I have written several times on this site about the impact (or otherwise) of the various programs initiated by the federal government in an attempt to get a pulse going again in the housing market. In a nutshell, I believe the programs have had mixed results.
On one hand, extending the upper limit of conforming loans to a max of $729,750 in high-cost areas such as San Carlos was a brilliant idea, and it couldn’t have come at a better time. Right on the heels of an unprecedented credit crisis in 2008, this new source of low-risk, low-cost funding was the single biggest factor in keeping the housing market afloat in San Carlos and in surrounding areas during that time. Extending this initiative well into 2010 was the second most brilliant idea so far.
The other element to the government’s stimulus plan was the $8,000 first-time home buyer’s credit. The idea behind this plan was to give first time buyer’s a credit on their federal income tax when they purchased a new home. Not a bad idea, right? But the first attempt at this plan didn’t yield much benefit for San Carlos home buyers, and now that the government has decided to change/extend this tax credit through 2010, there’s nothing that tells me the result will be any different. Here’s why…
The Current Tax Credit
Under the current plan, buyers are only eligible for the full $8,000 credit if their modified adjusted gross income (MAGI) doesn’t exceed $75,000 for a single buyer (no credit past $95,000) or $150,000 for a couple filing jointly (no credit past $170,000.) Well, in a community like San Carlos where the average listing price of a home is still north of $1M, it doesn’t take a financial genius to figure out that most people can’t buy a home that’s nearly 7X their annual income. Hence, not many people were able to take advantage of the current tax credit when they bought a home in San Carlos.
The “New” Tax Credit
Lawmakers listened to the criticism that was leveled at this unrealistic income cap, and made a few changes when they created the “new” tax credit for 2010. Most notably, the adjusted gross income cap was raised to $125,000 for a single filer or head of household, with the credit phasing out entirely at $145,000. For married couples filing jointly, the limit was raised to $225,000 with the credit phasing out at $245,000. On top of that, they created a new $6,500 credit for “move-up” buyers, or those who have lived in their home for 5 consecutive years (out of the past 8.)
So far his sounds like a home-run of a program, right?
Why it’s NOT a big deal for San Carlos.
But one must never forget the golden rule when it comes to the government and taxes:
The IRS giveth, the IRS taketh away.
With rare exception, the government has never been in the business to give you something without getting something in return, and this case is no different. While the revised tax credit has much higher income limits, it also carries a new stipulation that makes the credit available only if you purchase a home for $800,000 or less. Ouch. If you follow San Carlos real estate at all, you’ll know that’s a small piece of the pie.
Consider the following:
- In the past 12 months, approx 220 homes sold in San Carlos. Of those 220, only 68 ( or 31%) sold at or below $800K.
- Of all the homes currently on the market in San Carlos, only 28% of them are priced below $800K.
In other words, this means that before you even consider the buyer’s income, roughly 70% of the home purchases in San Carlos will not qualify for this tax credit. That’s not much to get “stimulated” about.
The real stimulus.
There has been much fanfare even on local blogs about this new tax credit. Sure, it will help some first-time home buyers looking to settle in San Carlos. But I never thought the old credit was a big deal, and I feel no differently about the new one. Apparently, I’m not alone in my opinion – check out this article in the US News and World Report.
As I mentioned at the top of this epic post, the real stimulus for the housing market in San Carlos lies in the extension of conforming (and FHA) loan limits up to $729,750. Why? In 2008 alone, the two largest segments of home loans written by Bank of America in this area were a) conforming loans and b) FHA loans, most of which took advantage of the higher limits.
And that, my friends, is proof of a program that works.
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