.  At some point, we’ll do another pass at all the questions, particularly if something new comes up.

My thanks to everyone who has participated on the site, and who has been reading the blog.  We look forward to our next project, and hope that you found the site and the blog helpful.

Thanks,

JR

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Posted in Deadlines, Home Buyer Tax Credit

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Home Buyer Tax Credit Closing Deadline Extended through June 30th

Posted on July 1, 2010 | 1 Comment

On Wednesday night, Congress overwhelmingly passed a standalone bill that would extend the closing deadline for the Home Buyer Tax Credit to September 30th. The extension will apply ONLY to buyers who were in contract by the in-contract deadline of April 30th, but those buyers will now get an additional three months to close beyond the original June 30th closing deadline.  As of this writing, the bill still needs to be signed by President Obama, but that is expected sometime today.

UPDATE: President Obama signed the legislation on Friday, the extension is now law.

The prospects for the extension had fluctuated in the past few weeks.  Although there was overwhelming support to give relief to the estimated 180,000 buyers who would not be able to meet the June 30th deadline, the extension had been tied to a much more controversial bill that would also extend unemployment benefits, which was opposed by Republicans out of concerns for its effect on the deficit.  Fortunately, from the perspective of real estate industry professionals and affected home buyers (and sellers whose transactions might have been canceled without the extension), Congress separated the tax credit extension from the more contentious provisions, allowing for its passage this week.

This is indeed good news, for a couple of reasons.

First, and most importantly, the extension recognizes that thousands of home buyers and sellers would have been unfairly impacted by the unrealistic June 30th deadline.  When Congress set up the deadlines back in November 2009, it could not have anticipated the inherent delays in the transaction process caused by more stringent financing requirements by banks and the higher percentage of sales that involve “short sales” that require a lengthy approval process.  Moreover, no one anticipated how many home buyers worked to the April 30th deadline, delaying their purchases until the very end of the eligibility period and further exacerbating the inherent sluggishness in the system.  Through no fault of their own, thousands of buyers would have missed the June 30th deadline, even potentially canceling their contracts and putting their sellers back on the market.

Second, even if you are concerned about the effect on the deficit, the extension is only allowing the tax credit to work the way it was supposed to.  When Congress set up the Home Buyer Tax Credit, it anticipated a certain number of buyers being able to claim the credit, without considering how difficult it might be to close by June 30th given the expected surge of transactions, financing delays, and the impact of short sale processes. Essentially, Congress fixed a problem with the initial legislation.  This was not an expansion of the tax credit, just a needed repair that allowed the credit to have its intended effect.  As such, it should not increase the expense of the program beyond what was initially projected.

Third, the extension will allow an orderly processing of transactions by the industry.  It would have been nice to get the extension two weeks ago, before thousands of mortgage lenders, title processors, lawyers, and settlement agents scurried to get deals closed by June 30th, but we’ll at least be able to see an orderly and normal transactional process for the next three months. 

Remember that the extension only applies to buyers who were in contract by June 30th — the extension does not open up the credit to new buyers.  As such, it was a good decision by Congress, recognizing the impact of the unreasonable June 30th deadline on thousands of buyers and sellers, and allowing people who expected the credit to receive it.

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Deadline Update: June 30th is still the closing deadline for the Home Buyer Tax Credit

Posted on June 25, 2010 | Leave a comment

Yesterday, Senate Republicans defeated a bill that would have extended unemployment benefits, provided aid to local and state governments, and also would have extended the home buyer tax credit closing deadline through September 30th. Senators voted 57-41 for the measure, but needed 60 votes to defeat the Republic filibuster based on GOP concerns of the effect of continued extensions of unemployment benefits on the federal budget deficit.

So for now, there’s no extension of the June 30 closing deadline coming up next week.  As we’ve discussed before, all real estate professionals will be working diligently to close “tax credit” deals by the end of the week, but we’re all concerned that it will be physically impossible to get everyone closed on time. 

What happens if a buyer planning on claiming the credit cannot close on time?  Can the buyer just opt out of the contract, since she won’t be getting the tax credit that she counted on?  It depends.  In some cases, she can get out, but in most cases, I don’t know that the failure to meet the deadline will be a material fact allowing for an unwinding of the contract of sale.

1.  What if the buyer has a contingency that she has to close by June 30?

If the contract is specifically conditioned on the buyer closing by the June 30th deadline, then the buyer could use that contingency to break the contract (just like a mortgage contingency).  If they have an out, then they are free to take it and unwind the contract.  Of course, they could also use the threat of exercising the condition to get a price change on the purchase, and sellers might be likely to be negotiable given the slowdown in the market the past two post-tax credit months.

2.  What if the contract is silent?

I would be surprised if many buyers had negotiated a pure contingency.  Most likely, the buyer and seller might have negotiated a change in price if they can’t close on June 30th, or the contract, like most contracts, has an “on or about” date on June 30th that is not binding on either party.  In that case, the buyer really cannot get out of the deal just because she lost the tax credit.

3.  What if the buyer tries to break the contract anyway.

A buyer trying to break a binding sales contract on the ground that she missed the tax credit deadline would be no different from a buyer trying to break  a contract because she lost $8,000 in the stock market.  In other words, it’s not a valid ground to break a contract. If they try, I’d be surprised if any seller’s attorney let them out.

We’ll keep you posted.

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