There has been a lot of speculation recently regarding the proposed continuation of or even extension of the $8000 tax credit. In a recent post, one author even hypothesized that by foregoing the tax credit, homebuyers could actually save more money. The rationale being that demand would sharply drop off and prices would follow. This may be true in her area, but it is not true in Louisville.
Jeff Belonger, one of the nation's top FHA experts and former Louisville resident, also disagrees. In his detailed response below, he captures the problems with this reasoning. In short, you are throwing away a sure thing for the hope of something better. Ever heard the one about a Bird in Hand? The risk certainly does not outweigh the meager rewards.
While you read Jeff's post, consider that the average home price in Louisville is around $150,000. A $20,000 drop in prices would be more than 13% in lost value. With the exception of select neighborhoods, Louisville home values didn't drop 13% at the lowest point in the market and aren't about to do so on December 1st.
Please remember, real estate is local. Find an area expert who knows the market you are in and listen to him or her. National news and out of area bloggers will only cost you money.
**Remember: Time is running out.
How smart do you think you are? Do you think you can outsmart people, just because you read some good advice, yet it failed to share with you the opposite side of things. That has been one of my biggest fears and pet peeves when it comes to blogging. And another? That many blogs are opinions, not facts, yet they sound like facts.
Janet Guilbault wrote this interesting post that makes a good point : Outsmart the crowd : Skip the $8,000 tax credit & wait to buy - She talks about skipping the first time homebuyers tax credit in hopes that you could get the house of your choice for $20,000 less. She adds that winter is around the corner and the market should be slower, which could get you that price reduction. Again, some good food for thought, yet forgetting some very key points to her opinion. And just for the fact, in my opinion, this is a risk. Are you willing to chance your $8,000 tax credit? Let's look at this further....
RISK – CHANCE – HOPE – LUCK – FALSE HOPE
Again, Janet states that you should skip the $8,000 tax credit, because you could get a better deal on a house in the winter months. And because there wouldn't be as many buyers in the market, because of the first time homebuyers tax credit of $8,000 would not be available. Overall, I feel really strongly against this kind of advice.
Here are my thoughts on why you should be careful of such advice :
- Reduced property values - You got the house for $20,000 cheaper, and based on a $250,000 mortgage, that would save you $120 a month. So you didn't get the $8,000 tax credit. It would take you 5.5 years to save that tax credit with your monthly savings.
- Interest Rates - Do you have a crystal ball? Do you know where mortgage rates will be in December? You get that new house for $230,000, yet the rate increased .375 of a percent. Your new savings will now only be $64 a month. That means that it would take you 10.4 years to save that $8,000.
- Real Estate Market - Do you know how appraisals truly work? Do you understand that an appraisal is an opinion from a certified appraiser? Not one house is the same and in many cases, not all appraisals of that same house are the same. I could give you many examples of specific homes in recent months, having a few different appraisals that could vary from $3,000 to $20,000 in value.
- $8,000 tax credit in your pocket - You now have the $8,000 in your pocket 2 months after settlement. What could you do with that monies?
- Use the money to fix up the house.
- Use the money to pay off some credit cards, which could save you more money in the long run.
- Possibly pay back some debt to those that helped you get into your new home.
- Save for any housing emergencies that could happen at any moment.
- Waiting for a possible increase to the tax credit, possibly a $15,000 tax credit - So you take Janet's advice and say to yourself, maybe they will extend the tax credit or raise it to $15,000. Ouch, in my opinion, that is a huge risk. If you are actually in the market now, why play the market? If you come across your home now, but it now, don't roll the dice.
- Real Estate Market - Each real estate market is different. In my opinion, even the experts can't truly predict what the housing market will do. Some have said that we have hit bottom. Some say it could be a year. But then again, in some markets, prices have increased already. In Janet's post and in a few of the comments, some people have stated that there will be a correction to this. Again, it's an opinion, not a fact.
- $20,000 reduced value - You don't physically see this money. You don't get 20k in hand. And what happens if the house was over-priced to begin with? What happens if values don't increase in 5 years? The only equity is that equity that you build yourself. In 5 years, you knocked your principal balance down by $16,000.
Conclusion : Janet ended her post with this ... "If you save $20,000 on your house, do you care if you sacrifice an $8000 tax credit? Probably not. (But don't expect anyone in the real estate industry to talk about this until AFTER the rebate ends)."
Well, I will still be talking about it, no matter if the tax credit continues or ends. I am all about educating the consumer, sharing both perspectives on real estate and mortgage issues. And yes, I would care if I sacrificed the tax credit, especially based on what I stated above. Especially if interest rates went up a half of a percent by December. In my opinion, I can go to Vegas and or Atlantic City to gamble. But why gamble on free money, money that you don't have to pay back. We are in a very tight economy now. I don't think many of you have money to gamble with as you did several years ago. (I don't want to get into the statement of free money, because yes, as tax payers, we are paying for that)
Lastly, excellent time for first time homebuyers. Home values are lowest in the last 5 years, with interests being close to the lowest in several decades, and $8,000 given to you if you qualify.
IMPORTANT REMINDER – The $8,000 first time homebuyers tax credit ends on November 30th, 2009
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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!
Copyright © 2009 by Jeff Belonger of Infinity Home Mortgage Company, Inc