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Do you remember the proposed $7500 tax credit in the new housing bill for first time home buyers?  Well, turns out it is really an interest free loan, and not a true credit.  More on this below.

In the recently passed housing bill entitled the Housing and Economic Recovery Act of 2008 there is a tax credit for first time homebuyers for up to 10% of the value of the home or $7500 which ever is smaller.  To qualify for the full amount, individuals must make less than $75,000 and couples less than 150,000.  Those making more (up to $95,000 for individuals and $170,000 for couples) are eligible for partial credits.  Because it is a tax credit, the overall tax bill is decreased by that amount. So if your annual tax bill is $10,000, you owe only $2,500.  If you owe less than $7,500 in taxes, you receive a check from the government for the difference.  "First time homebuyer" is defined as not owning a home in the preceding three years.  The credit is good for homes closed between April 9, 2008 and July 1, 2009.

So how is this more like a loan than a true tax credit?  The home owner must REPAY the $7,500 credit over a period of time.  Two years after the tax credit is used, the home owner must start repaying the amount in not more than $500 increments over 15 years.  If the home is sold before the loan is repaid, the balance is taken from the profit.  If there is no profit, then the balance is forgiven.

My fear is that many first time home buyers will look at this as "free money" and will either spend the cash or use it to buy an even bigger home.  The "money quote" from article linked above:

"And there are concerns that borrowers may treat the credit as a windfall, spending it as if it doesn't have to be repaid."

I have yet to find the penalties for non-payment of the credit, but you can probably be assured there are some otherwise many would just default.

The housing industry and realtors really pushed for the inclusion of a tax credit in the bill in hopes that it would clear inventory.  

"Realtors are also behind the credit."[It] will help chip away at inventory levels, stabilize prices and spur [sales] activity," said Richard A. Smith, CEO of Realogy, the parent company of both Coldwell Banker and Century 21.
The industry has had success with tax credits in the past. In 1975, Congress passed a $2,000 credit for home buyers (about $8,200 in today's dollars).
"Buyers flocked to market and cleared out a then-record inventory of homes," said NAHB president Sandy Dunn. But that credit did not have to be repaid.
And the impact should extend beyond first time home buyers, according to Lawrence Yun, chief economist for the National Association of Realtors. A boost in demand for starter homes means that those sellers will be able to trade up to bigger, more expensive places, and so on up the chain."

First time homebuyers comprise 20% of all purchasers, so it could induce a large segment of the population to purchase a home.  However, many probably do not understand the true nature of the "credit."

Nicholas Retsinas, director of Harvard University’s Joint Center for Housing Studies, doesn't think it will have a major impact:

"Plummeting home prices will blunt any impact that the credit may have, according to Nicholas Retsinas, director of the Harvard University's Joint Center for Housing Studies. As far as he's concerned, the market is simply too soft right now for a modest measure like this to make a big difference.
"The challenge right now is as much willingness to buy as affordability," he said. "The market still has this psychological barrier because people think prices will be lower tomorrow. I don't think this can overcome that barrier."

Originally posted to Mote Dai on Mon Aug 18, 2008 at 01:28 PM PDT.


Would this $7,500 "credit" impact your decision to buy a new home?

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