Tax credit extension boosts residential sector

Homebuyers, Realtors, lenders and builders received some welcome news last month when the Worker, Homeownership and Business Assistance Act of 2009 was signed into law on Nov. 6. The act extended and expanded the first-time homebuyer credit of up to $8,000 that would have expired Nov. 30.

Industry experts agree that the initial credit has driven significant business in recent months. The National Association of Realtors reported a 10.1 percent increase in existing home sales from September to October - the biggest monthly increase in 10 years - as buyers rushed to close on properties ahead of the deadline.

Homebuyer tax credits now apply to first-time and experienced homebuyers who purchase homes by April 30, 2010, provided that the sales close no later than June 30, 2010. Existing homeowners who buy can access a credit of up to $6.500, but the amount of the credits depends on buyer income and home price.

The new law also raises the income limit for homebuyers to $125,000 from $75,000 for individuals and to $225,000 from $150,000 for couples filing jointly; a smaller tax credit is available for individuals who earn $125,000 to $145,000 and for couples who earn $225,000 to $245,000.

Besides the income requirement, existing homeowners who purchase homes must have lived in their current homes as their principal residence for five consecutive years out of the last eight years.

Tax credit impact: Round 1

The initial first-time homebuyer tax credit, established in the American Recovery and Reinvestment Act of 2009, already has played a significant role in the residential real estate market.

"The initial first-time homebuyer tax credit had an immediate and significant impact on getting people who normally would be entering the home-buying market to do that, in spite of whatever economic fear or trepidation they might have otherwise been experiencing," said Matt Morrow, executive officer of the Home Builders Association of Greater Springfield.

G. Todd White, senior vice president and loan production manager at Arvest Mortgage Co., said the tax credit really seemed to help firm up the housing market. "It stopped the fall," he said, especially in the $100,000 to $175,000 starter home market.

"Looking at (November), a lot of the loans that we're closing are first-time homebuyer purchases," White added.

Judy Huntsman, broker/owner at Coldwell Banker Vanguard Realtors, also has seen a significant impact from the tax credit, which she estimates is responsible for 5 percent to 7 percent of her firm's business since the tax credit first became available.

The extension and expansion of the credit, she said, is exciting news that Coldwell Banker is anxious to share. The company is sending out several thousand mailers and launching an e-mail blitz about the tax credits, urging recipients to let their family and friends know the credit is still available, Huntsman said.

Ted Smith, a certified public accountant and owner of Ozark-based Tax Time, said the first-time homebuyer credit has boosted his business and his clients' bottom lines.

"I did quite a few amendments for people who bought a home and wanted to go and amend the prior year's return," Smith said.

The expanded credit offers the same terms: Homebuyers will have the option of claiming the credit for homes purchased through April 2010 on either their 2009 or 2010 tax returns.

Huntsman said increased sales in recent months have improved the local housing market's absorption rate, which is determined by dividing the number of listings in the market by the number of sales during the month.

"We've come down from nine and a half months' absorption rate to just a little over seven months," Huntsman said. "A normal amount would be about a six-month absorption rate."

Tax credit impact: Round 2

While the addition of a tax credit for homeowners is expected to have some impact, Arvest's White believes the extension will primarily continue to affect first-time buyers.

"There are people that, for whatever reason, just weren't able to make that Nov. 30 deadline," White said.

That pent-up demand is expected to make a difference in the first quarter of 2010.

Also, the higher income limits of $125,000 for individuals and $225,000 for couples, "really open (the first-time buyer credit) up for most of our buyers," White added.

But Morrow notes that the $6,500 tax credit for existing homeowners is an incentive to act for people who are ready to move to a different home but have been hesitant because of economic conditions.

White added that the $6,500 credit can be a real positive, especially in markets where homes may have lost some value and buyers are worried that they don't have adequate equity to purchase their next home.

"This would at least help in that regard," he said.

The tax credits also could help drive recovery in home construction as well.

"Both of these credits require that you get a contract on the home by April 30, but you don't have to close on the home until June 30, which is really a positive move for new construction," Morrow said. "It means (builders) can continue to take orders on some homes up until that April 30 date and get it done in time to move people in and take advantage of the tax credit."

In the meantime, Morrow said sales of existing inventory are outpacing new starts by at least a 2-to-1 margin.

"By those projections, we anticipate that new housing stock inventories will be at or below what would be considered healthy levels by the end of the first quarter," Morrow added.

Eligible buyers

Credit standards have tightened, but funding is available, White said.

"In most cases, they need a 620 credit score or better, and they probably need at least 3.5 percent down," he said.

That amount, he noted, is the Federal Housing Administration's minimum down payment.

With motivated sellers often willing to cover closing costs and prepays, he said, an FHA buyer can get into a $100,000 home for as little as $3,500.

"Credit is available," Huntsman added, "And believe it or not, there are still some 100 percent loan programs."

White noted that residents in communities of 25,000 people or fewer may qualify for rural development loans that offer 100 percent financing.

But few in the affected industries seem to be lamenting the dearth of easy credit.

"Really, the guidelines have gone back to where we should have been to start with: more prudent underwriting," White said. "You have to have decent credit ... and you've got to have a little money in the deal."

Huntsman agreed.

"It's a little more rigid than it was before, but that's a good thing," she said. "I'm all for stronger guidelines in qualification, and I think most people are."[[In-content Ad]]