Still can't figure out the new rumored tax credit.

From Bloomberg:

The deal would reduce the size of the tax credit to 10 percent of the sale’s price, capped at $7,290, the people said. The credit would be available on home purchases that are under contract by April 30, and borrowers would have 60 days more to close the sale. The existing credit is due to end Nov. 30.
....
The income eligibility for first-time homebuyers would remain the same at $75,000 for individuals and $150,000 for couples. The income criteria for step-up buyers would be $125,000 for individuals and $250,000 for couples.

The credit would be limited to homes costing $800,000 or less. There is currently no price cap on home purchases.

I've gone over this a few times in my head and I can't figure out why the income cap for first-time homebuyers is different than the credit for existing homeowners. The best I can come up with is it is a give away to the NAR and NAHB so they can pitch existing homeowners to trade up. But it seems weird to limit the FTHB like that. If you are trying fill empty homes you want to stimulate any new homebuyer not trade up sales. It just seemed designed to increase transactions at a very high cost to taxpayers but not really do any good for the market.

"stimulus jump-starts Conejo Valley real estate" - Really?

From a local Ventura County fishwrapper (emphasis added):

Chuck Lech, branch manager of Dilbeck Realtors with offices in the Conejo Valley and Los Angeles, said the government plan has “absolutely” jump-started the sluggish real estate market.

“It was meant as an incentive and has worked,” he said, adding that low interest rates and the changes in Federal Housing Administration loans have also been a boon to real estate sales.

Formerly, FHA loans were targeted to low-income families, but now the programs are intended for all first-time homebuyers.

Lech estimated that 40 percent of the sales in the Conejo Valley can be attributed to the stimulus plan, an estimate that is backed up by a survey published by the California Association of Realtors.

The association’s 2009 First-time Home Buyers Tax Credit Survey, released on Sept. 18, revealed that about 40 percent of first-time homebuyers reported that the federal tax credit played a critical role in their decision to purchase a home. The association surveyed 200 first-time homebuyers in California to determine the effectiveness of the government program.

“It is clear that the federal tax credit for first-time homebuyers is working, as evidenced by the spike in home sales in recent months,” said association president James Liptak. “This tax credit is arguably the most successful strategy employed by the government . . . to stimulate the housing market.”

I have the FTHB Tax credit survey and it doesn't differentiate between buyers who were thinking about buying and just moved up their buying decision a bit sooner and those who weren't thinking of buying but bought because of the tax credit.

From the previously posted charts for sales for Ventura. You will notice a big temporary spike in YoY numbers due to both seasonality and the fact the the initial $7500 credit that had to be paid back was allowed in April of 2008. Then you see diminishing returns as far as effectiveness, then the government gave $8,000 tax free in January2009 and you capture a new group of buyers (a lot of that YoY bounce is due to extremely favorable comparison, early 2008 was the worst sales in history). And as we move on into the market there are fewer and fewer suckers willing to spend HUNDREDS OF THOUSANDS OF DOLLARS just to get $8,000 back. My estimate for Dataquick for September 2009 is ~735 which would be down 8-9% YoY and the third consecutive lower YoY comparison.

If this is "absolutely" and "clearly" jump started the RE market and was "arguably the most successful strategy employed by the government . . . to stimulate the housing market" then that is more a sad story regarding the effectiveness of our government than anything else. The RE industry is doing exactly what the car industry did, trying to get a handout and keep it going. Except they are just stealing forward future demand than stimulating new demand, as we saw in todays post-Cash For Clunkers auto sales numbers. Sales are historically very low even though rates are at a ultra-low 5%, a tax credit and the FHA guidelines are very loose (as we saw in yesterdays "You can't teach stupid" update).

The tax credit is an extremely expensive way to stimulate sales, with each marginal sale estimated to cost $43,000. The RE industry is desperate for sales at any cost and is pulling out the stops to get another handout. The NAR is very powerful and I would be shocked if they didn't at least get an extension if not another expansion altogether.

"You can't fix stupid" - update

Filling in the information gap from a previous post regarding a CNN profile of buyers using the tax credit. Buyers Mike Spence and Noel Delisle mortgage has been recorded. I was hoping that the loan would show a significant down payment or something else that would make the purchase not seem so tenuous. Well, apparently, it is worse than I thought. Even though the FHA maximum limit is $729,750 the loan has been recorded for $736,415. I'm guessing closing costs or the Mortgage Insurance Premium was rolled into the loan.

The tax credit phases out over $150,000/yr in income and is completely lost after $170,000/yr. So we have a reasonable upper limit of salary for the couple, a "Level 3 Hair Designer" and a Crane operator for a tree removal company. The article mentions a 5.5% interest rate which gives us a ~$4,180 /mo for principal and interest. Property tax rate of 1.25% gives ~$781.00 / mo in property taxes. ~$70 / mo for insurance. The monthly MIP is 0.5% a year of the original loan balance which comes in at ~305 /mo for insurance. At $170,000/yr income their front end debt to income ratio would be a whopping 37.4%. At $150,000/yr income their front end debt to income ratio would be 42.4%!

This is not a loan that should be made. The debt to income ratios are insanely high. It seems like their future prospect for higher income is much lower than a low income couple with similar debt ratios but their future prospect for lower income is higher. And on top of it is the very real prospect of depreciation. Is it any wonder that people believe we will be bailing out FHA? Are we really helping this couple buy a home or just throwing them under the runaway bus to help slow it down?

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 Roost.com.

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.

Applications for new home tax credit no longer being accepted

From the Franchise Tax Board website:

Today, Thursday July 2, is the last day to fax new home credit applications to FTB. As shown in the numbers below, we have reached $100 million in new home credit applications and we will have received 12,000 applications by the end of today. We will not accept applications after midnight tonight. Do not send in applications if escrow has not closed. Applications cannot be accepted and will be denied if escrow has not yet closed.

We planned to receive 12,000 applications since many are duplicates, revised, or invalid. This ensures we have more than enough valid applications to allocate the full $100 million. These additional applications will be subject to the availability of remaining credits.

We will continue to report certificates issued on a weekly basis until the full $100 million has been allocated. We expect to complete processing all certificates in August. We will send a notification in response to all applications received, indicating the amount of credit allocated or denied.

There has been talk about expanding the program but it appears the budget issues will at least delay implementation of additional stimulus. I would imagine these issues will not derail it completely.

More on the FHA monetizing the tax credit...

Apparently you can use the tax credit for downpayment...

The new program lets home buyers apply the tax-credit advance against the FHA's 3.5% down payment requirement only if the loan is handled through a state housing-finance agency; otherwise the tax advance may only be used to cover closing costs, to increase the down payment, or to buy down the mortgage's interest rate. The FHA already allows down payment assistance from family, employers, and governmental agencies, but generally bars it from sellers, mortgage writers, or others who would benefit financially from the transaction.

How will this affect FHA defaults? Businessweek has this tidbit (emphasis added):

First, the source of a downpayment can make a big difference. For FHA-backed mortgages made in fiscal 2000, the foreclosure rate was 5.95% when homebuyers made the downpayment -- but 7.9% when it came from the buyer's family and 15% when it came, indirectly, from the seller in a practice that is now banned. When downpayment assistance came from a government agency -- eg, a state housing finance agency -- the default rate was 13.1%, more than double the rate when homebuyers coughed up the downpayment themselves.

Unlike normal times where government agencies have a limited budget which means few would be able to qualify (limiting the damage).. the funding here basically comes from the borrower and so there are no budgetary restrictions. This means that the monetization of the tax credit will have a much greater impact than I previously thought. If you thought inventory was low on the low end before just wait until this program is fully implemented. Buyers will be able to have zero down and have the sellers pay closing costs... Nothing like impulse buying a house. Clearly we have learned nothing from the housing bubble.

NAR calls for expanded tax credit

The NAR is calling for an increase in availability to the first time home buyer tax credit to anyone of any income level. They also are calling to make the raised conforming loan limits permanent. Many of the policies today (loan modification, foreclosure moratoriums) will actually reduce home sales in the future so I always thought it was curious that the NAR supported them. But if they just plan for the government to come in an subsidize sales for the foreseeable future I guess that is one way they can have their cake and eat it too. Can the handouts keep coming? When will people say enough is enough?

No you can't use the tax credit as a down payment.

I keep seeing this pop up as a "I just came up with this great idea" post around the internet. Just to be absolutely, 100% clear, You may not file for the tax credit and then use it for a down payment. Don't take my word for it, from the IRS:

Q. I am in the process of buying a home. I expect to close the deal before December 1, 2009. Can I claim the first-time homebuyer credit now? That would allow me to use the refund for a down payment.
A. No. You may not claim the credit in anticipation of a purchase that has yet to happen. Until you have finalized the purchase of your home, which for most purchasers occurs at the time of the closing, you do not qualify for the credit. IRS news release 2009-27, First-Time Homebuyers Have Several Options to Maximize New Tax Credit, contains details for filing options if the home is purchased after April 15, 2009.

$8,000 Home Buyer Tax Credit

It appears the home buyer tax credit will be $8,000 for first-time home buyers (which is usually defined as someone who hasn't owned a home in 2 or 3 years). This credit does not have to be repaid and is also refundable, meaning even if you don't have $8,000 in tax liability you will still receive the full credit. The credit applies for the borrowers if they closed between January 1,2009 and December 31, 2009. There are income limits as well of $75,000 for singles and $150,000 for couples but I am not sure if that is a hard cut off or a phase out.