The stimulus package is making its way to the President desk as we speak. One of the items that hits home for current and future homebuyers is the tax credit for first-time home buyers. Specifically, the latest version of this plan denotes, as agreed upon by the House and the Senate, "first-time home buyers are eligible for a refundable tax credit equal to 10 percent of the purchase price of their home, up to $8,000, if they made the purchase after Jan. 1, 2009, but before Dec. 1, 2009."Since I am currently working with a few prospective first-time homebuyers, I thought I'd picked their brain during my follow-up calls this weekend to see how they feel about this incentive.
Interestingly, their answers all seem to boiled down to one thought: if they are ready and want to buy a house now, they will buy no matter what; the tax credit of $8K will NOT be the factor that push them off the fence. On the other hand, if they are "just looking" and don't intend to buy soon, they will not take action because of the $8K tax credit either.
Now, note that all of these people intend to buy a home in San Francisco Bay Area and their target home price is $500,000 on average. Their tax bracket is generally in 25%-30%. One of them is a CPA and he said "free Money is a good way to convince me to buy [but only] around areas where houses are much much cheaper." He also added that the $8K credit works well for house price that is $80K (wait, do they even exist?...), because "if you buy a house around $80K, you already got a 10% discount. Sell the house back out 10% profit in your pocket as long as you hold it for a certain number of years." And that's assuming housing market does not continue to drop.
When asked what will be most helpful to get them into a home now, they unanimously came to the same response -- any program that helps with down payment. Although they have good credit and a reliable income, coming up with 20% of the purchase price (which is the minimum down payment requirement for most conventional loans nowadays) is the toughest part for them.
I think the best way to find out if a stimulus plan works or not is to go directly to the source -- the consumers -- and listen to what they have to say.
4 comments:
I think the stimulus package's help to first time home buyers will push those who are sitting on the fence (perhaps leaning more towards buying) to pull the trigger. But for those sitting on the sidelines, I think they'll stay there. It's just not enough.
Remember this is a Federal credit so the benefits might be greater to people living in other states.
Found a $80k house somewhere, for example:
http://patriciabaker.point2agent.com/Listing/ViewListingPhotos.aspx?ListingID=2126894&ShowCompact=False&Preview=False&Bb=BP&Cc=2126894
The buyer of this $80k house is going to get a 10% discount. If you think in terms of rate of return, how long would it take for the real estate market to gain 10%? A few years? The buyer of this house just made a 10% profit the second he/she closes escrow. Wouldn't you throw $80k into this house and get a 10% rate of return just like that if you have the cash sitting around? Or give your kids the money to buy if he/she qualifies as a first timer.
Think it would be hard to find an $80k resident around the Bay Area? The credit applies to mobile homes and houseboats too!
Here is one for $60k.
http://bam.kaango.com/feViewAd/13755996
What about this houseboat for $35k?
http://www.marineclassifiedads.com/bay+area+california-rs888/house.boats-c12/ad1117.html
Wait till I tell my girl the good news. Baby we are moving to the trailer park!! Yeeeehaaa!
Anonymous #2,
Those are very interesting examples you brought up. However, in my opinion, an $80K real estate property and a 10% instant rate of return in the real estate world seem unattainable and improbable to me. Instant gratification may only work on gambling tables, but real estate investments should be a long-term, well-planned investment.
However, base on the same rationale you presented, we can apply it to something that’s more relevant to the Bay Area:
You said that you will get a 10% instant appreciation if you purchase a property for $80K… what about coming out ahead 5% for a condo in Concord/Pittsburgh for $160K; or 2.5% for a 2-bedroom condo in the Peninsula or South Bay for $320,000; or 1.25% for a single-family home in San Francisco for $640,000….
...the bottom-line is, you may not win big, but would it be nice to know that you always come out ahead in this market?
Well the $80k property was just an example, and it is a good example too. Since this credit will help sell those properties a lot faster than the ones you just mentioned. It is a good place to park your money in this current market condition knowing you are guaranteed a 10% rate of return. Savings account? CD? Bonds? And there are lots of people with just $80k sitting around looking for a place to park.
You are totally right that there is no instant gratification in the real estate market. Maybe I shouldn't use the word "profit", since this credit is intended for long-term investment. There is actually little short-term “profit” to have, because administrative and other closing/selling cost would most likely offset some of the $8k. I don’t think the IRS would allow you to sell it right away anyways (I don’t have all the details on the credit yet).
10% rate of return on asset, yes.
10% profit…….not exactly.
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