As I write this, the president is poised to sign the American Recovery and Reinvestment Act of 2009, better known as the $787 billion Economic Stimulus Plan. There has been much speculation about what this plan might do for housing, real estate, homebuyers, and mortgages, ranging from 2.99% to 4.5% mortgage rates, $15,000 tax credits, and more, but when the dust settles and the plan is signed into law, the final effect will be quite different.
The most important thing the finaliztion of this plan will accomplish is it will end that speculation. Over the past few weeks, I have spoken with dozens of homebuyers, realtors, financial planners, and fellow mortgage advisors about the economic situation and the stimulus ideas, and the overwhelming consensus was this: "I'm not doing anything until I see what comes out of the package."
This is exactly why finaliztion of the package is important: not because the package might contain some magic bullet that will stop foreclosures, recapitalize banks and restore Amercans' faith in the financial system; rather because finalizing it puts an end to further guesswork regarding its contents.
So what does the package contain for the average homebuyer?
Section 1006 (page 54 of the conference report) describes changes to Section 36 of the Internal Revenue Code modifying the previous homebuyer credit that had been enacted in October of 2008. Specifically, the following important changes have been made:
- Credit has been increased: the original credit was limited to $7500 or 10% of the home's purchase price; this has been upped to $8000 or 10%.
- Credit no longer requires repayment: a significant criticism of the original 2008 credit was its repayment requirement, as those taking the credit would be required to repay it over 15 years. That has been addressed in the new law so that repayment is now required only if the home is sold within the first 3 years.
- Credit is now allowable for buyers using "revenue bond" funded mortgages: many state and local entities offer first-time homebuyer mortgage programs that sometimes offer terms more favorable than government or conventional mortgages. Previously those buyers had been prohibited from accepting the credit, however they may now claim it.
- Time to purchase extended: the original credit was due to expire June 30th; the revision extends that to November 30th
Meanwhile, many components follow the original wording instituted last fall, specifically:
- Credit is refundable: this means that a homebuyer who would otherwise owe no tax may still claim this credit and receive it as part of a tax refund
- Credit is for first-time homebuyers only: sorry, move-up buyers, but you won't receive this credit; do expect many more first-time homebuyers to be looking at your house, which should help you sell more quickly, if you're priced correctly
- Credit is income-limited: the legistlature didn't see fit to modify the terms of this program to allow all homebuyers to benefit, only those who haven't owned in the past 3 years
Finally, certain components are still somewhat unclear:
- Credit may be retroactively claimed: the prior credit offered the option to claim as if the purchase took place 12/31/2008 even if it closed in the early parts of 2009. The final bill's language appears to replace this paragraph (page 122, Stat 2981, section 36 subsection g) with something unrelated, which may mean buyers will need to wait until 2010 to claim the credit. UPDATE - As of 12 March, I have received confirmation that this credit may be claimed as if the home purchase took place in 2008, allowing buyers to get quicker access to the credit.
Overall, this program does a lot to change current programs by making them significantly more attractive to homebuyers. The removal of repayment requirement makes the credit much more attractive than the previous offer that had been made. The other changes are more semantic than meaningful, but the most significant thing accomplished by enactment of the bill is this:
At least now, we can stop guessing, and start working towards improving the housing market.
Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, Inc, and has worked in the mortgage industry for over 9 years. A 2005 MBA graduate of Clark University, Dan also serves as an Adjunct Professor of Finance for the University of New Haven and Roger Williams University.