A critical part of Fannie Mae's role in the Making Home AffordableSM Program is the Home Affordable Refinance Program (HARP), available for refinances of existing Fannie Mae loans only. The goal of the refinance effort, as announced by the President, is "to provide access to low-cost refinancing for responsible homeowners suffering from falling home prices." The expectation is that refinancing a Fannie Mae loan will put responsible borrowers in a better position by reducing their monthly principal and interest payments or moving them from a more risky loan structure (such as interest-only or short-term ARM) to a more stable product. Our solutions provide mortgage refinances for current LTVs up to 125 percent, and mortgage insurance flexibilities. Fannie Mae provides two Refi Plus™ options to provide Fannie Mae to Fannie Mae refinance solutions to eligible borrowers:
For details on our Home Affordable Refinance options, consult the following Selling Guide Announcements for lenders and servicers.
Let's first turn to the terrific news regarding the housing stimulus. Earlier this month, the U.S. Congress overwhelmingly passed and the President signed into law new measures to maintain the momentum for a housing market recovery. The home buyer tax credit, originally scheduled to expire at the end of November will now be available through the middle of next year and more potential buyers will be able to take advantage of it. The income limit was also increased and many move-up buyers - not just first-timer purchasers - also will qualify. Furthermore, loan limits will not shrink as was planned for next year; in high-cost areas, the loan limit will remain at near $730,000 in 2010, thereby permitting more consumers to tap into the historically low mortgage rates.
As most of us are aware, the housing market recovery to date has been concentrated in the lower-end starter home segment. While the mid-priced market has begun to show signs of life, it is still far below normal activity. The upper-end remains sluggish. Therefore, enlarging the tax credit to include move-upbuyers will add the necessary "juice" to broaden the recovery. The accompanying increased velocity in home sales will mean more economic activity. Also, even though there may be less impact in the overall net inventory (a person sells before buying so it looks as a "wash" on inventory), the months' supply will fall because of rising sales. Increased sales have the added benefit of making HVCC and appraisal issues less problematic since more comparables will be available.
Adding it all up, home sales are now expected to get a boost by roughly 15 percent next year. Existing-home sales are forecast to post 5.7 million units in 2010 (up from 5 million units in 2009). New home sales will also rise, reaching 550,000 (from 400,000). More importantly, inventory will likely fall to a 6-7 months' supply by the middle of next year. That draw down of inventory means that that there are likely to be modest home price gains. Roughly speaking a 2-5 percent price gain is likely in many parts of the country in the next year.
Rising home values will prevent home prices from overcorrecting even further. Home prices have, indeed, been overcorrecting and have led to sizable destruction in middle-class housing-related wealth. By contrast, stock market and financial wealth have experienced spectacular gains in the past nine months. Despite those gains, however, consumer confidence still continues to tread near historic lows.
Why is there a disconnect between the rising stock market and low consumer confidence? Most middle-class families have the majority of their wealth tied to housing and less to the stock market. So as long as home values fall, then consumer confidence and the broader economy will face challenges. Therefore, housing-focused stimulus measures will help households build up their housing-wealth (again) and lay the foundation for a sustainable economic recovery.
There were those who argued against the home buyer tax credit. They contended that it would be cheaper for the government just to let home values slide by $8,000 (the amount of the credit) because from a buyer's point of view, there is no difference between a $8,000 credit or an equal amount decline in home value. However, a further decline in home value by that amount would have translated into a $700 billion wealth destruction for middle-class home-owning families. Such an unnecessary loss of household wealth would hold back general consumer spending and thereby hinder a broader economic recovery. But with the tax credit extended and expanded, rising home sales will help nudge home values upward rather than continuing to overcorrect. Yes, the tax credit extension will have an impact on the federal budget deficit - around $10 billion. But those monies will be easily recovered as the economy gets a boost in addition to preserving the middle-class wealth.
The commercial real estate market will also benefit, though as always after some lag time. As the economy becomes more fully entrenched in "recovery" mode, employment will start to turn around. Rising employment and recovering consumer wealth will mean an eventual increase in demand for office, retail, and industrial space.
As always, there are some caveats. Despite the very positive news on the housing stimulus, there remain significant risks to the forecast. Mortgage rates will rise from their rock-bottom points as we move into the next year. The Federal Reserve will slowly start the unwinding of its mortgage-backed security purchases. Also, consumer prices will be watched for any sign of accelerating inflation. Bond investors, therefore, will be cautious about lending at such a low rates. The 30-year fixed rate is likely to reach 5.7 percent by the end of 2010 from the current 5.0 percent.
The labor market is another worry. Though anticipated, the rising unemployment rate is a painful reminder that not all is well. The unemployment rate in October zoomed into double digits - 10.2 percent, its highest level since 1983. And the climb is not over yet - look for unemployment to hit 10.4 percent before reversing. With 7 million job cuts in the past two years, the current total payroll employment at 130.8 million is even below the total jobs that existed in 2000. The country has about 25 million more people in 2009 compared to 2000, yet the total number of jobs has remained unchanged. The silver lining is that the pace of job cuts is now less sharp now than in the first half of the year. Still, the jobless rate unfortunately will remain stubbornly high for quite some time. While job creation is expected to turn positive by spring, unemployment will likely be at 9.5 percent by November 2010 at the time of the mid-term elections. A more-than-usual number of elected officials will be voted out.
Despite the risks of rising mortgage rates and rising unemployment, the housing outlook has significantly improved. As the fear of falling home values disappears, that one key negative factor that has held back home sales will no longer be in play. Happier days are ahead.
Sincerely,
Heath B Lefort
Economist-St. John's University
WASHINGTON (AP) - Senators agreed Wednesday to extend a popular tax credit for first-time homebuyers and to offer a reduced credit to some repeat buyers. The tax credit provides up to $8,000 to first-time homebuyers but is set to expire at the end of November. Senators agreed to extend the existing tax credit for first-time homebuyers while offering a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least five years, said Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, D-Nev. The tax credits would be available to homebuyers who sign sales agreements by the end of April. They would have until the end of June to close on their new homes, said a congressional aide, who spoke on condition of anonymity because he was not authorized to publicly discuss the deal. Senators were still negotiating the expansion of a separate tax credit that lets money-losing businesses get refunds for taxes paid in previous years, providing them with an immediate source of cash. Senators in both political parties were hoping to add both tax provisions to a bill that would give people running out of unemployment insurance benefits up to 20 more weeks of federal aid. The Senate could vote on the overall bill as early as Thursday, but lawmakers were still haggling over several unrelated amendments Wednesday evening. Popular bills like the one to extend unemployment benefits often attract amendments that would have a difficult time passing on their own. Republicans were demanding that they be given a chance to offer amendments to restrict federal aid to the beleaguered community activist group ACORN and on requiring that people receiving unemployment insurance be processed through E-Verify, an Internet-based system that employers use to check on the immigration status of new hires. Majority Democrats have refused to add the amendments.
If you have friends and family looking to purchase a home in the 3-6 months, please pass on my contact information. They will receive 350.00 of closing costs and I will guarantee the lowest interest in the market if their financed amount is 200K or higher! You can call me at 401-461-9987 or e-mail me @ hlefort28@cox.net
The benchmark 10 year treasury yield, the leading indicator for today's mortgage rates, continued it's descent today closing at 3.38 down (0.76 %) overall. Today's close marks the yield's lowest level in nearly 2 months. The increase in treasury prices, driving bond yields and today's mortgage rates which move it's opposite down, is credited to investors moving toward the safety of bonds over concerns the stock market rose too quickly on initial signs of U.S. economic recovery. The move to the safety of bonds comes even as manufacturing and home sales data released today supports a current economic recovery.
Today's mortgage rates research of wholesale lender's shows 30 year fixed mortgage rates as low as 4.875 percent available with zero buy down points. Today's 15 year fixed mortgage rates are available as low as 4.375 percent with zero buy down. Today's 5/1 ARM mortgage rates are available as low as 4.125 percent with zero buy down. Mortgage rates with zero buy down points are also known as par rates. Regular points and fees do apply.
Today's mortgage rates forecast is for low rates through the holidays. For the past 2 years mortgage rates have hit their lows over the holiday season. This year may follow the trend according to analyst's most recent forecast. Analysts now predict the 10 year treasury yield, which drives mortgage rates, will descend to 3 flat. Just weeks ago analysts predicted the same yield would rise possibly to 4 by the end of the year and as a result cause a spike in mortgage rates.
Release Date: March 18, 2009
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.
Mortgage Rates are now in the 4.50% Range! Please call if you have interest in refinancing your mortgage. Heath can be contacted at 401-461-9987 or via e-mail @ hlefort28@cox.net
Home Affordable Refinance Released on April 4, 2009!
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What is shaping up as the deepest and longest recession since the 1930s will most likely end in the second half of 2009.
The ongoing impact of $2 trillion in government stimulus, with other factors such as pent-up consumer demand and returning consumer confidence, will finally lead to a turnaround, and the third quarter of next year will be "better than expected" by many. It's like starting a fire and you're trying and trying to get your flame going and you keep blowing on the flame and all of a sudden it goes 'poof!
I feel that the housing sector will lead the way. One bright note is that the sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out.
Monetary policy should be augmented with fiscal policy
Current monetary policy will help only those households that do not need help - those that have plenty of money and have a stable job. They will refinance, buy homes and consume. It will not help those who are struggling to make ends meet, or have lost their jobs or may soon lose them, because no financial institution is going to lend them money to buy a home, no matter what the interest rate is. It is up to the new administration to help these households through fiscal policy, with government spending that will create jobs.
The current job market is one of the worst in decades, with another 3.7 million jobs expected to be lost next year. That means that job losses in this recession will total 5.5 million, twice as many as were lost in the 1981-1982 recession, the second worst since World War II. I expect the unemployment rate to rise to 8.8 percent by the end of 2009 and to average 8.2 percent for the year. Deflation will also occur. Gross domestic product will decline in the first two quarters before expansion resumes in the third quarter.
Paulsen blamed "fear mongering" by government officials to persuade Congress to pass the $700 billion Troubled Asset Relief Program in the fall for the depth of our problems today. That, he said, "froze everyone in their tracks" and resulted in "economic paralysis."
Factors leading to recovery - and long-term issues it will create
Paulsen predicted confidence will begin to return in the first half of next year, helped by "the consumer who waited to buy a car and is definitely going to need one."
The U.S. government will provide the primary support for the economy in 2009. This will come in a stimulus package from the new administration with infrastructure spending and middle-class tax cuts, plus "natural stabilizers" such as unemployment benefits, food stamps and other welfare payments. The infrastructure spending will be too narrow to help everyone, he said - but the middle-class tax cuts will offer more sustained consumer spending than recent one-time stimulus checks. Savings rates may also rise to 5 percent.
The economists worried about the long-term effects of government spending, likely to result in tax increases and inflation. "The U.S. government has plenty of 'cheap' financing to help the economy forward. This is going to be very expensive and will require higher taxes in the future, but the alternative is even worse. For the foreseeable future, we can expect economic growth to remain anemic - or until markets forget about past mistakes and start building the structure for the next big bubble.
Heath Lefort has his BA in Finance & Economics from St. John's University in Queens NY. He analyzes and forecasts international, national and regional economic trends with a focus on macro-economic and interest rate forecasting, financial markets, international economics and the overall economy.
Treasurys were little changed Thursday, with benchmark 10-year note yields still at multi-decade lows, as a report showed initial claims for unemployment benefits unexpectedly fell in the latest week.
Ten-year note yields fell 1 basis point, or 0.01%, to 2.65%, the lowest since the 1950s.
Initial claims fell 21,000 to total 509,000 in the week ended Nov. 29, the Labor Department said. However, continuing claims, an indication of the difficulty of finding a new job, increased to the highest since December 1982.
"The claims data are pointing to the hardest landing, at least so far as employment is concerned, since the early 1980s," said T.J. Marta, fixed-income strategist at RBC Capital Markets.
Reports that the government is considering steps to lower mortgage rates also helped out U.S. debt, as investors speculate the government may buy Treasurys directly to lower the yields, which serve as benchmarks for mortgage loans.
Federal Reserve Chairman Ben Bernanke said Thursday that "more needs to be done" to stem foreclosures, including possibly having the government buy mortgages in bulk and refinance them.
Treasurys had moved higher before the jobless claims report, following interest rate cuts by the U.K., the European Central Bank, Sweden, New Zealand and Indonesia.
Shorter-term maturities are under more pressure, as yields are also near record lows.
Two-year note yields rose 3 basis points to 0.92% after touching 0.85% earlier this week, the lowest in at least three decades.
By Heath Lefort, Economist
The inventory of homes on the market remains very high. It will take about 10 months at the current sales pace to fully clear off the entire inventory. Until months' supply can be brought down to a balanced level of 6 to 7 months, home prices will continue to come under pressure. Some local markets have already returned to more balanced conditions, but broadly speaking, buyers have a clear edge over sellers in many markets to negotiate for a lower price. And until inventory gets trimmed, the uncertainty about the bottom in home prices will continue to lead to rising foreclosures and inflict pain on Wall Street.
There are two ways to draw down housing inventory: by reducing supply or by raising demand.
On the supply side, a sharp cutback in new home construction is helping to reduce the flow of new homes reaching the marketplace. Homebuilders are hurting badly, but it is a needed necessary adjustment.
Another way to reduce supply is to lessen the number of foreclosures. The media and Congress are heaping praise on Sheila Bair and her plans to reduce foreclosures. Her plan to modify troubled mortgages into an affordable payment structure will help more homeowners keep their homes and thereby, aside from lessening the great human and social cost related to foreclosures, help reduce the flow of additional inventory arising from forecloses. Sheila Bair gets great credit for recognizing early the impending tide of foreclosures and the need to do something about it. More than a year ago she had asked banks to voluntarily rework the troubled mortgages. Now, given the slowness of the voluntary plan, she has proposed a government spending program to rework the troubled loans. As FDIC chief, Ms. Bair is not in a position to authorize government spending, however.
The government spending in the form of guarantee payments to banks for some of the reworked loans that may default is under the purview of the Treasury Secretary Hank Paulson. Mr. Paulson has said no to the Bair plan and is getting excoriated by Congress for not doing anything to help the homeowners facing foreclosure. He contends that the $700 billion TARP funds are for investment only - those with a potential for revenue recovery for taxpayers - and not for government spending. That is what he says publicly. However, the likely reason for not supporting Sheila Bair's plan is due to moral hazard and perverse incentive concerns. That is, some of the currently performing loans will turn sour on purpose in order to qualify for the associated better mortgage terms under the Bair Plan. Furthermore, those borrowers who have been fulfilling their original contractual obligations would not benefit, while those falling behind on mortgage payments - whether on purpose or not - get relief. It's a great test of what is fair and what is not.
Some also contend that most of the reworked loans will go into foreclosure after the short delay and that Sheila Bair's plan can only postpone the inevitable and prolong the housing market downturn. One large mortgage broker, looking at loans that were modified 6 months ago, told me recently that 75 percent of these loans have already defaulted or are in the process of defaulting. That is only one anecdotal story and more empirical data should be reviewed before reaching conclusions about the success of the re-worked loans, however.
Lessening foreclosures definitely help lower inventory. Cutbacks in new home construction also lower inventory. But there is another way to quickly chop off inventory. Increase housing demand. Let the buyers soak up the inventory. Right now, there is a great deal of pessimism in the marketplace - and rightly so given the continuing home price declines in many markets. Though some buyers are responding to lower home prices and buying their dream home at bargain prices, there are still quite a few who are saying 'why buy now, when prices will be lower later?' The way to change that mentality is to put money on the table for buyers to pick up. Given that Washington is in spending mode with President-elect Obama speaking of a possible $500 billion in economic stimulus and, of course, the $700 billion already authorized by the TARP plan, it seems sensible to direct a portion of that money into kick starting housing market recovery. NAR has been proposing the following to help the buyers with the associated government cost shown in parenthesis.
The plan should be only short-term - maybe for one year, because the principal purpose is to get the housing market going in order to get the economy going. My estimate is that even a one-percentage point mortgage rate buy-down (that is, to bring mortgage rates down from the current 6% to 5%) would lead to 560,000 to 840,000 additional home sales. Correspondingly, the months' supply of inventory will fall to about 7.5 months - the level consistent with no further home price declines. An added stimulus beyond the one-percentage point rate buy-down will lead to even higher home sales and even deeper cuts in inventory. Home prices could even rise. If the national median home price was to rise by, say, 3 percent, then the U.S. economy will have surely turned for the better because such a price gain would translate into a wealth addition of about $500 billion for the nation's 75 million homeowners. The rising wealth will lead to positive gains in consumer spending.
Raising housing demand is an equal opportunity incentive. It does not introduce the moral hazard and fairness issue that Paulson is concerned about. Not to dismiss Shelia Bair's plan of reducing foreclosures and inventory, which should be tried - but the priority should be on raising the housing demand.
30yr fixed rates will continue to fall due to the unemployment numbers. A 30 yr Fixed is currently 5.75%. This is one of the best times to buy a place to live for the long term. Please call me, if you are interested in being advised towards home ownership or restructuring your debt. Happy Thanksgiving to you and your family!
The Feds want mortgages to remain available at good rates to creditworthy borrowers. That's good news. But don't expect easier jumbo mortgages or home equity loans.
The government takeover of Fannie Mae and Freddie Mac is designed to put downward pressure on mortgage rates and to ensure that home loans remain available.
Those goals are made crystal clear in the statements made by public officials.
"The primary mission of the two mortgage giants now will be to proactively work to increase the availability of mortgage finance," says James Lockhart, who will temporarily govern Fannie and Freddie.
Lockhart, head of the Federal Housing Finance Agency, adds that his agency will examine Fannie's and Freddie's fees "with an eye toward mortgage affordability."
Treasury Secretary Henry Paulson says the government has three objectives: "market stability, mortgage availability and taxpayer protection." That's another signal that the government wants mortgages to remain available, at good rates, to borrowers with a low risk of default.
The good news for the consumer is that money will still continue to flow, provided you have the ability to qualify."
"I think that the immediate impact will be somewhat positive. You'll see some drop in mortgage rates because it'll decrease the uncertainty that had pushed mortgage rates up this summer.
I can imagine a drop in mortgage rates of around a quarter of a percentage point, give or take about 5 basis points. A basis point is one-hundredth of a percentage point.
It's hard to guess the timing of such a rate decrease. It might happen as soon as today, but possibly later, as people in the mortgage industry scratch their heads and assess the federal government's plan. Probably we're talking inside of two weeks.
Mortgage rates are expected to fall because the Treasury Department will buy mortgage-backed securities. Here's why rates would fall as a result of the Treasury buying mortgage-backed securities:
When investors buy bonds, they have a wealth of choices. They can buy U.S. Treasury bills and notes, or corporate debt, or bonds from state and local governments. Or they can buy mortgage-backed securities, which behave much like bonds. Mortgage-backed securities are known as MBS in industry shorthand.
Fannie and Freddie guarantee the mortgage-backed securities that they issue, and those securities are deemed quite safe as investments. Not as safe as Treasury notes, but relatively safe. Fannie and Freddie are government-sponsored enterprises, or GSEs, and for decades they had implicit government backing. That backing is now explicit.
In the past few months, investors have rushed to the safety of Treasury notes and haven't been as eager to buy mortgage-backed securities. The lessened demand caused the prices of mortgage-backed securities to go down. When bond prices fall, bond yields rise, and that's what happened with mortgage-backed securities. As yields went up, so did mortgage rates. The difference, or spread, widened between Treasury yields and mortgage-backed securities.
Now that the Treasury will buy mortgage-backed securities, their prices should rise because of the greater demand. (The same thing would happen if the federal government bought, say, boxcar loads of sugar. You would expect sugar prices to go up.) When bond prices rise, yields drop -- so mortgage rates should follow.
Lockhart, whose department will run Fannie and Freddie, describes this succinctly when he says, "As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasurys widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. (The) Treasury will begin this new program later this month, investing in new GSE MBS."
Because they are perceived as riskier, rates on jumbo mortgages have been unusually high for the last year. Historically, jumbo rates had hovered about a quarter of a percentage point above the rates for mortgages backed by Fannie and Freddie. Now they're about a full percentage point higher, and that gap is unlikely to fall soon.
The government's bailout of Fannie and Freddie won't affect rates on home equity loans or home equity lines of credit, either.
The recent housing bill, H.R. 3221, the Housing and Economic Recovery Act of 2008 passed by Congress is a bit confusing. It is intended to spur home ownership while giving 1st time homebuyers a tax credit for purchasing a home. Below I have copied the information needed to try and sort out who qualifies and for how much. The caveat to the bill is that is initially a tax credit to be paid back interest free over 15 years or upon the sale of your home. If you sell your home and don't have enough equity to repay the loan, it is forgiven.
Builders Can Use New Tax Credit to Help Spur Home Sales
Prospective first-time home buyers who have been sitting on the fence now have a significant financial incentive to explore the opportunities available in today's housing market.
H.R. 3221, the Housing and Economic Recovery Act of 2008 - which has just been passed by the Congress and now is on its way to President Bush for his signature - allows first-time home buyers to take a $7,500 tax credit from the purchase of a single-family home, townhome or condominium apartment.
Any home buyer who has not owned a home during the past three years and is a U.S. citizen who files taxes is eligible to participate in this program. (Some home buyers who are not citizens may also qualify; see #14 in the questions and answers below.)
To qualify, buyers must actually close on the sale of the home on or after April 9, 2008 and before July 1, 2009. The original eligibility period expired in April 2009, but following a major grassroots campaign from NAHB members, the period was extended to enable home builders to include the credit in their sales and marketing next spring and into the early summer - the peak home buying season.
The program does have income limits. Single or head-of-household filers can claim the full $7,500 credit if their adjusted gross income (AGI) is less than $75,000. For married couples filing a joint return, the income limit doubles to $150,000.
Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit. The same applies to married couples who earn between $150,000 and $170,000.
The credit is not available for single taxpayers whose AGI is greater than $95,000 and married couples with an AGI exceeding $170,000.
A refundable credit means that if a taxpayer pays less than $7,500 in federal income taxes, the government will write them a check for the difference. For example, if $5,000 in federal taxes is owed, the taxpayer would pay nothing and a $2,500 payment would be received from the IRS. If a qualifying home buyer were owed a $1,000 tax refund, they would receive $8,750.
Buyers can take the tax credit on their 2008 or 2009 tax return. Those who close in 2008 take the credit on their 2008 return. Buyers in 2009 have the option of taking the credit on their 2008 or 2009 returns.
The tax-credit program also has payback provisions.
The credit essentially serves as an interest-free loan to be repaid over 15 years. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. If the home owner sold the home, then the remaining credit would be due from the profit of the home sale.
If there is insufficient profit, then the remaining credit payback would be forgiven.
Questions and Answers for Consumers
Following are the "Frequently Asked Questions about the First-Time Home Buyer Tax Credit" that will appear on NAHB's consumer Web site (www.federalhousingtaxcredit.com). The site will become active as soon as the housing legislation is signed into law.
1. Who is eligible to claim the $7,500 tax credit?
First time-home buyers purchasing any kind of home - new or resale - are eligible for the tax credit.
2. What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase.
3. What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses, and condominiums.
4. Are there income limits to determine who is eligible to take the tax credit?
Yes. Home buyers who file their taxes as single or head-of-household taxpayers can claim the credit if their modified adjusted gross income (MAGI) is less than $75,000. For married taxpayers filing a joint tax return, the MAGI limit is $150,000. The limit is based on the buyer's modified adjusted gross income for the year that the house is purchased, except for certain purchases in 2009.
5. What is "modified adjusted gross income"?
Modified adjusted gross income, or MAGI, is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income," or AGI, which is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income - including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit? Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phase-out limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
7. Can you give me an example of how the partial tax credit is determined? Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phase-out to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.
Here's another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer's income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
8. Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files its taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
9. Are there any circumstances under which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
10. I heard that the tax credit is refundable. What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15. Suppose now that taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
11. What is the difference between a tax credit and a tax deduction?
A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15% tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer's tax liability would be reduced by $1,125 (15% of $7,500), or lowered from $7,500 to $6,375.
12. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
No. The tax credit cannot be combined with the MRB home buyer program.
13. I live in the District of Columbia. Can I claim both the D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
14. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519 (www.irs.gov/pub/irs-pdf/p519.pdf).
15. Does the credit have to be paid back to the government? If so, what are the payback provisions? Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
16. Why must the money be repaid?
The intent of Congress was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices and will increase home sales. The repayment requirement reduces the impact on the U.S. Treasury and assumes that home buyers will benefit from stabilized and, eventually, rising future housing prices.
17. Because the money must be repaid, isn't the first-time home buyer program really a zero-interest loan rather than a traditional tax credit? Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers more than $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed. 18. If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on Dec. 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
19. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phase-out would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
I would like to hear what your thoughts are on the proposed legislation that is to be signed by President Bush.
If you would like to see more information like this, go to my website at www.alternativelendinggroup.com or contact me directly at 401-461-9987 or email me hlefort28@alternativelendinggroup.com
by Heath Lefort -Economist-St.John's University, Queens NY
Modest near-term movement is expected in existing-home sales, with a recovery in sales seen during the second half of the year. The Pending Home Sales Index, NAR’s forward-looking indicator based on contracts signed in May, fell 4.7 percent to 84.7 from an upwardly revised reading of 88.9 in April, and remains 14.0 percent below May 2007 when it stood at 98.5. Some pullback after a sharp increase in the previous month was expected. The overall decline in contract signings suggests we are not out of the woods by any means. The housing stimulus bill that is still being considered in the Congress is critical to assure a healthy recovery in the housing market, jobs and the economy.
But location has never mattered more than in the current market. Look at the pending home sales index for the West. While it’s true the index slipped 1.3 percent to 97.5 in May in that region, it was 2.0 percent higher than it was in May of 2007. Indeed, some markets have seen a doubling in home sales from a year ago, while others are seeing contract signings cut in half. For instance, double-digit pending sales gains in May from a year ago were noted in Colorado Springs CO, Sacramento CA and Spartanburg SC. In addition, price conditions vary tremendously, even within a locality, depending upon a neighborhood’s exposure to subprime loans.
Current real estate market conditions are positive for most buyers: still-attractive interest rates, a large inventory of homes available for sale, and many sellers willing to negotiate their prices – sometimes significantly. And in spite of the headlines surrounding issues with Fannie Mae and Freddie Mac – as well as the recent federal “takeover” of IndyMac – there is still mortgage capital out there. Credit may be tightened, but lenders are still happy to originate a mortgage loan to households who qualify. And remember: owning a home still provides long-term value – and most buyers today plan to remain in their homes for five or more years. Home buyers can get a great deal right now.
Yes, there are some concerns on the horizon. Although inflationary expectations appear to be under control for the time being, sharper consumer price gains could lead to notably higher mortgage interest rates in 2009. Based on current indicators, the 30-year fixed-rate mortgage is forecast to rise gradually to 6.5 percent by the end of this year, and then hold at that level for most of 2009. But note – that is still well below the “threshold” level of 7 percent. In spite of a month to month decrease from April to May, housing affordability – as measured by NAR’s housing affordability index -- is improving this year and is likely to rise 15 percentage points to 127.0 for all of 2008.
Existing-home sales are expected to grow from an annual pace of 5.01 million in the second quarter to 5.75 million in the fourth quarter. For all of 2008, existing-home sales should total 5.31 million, and then increase 5.0 percent next year to 5.58 million. That is less than 100,000 unit sales off the annual pace last year.
The speed at which home prices have declined in a few select markets is unprecedented, but the large price declines in those areas have enticed bargain hunters back into the market. Interestingly, there have been reports of multiple bidding after the large price cuts, so it is possible that most of the price declines have already occurred in those markets. The aggregate median existing-home price (on a national basis) is projected to fall 6.2 percent this year to $205,300, and then rise by 4.3 percent in 2009 to $214,100.
New-home sales are a different story. They are likely to fall 32.3 percent to 525,000 in 2008 and decline another 3.4 percent next year to 507,000. In light of high inventory conditions, rising commodity prices and construction costs will curtail new home construction deep into next year. Housing starts, including multifamily units, will probably fall 28.7 percent to 966,000 this year, and then drop another 9.0 percent in 2009 to 879,000. The precipitous drop in starts is due in part to some overbuilding during the “boom” years, as well as the rising costs of construction. The median new-home price is expected to decline 3.2 percent to $239,300 this year, and then rise 5.3 percent in 2009 to $251,900.
Officially, the U.S. economy has still not drifted into recession. In fact, GDP growth in the first quarter of this year was revised upward from preliminary estimates – albeit at a slow 1.0 percent rate. Growth in GDP is forecast at 1.6 percent for all of 2008 and 1.4 percent next year – not spectacular, but still positive. Inflation, as measured by the Consumer Price Index, is forecast at 3.7 percent this year and 2.4 percent in 2009. Unfortunately, personal income gains are unlikely to keep pace with rising prices. Inflation-adjusted disposable personal income is projected to grow 1.5 percent in both 2008 and 2009.
So, what does all this mean for housing consumers? It will continue to be a buyer’s market for a while. Obviously, we will need to watch developments with credit markets and the GSEs, but if a potential buyer can qualify for a mortgage, there is plenty of choice out there.
Home resales fell 1 percent in April to a 4.89 million-unit annual rate, the National Association of Realtors said.
The sales pace was a bit better than expected on Wall Street, but the stock of unsold homes surged 10.5 percent to 4.55 million units, leading economists to warn of further market woes ahead.
At the current sales pace, the supply of homes reached 11.2 months' worth, the highest since the trade group began tracking single-family and condo properties together in 1999. For single units, the supply was 10.7 months' worth, the most in 23 years.
The increase in unsold inventory suggests that the housing downturn will continue on through this year and well into next
Stocks initially got a slight lift from the data, but later turned lower as the market digested the news and warily eyed a resumption in the steep run-up in oil prices. In early afternoon, the Dow Jones industrial average was off 150 points.
Prices of U.S. government bonds rose as investors shifted out of stocks, while the dollar fell and oil climbed above $131 a barrel.
The report showed the median home price in April was down 8 percent from a year ago, at $202,300. It was the second-largest price decline on record, following the biggest drop in February.
"The big surprise was the inventory of unsold homes rising to a record level,' "This would suggest to us that further price declines are going to be necessary for the inventory to clear."
A report on Thursday showed home price declines accelerated in the first quarter. The federal Office of Housing Enterprise Oversight said its price index fell 1.7 percent in the first quarter, the steepest drop in the index's 17-year history.
Other price measures have shown even steeper drops. The Standard & Poor's/Case Shiller home price index of 20 metropolitan areas showed a drop of 12.7 percent in the 12 months through February, with prices down 15.8 percent from their June 2006 peak. The March index will be released on Tuesday.
"With prices collapsing, the incentive not to buy a home is increasing by the week, and with inventory showing no sign of improvement prices will keep falling. One-fourth of the sales likely were due to foreclosure, which he said was another negative sign.
Foreclosed homes, which sell at substantially lower prices, are increasingly showing up in the existing home sales data.
Several markets are seeing a significant rise in home sales. These markets are also the markets that have witnessed a substantial decline in prices.
The trade association said last month's existing home sales pace was 17.5 percent below the rate of April 2007, with single-family home sales off 16.1 percent and sales of multiple family units down 27.9 percent
Today, real estate is a great investment, but you have to be smart about what you are offering. I recommend that clients bid 12-15+% below the asking price. This will allow you to build in the market decline as real estate inventories increase putting downward pressure on house prices.
If you have any questions, please just call.
Happy Memorial Day!
Heath Lefort -Personal Financial Advisor & Economist
401-461-9987
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