Wednesday, October 28, 2009

Homebuyer Tax Cred Extended Through Apr/2010. Will This Do Anything For Charlottesville Area "Move-Up" Market?

Last night (10/27/09) it was a done deal; today, it's iffier.  But it's likely that the "First Time Homebuyer Tax Credit" is going to be extended and expanded to include "Move-Up Buyers" and run through 4/30/10. 

 Is this going to significantly increase Move-Up Buying in this area? 

Short Answer:  Not likely.  But do read on to learn why.

The new tax cred of $7,290 UPDATE $6,500  has expanded income caps and will be available for "move-up" buyers who have lived in their homes for five years or longer.  (The cred remains $8K for first-timers.)

But that's a huge problem here and elsewhere: lack of move-up buyers.  This blog noticed the phenomenon in the past in this post, and in another post about listings which had sellers who were not going to "move up."

While the second post was a one-week snapshot of new listings, the problem persists: those who are selling in this area for the most part fall into one of these categories:

1. seller is leaving town for a new job
2. seller is leaving town after a UVA program or residency ended
3. property is for sale by a trustee due to owner death
4. seller is retiring or ill and downsizing
5. seller has been in the property about 5 years--there's an Option ARM resetting
6. seller wants to unload an investment property
7. the property is REO or short sale

8. seller is trying to downsizee before a foreclosure or shortsale 

And--oh, yeah--then there's price.

After excluding the above sellers, there's a handful left over confronted with the prices of "move up" homes.  A tax credit of $7,290  $6,500 is not much of a motivator.  

With the current tax cred and an FHA loan,  $8K can essentially cover the 3.5% down payment for a "starter home" of up to $230K. Even so, 2009 sales were already below 2008 sales here, despite the tax credit and low mortgage rates.  Look at City sales for an example.  According to Nest Realty Group
  • 69% of all transactions through Q3 were $325K or below 
  • Nearly 2/3 were $250K and below

So this little bit of Federal Gov't intervention won't do much more in this area.  But it's a ridiculous version of "extend and pretend" and further enslavement of the American tax payers.

As this blog pointed out the other day in response to The DP's advertisement article, this homebuyer tax credit is rife with problems.  Read more about the problems via The Baseline Scenario  (Thanks, Main Street).   And for the most cogent indictment of this idiocy, see The Automatic Earth:

That principle is: the US government is busy actively raising home prices. And there we are back to what I've been saying about Fannie and Freddie for the longest time. While the reason given by Washington is that its involvement is driven by a desire to "stabilize" the markets, that is at best only part of the truth. What the White House and Capitol Hill are trying to do is "stabilizing" the markets at a level that they find acceptable. Which, if we recognize that their policies increase the number of homes on the market as well as their prices, evokes the image of a hamster on a flywheel. And that hamster WILL get tired at some point.

Who loses in this set-up? First, homebuyers, since they pay much more for their homes than if the government would stay out of the market. Then again, what obligations do the buyers really have? They get a home for free, more or less, and often with a non-recourse loan to boot. In the end, the by far biggest losers are the American taxpayers, who have to watch helplessly as their own chosen government shifts a fast increasing share of the losses of the housing market onto their tab, all solely for the benefit of the one and only party that stands to profit.

That is, the banks. Which can unload repossessed properties at much higher prices, given the tax credits. Which can keep properties and loans at greatly elevated prices on their books, which allows them to fool their shareholders and depositors into thinking they are far more healthy than they would be without government involvement. Who can use the artificially raised "values" on their books for highly leveraged financial wagers that if they pay off allow for multi-billion dollar bonuses, and if they don't can be channeled back to the taxpayers' account.

(BB emphasis) 
Updated Details...CR notes this can be used for "move down" buyers as well.

The Details of the Tax Credit Extension
US Senators Near Deal (Thanks, anon)
Uncle Sam Adds 5% w/ Tax Credit


Anonymous said...

Moving In Buyer

I'm irate! I sold my first home last spring and lost my entire 20% down payment. Now I've been looking forward to buying my next house is Cville and perhaps not paying 2X the actual value. Suddenly, buying this spring doesn't look so good after all, since my number one goal is NOT to be underwater 2 months after closing. (Oh, and since I only lived in my home for 3 years, I don't even qualify for this waste of a credit.) Joy. I get to pay 5-10% more than I should, and lose money all over again, or avoid buying altogether. Sigh...

downtownenvy said...

Anonymous, don't feel bad. The husband and I have been waiting for a price "correction" for 5+ years. Friends think we are crazy, but everytime we run the buy vs. rent numbers calculator for this area we are happy to wait.
If you feel yourself wavering and want to run out and overpay for a house just go to Bankrate and do the same- you will feel much better staying put and holding on to your money.

Anonymous said...

DE, I'm confused. We've been similarly on the fence in terms of purchasing for 5 + years, in part because of living in an extremely expensive area in the northeast. We've now decided to buy in C'ville, though, and running the buy vs. rent numbers at our current interest rate, the calculator you mention says we'll save $17-18 K over the next five years by shifting from an $1850/mo. rental to a $417 K 30 y fixed mortgage ($520 K purchase-prince, 20% down). After following the local market for over a year, it seems to me we can get much more house in a better location for a $520 K purchase price than a $1850/mo. rental. What are the numbers you're running that have kept you from purchasing for so long, both before the bubble and after? Is it a specific neighborhood or something?

Anonymous said...

Also, I should add that the houses we're looking to get in the low $500Ks would have been asking well into the $600Ks when we started looking in Spring 2008, so we have already seen a 15-20% drop in the area (generally considered desirable) where we're looking. I've been looking at the transfer records online and I appreciate this doesn't get us back to 2003-2004, but I don't see why that should necessarily ever happen, given the population expansion in the area that's taken place since 2000. And from your comment it sounds as though you thought things were unacceptably overvalued already in 2004--what would seem an acceptable pricing environment to you? I'm very interested in your thinking because it sounds as though you have really been paying attention locally throughout the boom and (partial) bust.

Real C'ville - The Bubble Blog said...

Anonymous x 2,

Did you look at the pie chart of sales?

Do you realize that sales in the $500-$600K range in the City made up 3% of all sales for the first three quarters of 2009 to date?

What could make you think that sales are going to increase in this price range?

Who do you really think is your "buyer competition"?

Anonymous said...

Hey, thanks for your response.

We don't think sales are going to increase, certainly not. We're not looking to make money on a home purchase, though we'd like not to lose buckets. I don't think there is "buyer competition" in the $500K range, and that's why I think I'm seeing offerings there that would have been in the higher price range (over $600K) 18 mos. ago, looking more like 2004-2005 prices, at least.

I appreciate that there has not been the amount of correction in this market, at least not in the neighborhoods we're interested in, that can be seen in many places nationwide--nowhere near 2001 prices, not even back to 2003. I've been frustrated about that like many other buyers who post on your site.

Nonetheless, it's time for us to buy a house at last--we're in our mid-thirties with two kids--and I don't see indicators that make me feel like it will be worth it to "game" the market for an indeterminate number of continuing years in hopes that C'ville will be the next Detroit. In fact, I hope it's not.

What I was venturing to propose (and I'm not expert like y'all) is that the purchase-price/rent ratio is perhaps not so out of whack any longer, at least not for family homes in strong school districts.

But please continue to correct me if you think I'm misguided! That's why I've posted.

Thanks again.

Anonymous said...

I tried to post a reply earlier, so sorry if there is redundancy--

Hey, BB, thanks a lot for replying!

We don't think that sales are going to increase in the ca. $500K range, and we don't think we have "buyer competition"--that is why we are looking at properties now in our price range which would have been in the higher bracket (well over $600K) about 18 mos. ago.

We aren't looking to "make money" off a home purchase--we think that mania is what caused the bubble in the first place. That said, we don't want to lose buckets of money either, naturally.

What I was trying to point out was, in response to DE's post, that it seems to us that buy-vs.-rent numbers are becoming quite more reasonable in C'ville/Albemarle, especially given the current interest rates and given our personal situation (family of four, schools of paramount importance).

Housing is always going to be a significant line-item in our monthly budget. We are trying to think in terms of buy-vs.-rent as DE is, but (perhaps because of our priorities/needs, or perhaps because we are looking at different micromarkets?) we are coming to the opposite conclusion--buying now seems to make more sense.

So I wanted to get a sense of whether you-all on this site, having followed the market assiduously and bubble-bustingly, think we're pathetically misguided.

And I will say I'm following this blog in the first place because when we initially started looking in Spring 2008, we had the experience of so many others of feeling personally insulted by the asking prices and the narratives supporting them. And we have crammed our family into a too-small rental and put up with all the hassles of not fully settling in in order not to play the game when the rules seemed so far out of whack. Coming from outside, never having seen what things were like pre-boom, we feel like we've seen significant movement over the past 18 mos. Sure, local prices aren't to 2001 levels, or even to 2003 levels, and there's not a Detroit or Cleveland on the horizon with late-90s pricing. But I don't want C'ville to *be* Detroit or Cleveland, after all.

Thanks for any other input you guys or your followers can give us relative newbies.

Real C'ville - The Bubble Blog said...

Anon x2 (x2!) Sorry you had to re-post...comment moderation is enabled after 7 days in order to inhibit spam-bots. Both of your comments were put up b/c they're not identical and both are interesting.

The blog has some details/info that we'll add here in comments over the weekend...and perhaps other people will, too (like DTE, perhaps, or a couple others looking in this price range).

Wondering, since Prez Obama will sign it into law Friday a.m., if extension of homebuyer tax cred has any impact on your decision? Or just a nice perk, if you qualify?

Anonymous said...

The tax credit is not a factor in our thinking. We assumed it would expire as scheduled. It ought to expire as scheduled.

downttownenvy said...

Anonymous, we are a lot like you. Family of four and one of my little guys is already at Venable where we plan to keep him. We rent for quite a bit less than you, so that is probably why our deal looks so good to us. We negotiated a really low rent because of the high vacancy rate this year. We have a house that even at purchase time while still in the Venable district won't be in the $500,000 range.

We talked to the owner and they are looking at selling next year and are very interested in a rent to own situation with us which suits us fine because the price is below $340,000 and has tons of potential. It is a fixer upper, but then again so are a lot of the $500+ range which is what still insults us about this market. We refuse to pay top dollar for something that still needs $150,000 to bring it up to date kitchen and bathwise. We are way LESS insulted if the house is in the school district we want, has the sq footage we want (1700 fin/1700 unfin) and has a large enough lot(double city lot). We lucked into this one, so we will probably buy it because it has all of these things. Knowing that people are still asking what seems to be 200+% for houses around here just keeps turning us off and with a rent that is so cheap, the calculator still works really well for use. We save over $600 a month on our house because of the cheap rent. That will change when we buy, but not that significantly because we plan on being here a while and renovating it to suit us.

downtownenvy said...

I should follow up that my husband has a take no prisoners attitude about home buying. We don't have to love a house to buy it. If it's in the right neighborhood and school district we are really unemotional beyond that. It's just a business deal, and the biggest of our lives after our business so we are determined to get a good deal. My husband also believes that buying a house in this local market at these prices is like feeding stray animals. If buyers keep paying ridiculous prices, local sellers will keep expecting them to do it in the future. We are just a pebble against the tide, but we can live with that.

Real C'ville - The Bubble Blog said...

Anon, we are going to roll these issues into a post, due on Thursday, Nov. 12. Don't buy until then! ;0)

Anonymous said...

DTE, thanks for your reply. What you say makes perfect sense to me, and it's great that you're able both to rent at a cheaper rate than we are, and to follow up the possibility of buying a house through personal connections with your current landlord. That sounds like a great plan, and having some $$$ left over to modify/renovate to your own designs will be tons of fun.

We don't have such a specific plan, but are looking to get a well-maintained and updated house of 2500+ sq. feet, 4 beds/2.5-3 baths, in the Western Albemarle High district but quite close in to town, as we work in the city. I have to say, we just don't see a lot of pricing flexibility given those parameters, in terms of either rents or selling prices, but we have seen prices come down at least 15-20% over the past year, and given the total supply of properties that we're interested in, it's hard to see why things would go that much lower. And it seems as though rents and purchase prices in this admittedly restricted market segments are coming back into alignment.

So, BB, was the most recent post the one explaining why not to buy? I see the doomy stats with some trepidation, but again given our specific criteria I'm not sure exactly how all this stuff applies to our situation.

Thanks again, all, and happy weekend.

Real C'ville - The Bubble Blog said...

Anon, you're referring to this post:

It IS full of gloomy stuff viz. the nat'l economy.

But no, it's not the "don't buy" post. :0) There will be a post full of local numbers, graphs, charts, etc. that will address current market conditions locally (w/some wider context thrown in). We've been delayed on blogging schedule, but hope to have it up in next 24. (We'll link to this new post here in these comments.)

We're not really saying "Don't buy," though. Lots of buyers made bad decisions in the recent past, and some sellers still believe it's 2006. We're sayin that current buyers shouldn't make the same mistakes as bubble buyers. In general we say appreciation has risen beyond the scope of credulity, prices are out of sync in terms of earned median incomes, and there's the unknown of coming resetting mortgage rates...combined with steady or rising unemployment, sales will not regain their bubble peaks and prices will continue falling through at least 2011 before flatlining.

But in fact, you have compelling reasons to buy--the desire to settle and have control of your environment. These issues can supercede any $$$ issues. In the area you're looking in, according the Q3 Nest Realty Report, prices are down 16% '09 over '08.

Nevertheless, the local market (and all its micro-niches) remain unpredictable...and in the context of the Gov't's larger control of the terms of pricing, tax credits, and mortgage rates...ANY buyer wants to make as smart a decision as possible, using as much data as available.

So the visual data....soon.

downtownenvy said...

As I say wholeheartedly to all buyers in this county/city. Good luck. Just remember that your best tool in negotiating in this market is your feet. If you don't get the deal that you feel is fair, remember that there are a TON of properties still available and a whole lot more waiting to be released into the market. I hope you get an affordable deal and a home that you love. Good Luck!

Crunching Numbers said...

@Anon from November 4, 2009 9:53 AM

I'm trying to figure your calculations on the rent v. buy.

Rent: 1850 per month

Buy at 520K w/ 20% down:

1) Avg. interest per month on fully amortizing 30 year 5% fixed rate loan for first five years: 1670 per month
2) Taxes at 1% (Cville): 5.2K, or 433 per month
3) Insurance at 1.2K, or 100 per month
4) Transaction costs to realtor (assuming seller will pay closing costs)=6%, or 31.2K, or 500 per month over first five years
5) Opportunity cost on 100K (assuming 1.8% return on FDIC CD): 150 per month
6) Maintenance cost: 4.8K per year, or 400 per month

TOTAL COST to BUY: about $3250 per month

I don't see how buying makes sense, unless one assumes that the house's price will appreciate significantly over five years--like 20%.

Anonymous said...

Hey, BB:

Thanks for the epic post! Like all things meaty and good, it will take a while to digest.

CN, I used the Bankrate and NYT Rent vs. Buy calculators. But I do disagree with a bit of your math.

As of now we can get an interest rate under 5%, but for the sake of it let's say 4.875.

1) is then an average of $1623/mo. over the first five years, but you have to factor in the income tax deduction too. In a 33% tax bracket, we will save $3K a year over standard deduction itemizing only this interest payment. But once we have a reason to itemize we can deduct other stuff too, like our church and other charitable contributions, any medical over FSA, etc. Again, for the sake of argument, leave that at $300/mo. Net $1323/mo.

2) We're looking in the county, which was .71% (but going up?). Anyway, $308/mo. Net $1631/mo.

3) OK on insurance, that's my number. BUT I'd note our renter's insurance is almost that much (we may be overinsured, but we also live in an old place without security system, covered parking etc. So net $1631 still.

6) OK on maintenance. Net $2023/mo.

This is versus $1850 a month now. By lease our rent can increase up to 3.5% per month, and last year it increased 3%. I guess you could argue our rent would never increase again, but let's say, nonetheless, that it increases 2% per year. So five years from now we're paying $2003/mo.

Net difference five years from now, owning a $520K home versus renting an $1850/mo. rental: $20/mo.

And let me add to rent the house we're looking to buy, on a normal basis as opposed to squatting temporarily while a squeezed seller continues to try to sell, would cost *considerably* more that $1850/mo. in the current market. It is just not apples to apples.

Obviously I've left out your #s 4 and 5 here, but I think they're a bit disingenuous. We're not planning to move in the next five years or we wouldn't be looking to buy--basic rule of thumb, and we are pretty educated after MANY years of deferral and nest-egg savings and 800-credit score accruing. Of course s**t happens--but what if we sell FSBO, etc.? I just don't think it's fair to include that cost upfront. Even if you do, though, it amortizes out after 5 years, and who

And the "opportunity cost"--well, fair enough, but historically housing has appreciated 1.8% per year. No one can guarantee returns from either housing or the market (believe me, I've PAINFULLY watched our downpayment/nest egg savings shrink at the same time homeowners have watched their paper values drop). So as long as you're not expecting much out of either, that seems to net out to me, too.

I think that's more than likely how the calculators told me what they did.

Thanks for the horrific jolt first thing in the morning, though! This conversation definitely has us thinking harder.

Real C'ville - The Bubble Blog said...

Thanks for adding the details, DTE, N Cruncher, and Anon're helping others look at their own situations. The new post w/current data is here:

Comments are still welcome on this post, but they go into limbo for a little while instead of appearing instantly (spam prevention) b/c the post is more than eight days old.