Homebuyer Tax Credit Extended and Expanded

By Xin Lu on 7 November 2009 (Updated 22 February 2010) 22 comments

A couple months ago I wrote about the pros and cons of extending and expanding the popular first time homebuyer tax credit which was due to expire on November 30th, 2009. I wrote that there was a good chance that Congress would extend the credit regardless of the costs. Sure enough, this week Congress has approved an extension and expansion of the credit. Here are some details on the changes.

First of all, the $8000 tax credit will be available to first time homebuyers that enter into contract by April 30th, 2010, and close on the deal by June 30th, 2010. This is essentially a 6 months extension.

Next, the income limits for qualification have been increased from $75,000 to $125,000 for single filers, and $150,000 to $225,000 for joint filers. This increases the number of people eligible for the credit as well as the cost of the program by quite a bit since many people who could afford to buy homes now have high incomes.

Finally, there is an expansion of the credit for move up buyers. Basically, those who have owned their current homes for at least five years could buy a new home and get a $6500 credit. The new home purchased must cost $800,000 or under. The start date for this new credit will be November 6th, 2009, when President Obama signed it into law.

This credit extension was attached to a larger bill that is extending unemployment benefits by 14 weeks to 20 weeks, and it passed with very few dissenters. The new extension is projected to cost 10.8 billion in lost taxes, but if it works out like the Cash for Clunkers program or the first part of the tax credit then it will probably cost quite a bit more.

In my last post some commenters wrote that they would be very angry if late comers were given a better deal on the tax credit. Some people I know are also feeling gypped that they did not qualify for the tax credit this year due to the lower income limit. What do you think? Is the tax credit extension really necessary now? Would you take advantage of the new extension?

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Rick

It seems very silly to be funding this tax credit from borrowed money. To those who can take advantage of it, good luck to them. But to the people who are voting this into law they just need to be voted out of office.

Guest's picture
Adam

I disagree with Rick. I have been house searching for about 6 months and have not found "the one" just yet. So this extension is great for me - and many others. I realize it's a huge cost to the taxpayers but when people buy houses they buy paint, hire contractors, buy furniture, etc - it's a huge spark to the economy. So I like the move and think it'll help things moving in the right direction.

Guest's picture
Mivey00

Adam,
Your defense of the credit essentially describes the entire argument against it. The point is that since the credit is going to a large number of individuals who would have bought a house without it (which seems to describe your situation entirely), why continue it? There are estimates that it is costing over $50,000 per house that would not have otherwise been purchased. Is this really the best way to stimulate the economy? I think not.

Guest's picture
s2i

Just one correction, which I am personally affected by and covered in this article on the home buyer credit extenstion. The income qualification limits are NOT retroactive. The higher income limits are only for homes purchased after Nov. 6, 2009. That is, the existing MAGI phase-outs of $75,000 to $95,000 or $150,000 to $170,000 for joint filers still apply to purchases on or before Nov. 6, 2009.

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El Cheapo

I think the move-up credit will do very little to stimulate the jumbo loan 400K plus housing market. Which at the current time is all but frozen and is compounded by the fact that banks are sitting on huge shadow inventories. Banks have little incentives to loan these days (with LIBOR and interbank rates so low and spreads high.. this on top of crumbling balance sheets). Home owners who have larger mortgages and a bit of equity having lived in a residence 5+ years also have little incentive to 'move up'. Closing/realtor costs and fees, timing a contingency purchase, hassle of moving, isn't normally worth such a credit. Why not just pay the points and refi to a lower rate and stay in your current home, which many such homeowners already have?

I also believe that the 6K housing credit will continue to stimulate the lower-middle and lower end spectrum of housing along with the booming FHA loan market. The lower-end market is hot due to lower capital requirements and the availability of near-prime rates even for FHA loan participants. Another mini-bubble if you ask me (well at least in SoCal).

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Michael

I guess I was a fool for buying my house in late 2008. Hell at that time, they weren't even discussing a 2009 credit. I guess the financial bailout to Banks and the impending doom was too great of focus. I'm not really complaining about the credit, but I wince every time I hear the 8,000 tax credit for this year and now into the next brought up. It seems like it passes my ears at least once a day, do to various forms of media hype, like if you didn't saturate the media enough, people might now find out about this credit.

I think that this credit is somewhat a continuance of the ill advised policies that lead to the housing bubble. Just because someone can't afford a house/new car/bank implosion doesn't mean we should support them so they can. Some ppl are never meant to be homeowners and the like, but that isn't politically popular.

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Guest

I bought my first house this summer. The tax credit is already spent at the ACE hardware, Home Depot, Crate and Barrel, and at local reupholsterer. Between fixing the previous houseowner's stupid houseflip fubars and buying curtains that I like, I'd say that I'm pretty confident that this $8000 has gone straight from the IRS into the local economy.

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Guest

This new 6,500 credit will definately make me more motivated about moving into a larger and much needed home than I previously have been.Finally something to help the lower middle class income worker!We struggle to get by without all the perks of those with lower incomes and those who have enough and don't need the perks.

Guest's picture

We will have owned our current house five years this May. Before reading this article, I was unaware of the new credit for move-up buyers. Thanks for this info.

I hope that NO ONE feels "gypped" by the new credits. We should not be jealous of those who are offered another deal that was unavailable to us. The goal of the credit is to help the economy as a whole. Anyone who has bad feelings about this is just plain childish.

Guest's picture
Guest

I don't think that being upset that other people have access to a pool of money that I paid into, but don't have access makes me childish.

It makes the person who is *supposed* to be accountable for the money irresponsible!

Guest's picture
Candice

We are relocating - thus, buying a new house and would qualify for the $6500 credit...if....

We had our last house for more than the 2.5 years we did. We moved into that house because of a job relocation, too. We've owned a house for the past 10 years, but unfortunately, we don't qualify because of the "5 year" thing.

It would have been nice to have, as this time we chose to buy a fixer-upper that has already required $10K of work just to get the small $66K loan on it. At least the house is worth quite a bit more than what we are paying for it!

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Brent

For me I just feel like I got lied to thats all. I felt that from the time the bill passed till its end date was fairly small that it was an emergency effort. The point being... if you were saving up an amount and are less than 8k from your goal point, buy before Dec 1st. This opportunity wont come again. But it did. I wasn't going to get up to my goal on my own before December, but It was worth it considering the 8k. So I bought. Now its been extended and I look at how I could have put 20% down instead of 10% and that would have made it safer, and more responsible, but I acted quickly to beat the deadline. I'm not complaining about the deal that I got, I'm complaining about being urged to act quickly when they would have been fine with me acting slowly. I didn't want it the first time, but I'd be a fool to turn down free money. I didn't want it this time either, when it makes even less sense. I still have to pay for it.

Guest's picture
Trevor

We, a young professional couple, bought a 117-year-old house in July of 2008. No $8,000 tax credit.

If we had one, we could make green improvements to our house...insulation, efficient windows, attic ventilation, coat of paint, roof repairs, woodstove.

Right back into the local economy.

Are we being punished or something? Buying our house didn't even allow us to itemize tax deductions last year.

Guest's picture
Tracie

My question is that after all these changes to the program do the first people who used it still have to repay the money? Or is that considered a different program? If so feeling a bit gypped here.

Guest's picture

Does this mean putting yourself into more debt? I think so. In this economic climate I see no sense in it. Are these new home buyers guaranteed that they will keep their jobs. I think not. I would be very cautious about using this, what I call "hand out".

Guest's picture
Bobster

All those who want to get free money from the government please raise your hand. Ah, yes, looks like a majority.

All those who want to pay the government debt with interest so that others can get free stuff from the government please raise your hand. ... um, don't all jump as once...

Guest's picture
Colleen

I unfortunately missed out on all counts. I closed the second week of January 09 so I missed the $7,000 "loan" and I owned an old garden apartment that was considered a condo so I was not eligible for the $8,000 credit and now they are offering $6,500 for move up buyers but not starting until Nov 09. So although I LOVE my new house, I can not take advantage of any of the credits. I did my job at helping the economy. Oh well.......

Guest's picture
alienation

I think it's not a good way to get stimulus.

1. Most of the stimulus is coming not from the government, but from the borrower. Think about it - the government gives you a little money, but, with that cash, you're borrowing a lot more money.

2. By easing the credit requirement, you cause demand to increase, and prices to rise. The nominal increase is around what the tax credit will help you borrow, which is around an extra 200k.

This tax credit is great for the government. They pay you 8k. You borrow an extra 100k or more. You pay taxes, which amount to around 10k. The government is ahead around 2k.

You keep paying taxes on that overvalued property... amounting to thousands more dollars.

Then, they claim that 8k is debt and must be paid back from taxes, later. The investors get paid!

This is just neo-liberal pseudo-Keynsian pseudo-deficit spending. It's a smoke and mirrors trick to get people to accept more debt, to stimulate the economy.

I think direct spending on reparing infrastructure is more useful. We have roads to fix. It's less dramatic, but, it needs to be done, and labor is cheap today.

What would help the lower-income worker is slightly higher interest rates combined with a large infrastructure spend. It would cause the price of houses to drop, due to a reduction of demand (and speculators avoiding the market). At the same time, the price of labor would rise.

Guest's picture
Guest

I think this is entirely unfair. They should make it retroactive to at least the beginning of this year. It does not make sense to have two standards of eligibility in the same tax year.

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Guest

Amen to that!!!

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Guest

The credit doesn't always convince people to borrow more than they would anyway. In my case I was waiting for the right time to buy, had enough for a down payment, and was considering various neighborhoods. In February I was offered a mortgage for the cost of the house I eventually chose but not money for the new furnace it needed to make it livable (there is a rental unit that was unoccupied, so that possible ncome wasn't taken into account--which did keep me from borrowing more money to fix up the place). The rest of the remodelling I've paid for as I've had the money, but I really needed the stimulus money to buy that one big-ticket item that was critically needed right after I got the property. So that $8000 went to a very nice local family business, my house is warm, and I have less debt than I would have had otherwise.
The national debt isn't going to be paid off in my lifetime, and I like the services I get from the government, so I don't mind the extra cost. My kids will like those services, too, so I think it's fair that they pay for them when their time comes.

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Guest

Correct me if I am wrong. I sold my house of 6 years in July and purchased a new home a few months later, unfortionatly before Nov 7. I am not eligable for the 6500 correct?

That really sucks!