ChoiceOne Real Estate Blog

Senators reached a compromise to extend the $8,000 tax credit for first-time home buyers, a boost the housing industry expects will help it pull out of its two-year-old downturn.

Lawmakers in Washington also added a $6,500 tax credit for other primary-home purchasers and raised the qualifying income limits to $125,000 for single taxpayers and $225,000 for joint taxpayers, housing-industry sources said.

Under the Senate compromise, buyers must have sales agreements in hand by April 30, but they will have until June 30 to go to settlement, the sources said. The measure still faces votes in the full Senate and the House.

The current tax credit did little for the new-home market in September, the Commerce Department reported – news that took many industry analysts by surprise. Sales fell 3.6 percent from August and 7.8 percent from September 2008.

Industry observers had expected a fifth consecutive monthly increase in new-home sales, believing that the tax incentive for qualified first-time buyers – credited with 357,000 sales of previously owned homes so far this year – would do the trick.

Instead, sales of typically more expensive newly built houses slipped.

“The decline in new-home sales seems to us to be more a function of the attractive pricing available on resales in the current environment than a reflection of weakening demand,” said Michael Feder, president of Radar Logic Inc., of New York, which tracks the market.

“Big deal,” said Joel L. Naroff, of Naroff Economic Advisors, of Holland, Bucks County. “Since hitting rock bottom in March, demand is up 20 percent.”

For Naroff, the robust rise in existing-home purchases – 9.2 percent year over year in September – indicated that the housing market was not faltering.

“Maybe the issue is supply, which fell to its lowest level in 27 years,” he said. “Builders, at least those left standing, have been making sure they don’t have any houses sitting around, and they have been very successful in controlling inventories.”

IHS Global Insight Inc. economist Patrick Newport echoed that, noting new-home inventories “sank for the 29th straight month to their lowest level since November 1982.”

Naroff maintained housing had recovered enough to stand without the tax credit. But Newport said he believed that if the credit were not extended and expanded, housing demand would take a hit, and home sales would drop.

Until the Senate compromise today, the extension of the credit seemed mired in what National Association of Home Builders vice president Jerry Howard called “a game of partisan chicken.”

Howard’s take on the lower September numbers: It was too late to sign a contract on a house that would be completed by the current Nov. 30 deadline, and many buyers were concerned the credit would not be extended.

The credit has helped, acknowledged Marshal Granor, a principal in Granor Price Homes, of Horsham. But he added, “I’d love for it to go away, for a month.”

“People who believe there is no rush aren’t buying, they are waiting for more bargains from more squeezed sellers,” Granor said.

Still, said Feder of Radar Logic, lower home prices have carried “buyers further into the autumn than we would expect, based on historic patterns.”

Declining inventory means builders will have to ramp up production, Newport said.

As the Senate worked on the compromise, third-quarter data were released showing that the burden of foreclosure filings in the post-bubble market continued to shift from the subprime-ridden “sand” states (California, Nevada, Florida and Arizona) to areas with rising levels of unemployment and adjusting rates on the “exotic” mortgages prevalent in high-cost metropolitan markets.

Yet Las Vegas remained the toxic-loan capital, according to the third-quarter survey by RealtyTrac Inc., of Irvine, Calif. – its rate of foreclosure filings was seven times higher than the national average.

Copyright © 2009 The Philadelphia Inquirer, Alan J. Heavens. Distributed by McClatchy-Tribune Information Services.

Key congressional leaders want to extend the tax credit for first-time homebuyers beyond its scheduled end-of-November expiration despite complaints of fraud and Obama administration concerns about the costs.

Housing and Urban Development Secretary Shaun Donovan says the administration is not sold on the idea. For the past several weeks, Obama administration officials have been talking about possibly extending the credit to help spur the economy and create jobs. But at a congressional hearing Tuesday, Donovan said the administration needs better cost estimates.

“To truly understand the costs, we will not know that until Americans have filed their tax returns,” Donovan told the Senate Banking Committee. “We believe it’s critical to have the information necessary to make a fully informed decision about the costs.”

Tax filing season doesn’t start until next year. But Donovan said he expects to get cost data in the next few weeks. “We understand the urgency of this situation,” Donovan said.

The Internal Revenue Service has opened 107,000 examinations of questionable claims and identified 167 criminal schemes involving the tax credit since it was expanded as part of the economic stimulus package enacted in February.

But lawmakers understand the program is popular and has helped the struggling housing industry recover.

Lawmakers said they might add protections to help prevent fraud. But there is a growing consensus among congressional leaders that the housing market is still fragile enough to justify extending the program.

House Majority Leader Steny Hoyer, D-Md., said he favors extending the existing credit through the end of the year as lawmakers work to “find out about how ethically and how honestly this policy is being pursued.”

Senate Banking Committee Chairman Chris Dodd said, “We still need to use every tool at our disposal” to help the housing market. Dodd, D-Conn., has joined Sen. Johnny Isakson, R-Ga., in sponsoring a bill that would extend the credit until June 30 and expand it to people who already own homes.

It would cost about $1 billion a month to extend the existing credit, according to congressional estimates. The bill sponsored by Dodd and Isakson is estimated to cost $16.7 billion.

The existing credit allows qualified first-time homebuyers to reduce their federal income taxes by 10 percent of the price of a home, up to a maximum of $8,000. Homes purchased after Jan. 1 are eligible. The full credit is limited to single filers making less than $75,000 a year and joint filers making less than $150,000.

About 1.4 million first-time homebuyers have qualified for the credit through August. The National Association of Realtors estimates that 350,000 of them would not have purchased their homes without the credit.

“The housing market would not have moved without this tax credit,” said Lucien Salvant, spokesman for the National Association of Realtors. “It’s a fragile recovery, which is why we think it should be extended.”

The IRS began special screening procedures for tax returns claiming the credit after it was enacted, said IRS spokesman Frank Keith. For example, taxpayers who previously claimed the mortgage interest deduction would warrant a second look if they claimed the first-time homebuyers credit, he said.

Processing claims presented special challenges for the IRS during the spring tax filing season because homebuyers were eligible for different credits, depending on when they purchased their homes.

First-time homebuyers who purchased homes in 2008 were eligible for only $7,500 in tax credits, and the credits had to be repaid over the following 15 years. Those who bought homes in 2009 were eligible for up to $8,000, and there was no requirement to repay the money. Also, people who bought homes in 2009 were allowed to claim the credit on their 2008 tax returns.

An audit by the agency’s inspector general found that 93 percent of the returns claiming credits for homes bought in 2009 were coded incorrectly, meaning those taxpayers could be incorrectly identified as liable for repaying the credit. The audit was released in September by the Treasury Inspector General for Tax Administration. It reviewed 47,276 electronically filed returns.

The IRS, in a response to the audit, said it plans to track the returns and confirm that taxpayers are liable to repay the credit before pursuing them.

Copyright 2009 The Associated Press, Stephen Ohlemacher, Associated Press writer.