Nerve Endings Firing Away

The $8,000 tax credit for first-time homebuyers would be extended and some people who already own residences could claim a benefit under a proposal by Senate Democrats.

An agreement reached yesterday by the Democrats would let homeowners who buy a new home qualify for a $6,500 credit if they have lived in their prior residence for five years, according to Regan Lachapelle, an aide to Senate Majority Leader Harry Reid.

The plan would extend the homebuyers credit, due to expire Nov. 30, to home purchases under contract by April 30, 2010, with borrowers allowed another 60 days to close the sale, according to a person familiar with the details of the agreement [source].

Since we are now in the market for our first home in this country, this comes as welcome news. It vindicates our decision to wait a while before we bought a home. In fact, the extension opens up the program to homeowners who may not be buying their first home but have lived in their existing home for at least five years (approx. the average period a household lives in one home in the U.S.) The tax credit is 10 percent lower but it is at least better than nothing.

On the other hand, I know of people including my in-laws who purchased their first-home this year just to take advantage of this tax credit. But considering the still-dire economic conditions and the sad state of the housing market, I had expected at least a one-time extension of this program similar to the ‘cash for clunkers’ program. There are arguments to be made on either side whether this program works or not but in our town which has been largely unaffected by the housing crisis, realtors and mortgage lenders have admitted that business was up by at least 20%.

This tax credit provides an impetus to potential homebuyers to take the plunge toward their first home and in turn stimulate the real estate market to get the ball rolling. However, this can also encourage behavior that landed us in this spot in the first place. I know of some people who rushed into buying their home this year just to take advantage of this tax credit. Buying a 200-300K home for 8K sounds ridiculous especially when you have a mountain of student loans. I know my in-laws who recently moved into their new home factored this in their decision but at least they put 20% down. For yuppies who wait and save up for their downpayment, this extension comes as a godFSMsend. More on the housing hunting later.