Thursday, September 3, 2009

You can't fix stupid... but apparently you can give it a tax credit.

From CNN Money (emphasis added), What I bought with my $8,000 tax credit:

Location: San Carlos, Calf.
Property: 3 bed, 2 bath, 1,600 s.f.
Price: $750,000

My fiance and I were running around making wedding plans and looking to buy a home in San Carlos -- about halfway between San Francisco and San Jose. We finally found the right place on

We get married in November, but we're moving into the house this month. I'm excited because it's the best entertaining house we've ever seen. The house is built around a courtyard, and there's a barbecue. I love to entertain.

We felt like we had to hurry and buy before the end of the year so we wouldn't miss out on the tax credit. That turned out to be truer than we thought: As we got closer to the end, we realized how much closing costs and other fees would add to the purchase price, which was high enough already.

The $8,000 tax credit is saving us. Wedding, new house, we're tapped out. We're definitely big fans of the tax credit!

Still, we feel good about the purchase. Even though it's a lot to pay, we feel we got a good buy. The house next door is going for $1.2 million.

Prices have tumbled in this area, so the house is a lot cheaper than it would have sold for a year or two ago, and we got a great rate, about 5.5%, on a FHA loan. We'll use some of the credit money to updating some of the home's circa-1950's decor -- fake wood beams and chandeliers, textured wallpaper and the like.

This article was interesting. It was interesting that many were already buying so the tax credit didn't really effect their purchase timing or effected it very little (meaning, the tax credit didn't really stimulate an additional sale). Many homes were at or below the national median with some borrowers stating they were using FHA. But these blessed borrowers featured above. buying a $750,000 house using a FHA loan (meaning they don't have much down) AND are in the process of planning a wedding.

This house would require about $5,000 a month in PITI and $200,000 a year income (31% front end ratio FHA max which I'd bet can be pushed higher using AUS) for this hair dresser and crane operator to maintain. This is why FHA and high cost areas doesn't make sense. Your future prospect for increased income is low and prospect for decreased income is high yet the loans are underwritten the same for low income/low mortgage balance vs high income/high mortgage balance. Note their plans aren't to use the tax credit for rebuilding depleted reserves or paying down the mortgage. They are going to use it to redecorate their new home. Our tax dollars at work. What is funny is this is exactly the type of high consumption behavior the Fed & Government is trying to encourage with their actions. Malinvestment at its finest. It is no wonder people have little doubt that the taxpayers will be bailing out FHA soon. They will go hat in hand to Congress for a bailout and claim nobody could have possibly seen this coming.

EDIT: Commentator dafox noted that the income limit kicks in at $150,000 for the tax credit which makes the above couple situation even weaker than I first thought.


dafox said...

The credit seemed to be more of a catalyst than an enabler:
1- really want the tax credit
2- it motivated me
3- The $8,000 tax credit is saving us.
4- The tax credit helped change our minds
5- ready to buy late last year
6- If it was not for this tax credit, we would still be living in our two-bedroom apartmen
7- tax credit let me buy a three-family house without emptying my retirement.

Of those, I think #6 is the only one that was brought from one side of the fence to the other. The other 6 were fence sitters.

IMO, the 'action' we've seen over the past 6mo is going to fall off very, very quickly. And if theres *any* more inventory coming on, lookout below.

dafox said...

Also, you're right about the DTI.
$750k @ 3.5% down = $723k loan. or ~$5k/mo PITI.
The credit goes away when you make >150k/yr. So at $150k/yr, $5k/mo is a 40% DTI.

FHA is not respecting the front end ratio (31%) at all and using a 43% DTI backend only.

W.C. Varones said...


Effective Demand said...

My guess is that they either have some savings for a higher down or mumsy and daddy are forking over cash as a wedding gift.

FHA guidelines state DTI ratios can be pushed with "significant compensating factors", a higher down is one of those factors.

I'll find out the property address when it records and check it in a couple years, I wouldn't be surprised if was in foreclosure.