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New Tax Credit Gives Fence-Sitters Hope

If you’re planning to buy a house this year, you’re buying because you feel that interest rates are at a historic low (they are!), millions of foreclosures have driven down the prices of homes near you to something much more affordable, and because you have a job that you expect to keep over the next few years.

The fact that you might get an $8,000 tax credit because you buy this year hasn’t entered a lot of people’s consciousness.

Last year, as part of the Bush administration’s stimulus package, first-time homebuyers who purchased a home through June 2009 were given a one-time $7,500 tax credit. Although the $7,500 first-time homebuyers’ credit (10 percent of the purchase up to $75,000) may have factored into some people’s decision to buy at the end of the year, a lot of home buyers have written to let me know that it seemed like a big surprise bonus — they had no idea there was anything in the pot for them.

Last year’s $7,500 credit was more like an interest-free loan, requiring a payback at $500 per year over 15 years. But getting that money all at once, when you file your tax return, made it seem like a big chunk that could be used for other things.

Now the pot is a bit bigger and has a gilt edge. President Obama this week signed into law HR 1, the American Recovery and Reinvestment Act of 2009, which expands the $7,500 first-time homebuyers’ credit into an $8,000 credit that would be available to first-time buyers of a primary residence (sorry, real estate investors). Better yet, it would not need to be repaid as long as you stay in the house for at least three years.

The $8,000 tax credit could be a deciding factor for some buyers who are on the fence and aren’t sure how long they’re going to be staying in their new residence.

I heard from one Atlanta resident this week who is thinking about moving to a Chicago suburb. She’s a transferee, and her company would probably buy her house through its relocation company if it doesn’t sell quickly. She wanted to know if it made sense to buy in her new location.

If she’s there for only four years (her current estimate), there’s a good chance she might not make any money on the property, unless she’s extremely savvy about which home she buys and how much money she pours into improving it. However, getting an $8,000 tax credit could swing the pendulum definitively into the “buy” column, especially if she’s able to use the cash to pay down debt, build equity, or fund needed renovations of the property.

The real question members of Congress need to ask: What is the optimum level of home buying that should be taking place? Over the past decade, a significant percentage of homebuyers were actually real estate investors buying up condos, townhomes and single-family houses to fix and flip, or to rent. Lots of people bought homes who couldn’t afford them even in good times, not to mention a massive recession.

Because real estate investors are having a difficult time getting financing, that sector of the market has dwindled dramatically. So 40 percent of homes sold may not be to real estate investors, a level achieved for several years running earlier this decade.

But if the real estate infrastructure is now set for 7 to 8 million new- and existing-home sales each year, but the real number of first-time and trade-up buyers is actually more like 4.5 million, increasing the number of buyers this year may wind up siphoning the home-buying market in years to come.