We now have the lowest mortgage rates since the '50s, so rate affordability won't get much better than now; however, the price distribution of homes sold has changed, and as a result the median price has gone up and overall affordability has gone down. This is a structural change that makes the numbers in this report inconsistent, but probably doesn't represent an actual rise in prices across our market. Market inventory is rising, so prices should be going down.

The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. We've recently updated the income and 1st time buyer assumptions for this comparison to conform with current methods at WCRER. These updated data and calculations show not only that affordability has suffered because median household incomes have fallen the past few years, but also that affordability has not yet returned to where it was at turn of the century. Note that these calculations only compare the affordability of standard conventional loans. During the era of zero down subprime lending, other products with adjustable interest rates, interest only, or option ARM loans were used to qualify buyers for higher loans. History has shown that many of these were ultimately unaffordable. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 10% down on a house priced at 85% of the median and obtains a 30 year fixed rate mortgage with mortgage insurance. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2001, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2010 are estimates using the latest monthly data for median prices, interest rates, and median income.

 The interest rate for a typical 30 year fixed rate conforming loan has fallen to about 4.50%, a record low reflecting investment in US Treasuries as a safe haven. The July median closed sale price rose about 10% from June to $264,250. This big jump in median price represents a shift in the distribution of buyers rather than a rise in overall prices. There were fewer buyers of low priced properties because many had purchased earlier this year to take advantage of the homebuyer tax credit. For our calculations here, the rise in median price makes affordability worse even though we don't think real prices have risen. Rates have been expected to rise at some point in the coming year, with some experts predicting they'll reach 6% by the end of 2010. However, fear of a European sovereign default and other signs of continued economic weakness appear to be resulting in a longer period of low US Treasury and mortgage rates. The inconsistency in the median price as the price distribution changes makes the information in this report less meaningful. It's important to understand that this same phenomena also affects the regional and national statistics being reported in by the news media.

The affordability index worsened to 1.12 in August from 1.23 in July. First time buyer affordability also worsened to .71 from .82 in July.  First time buyer affordability went down not only because of the median price rose, but also because the cost of mortgage insurance appears to have risen significantly. We use an automatic PMI calculator at a public web site. The first time buyer PMI for this month was about double what it has been in recent months. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

Year	2004	2005	2006	2007	2008	2009	2010
Annual Average interest rate	5.84	5.87	6.41	6.34	5.80	5.03	4.50
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$264250
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$1071
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.12
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1182
1st time buyer affordable payment	$794	$853	$901	$885	$862	$842	$842
1st time buyer affordability index	0.79	0.70	0.64	0.60	0.68	0.77	0.71

August's APR is 4.559% on a 30-Year and 4.069% on a 15-Year, both conforming. July's rates were 4.686% on a 30-Year and 4.195% on a 15-Year, both conforming. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. The homebuyer tax credit was reworked last year to give some incentive to move up buyers as well as first time buyers. A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.264% on one major bank web site - same as last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one -

http://bankrate.com/.

Much recent news has focused on the economic slowdown. 2nd quarter GDP fell to an annual growth rate of 2.4%. With concerns about high unemployment and high government debt, government economists are weighing their options. The media have reported that economists predict a gloomier national housing market. July closed sales in Kitsap County appear to have fallen significantly (perhaps because of the rush to complete sales by the end of June), while July pending sales appear to have held fairly steady.

The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. We’ve recently updated the income and 1st time buyer assumptions for this comparison to conform with current methods at WCRER. These updated data and calculations show not only that affordability has suffered because median household incomes have fallen the past few years, but also that affordability has not yet returned to where it was at turn of the century. Note that these calculations only compare the affordability of standard conventional loans. During the era of zero down subprime lending, other products with adjustable interest rates, interest only, or option ARM loans were used to qualify buyers for higher loans. History has shown that many of these were ultimately unaffordable. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 10% down on a house priced at 85% of the median and obtains a 30 year fixed rate mortgage with mortgage insurance. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2001, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2010 are estimates using the latest monthly data for median prices, interest rates, and median income.

The interest rate for a typical 30 year fixed rate conforming loan has fallen to about 4.59%, a record low reflecting investment in US Treasuries as a safe haven. The June median closed sale price fell about 2% from May to $239,000, further enhancing affordability. Rates have been expected to rise at some point in the coming year, with some experts predicting they'll reach 6% by the end of 2010. However, fear of a European sovereign default and other signs of continued economic weakness may result in a longer period of low US Treasury and mortgage rates. Keep in mind that median prices can be deceptive and that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges.

The affordability index improved to 1.23 in July from 1.19 in June. First time buyer affordability also improved to .82 from .76 in June.  Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

Year	2004	2005	2006	2007	2008	2009	2010
Annual Average interest rate	5.84	5.87	6.41	6.34	5.80	5.03	4.59
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$239000
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$979
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.23
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1031
1st time buyer affordable payment	$794	$853	$901	$885	$862	$842	$842
1st time buyer affordability index	0.79	0.70	0.64	0.60	0.68	0.77	0.82

July's APR is 4.686% on a 30-Year and 4.195% on a 15-Year, both conforming. June's rates were 4.812% on a 30-Year and 4.195% on a 15-Year, both conforming. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. The homebuyer tax credit was reworked last year to give some incentive to move up buyers as well as first time buyers.  A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.264% on one major bank web site - down from 5.643% last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.

Though the Home Buyer Tax Credit has been criticized in some quarters as bad policy, there was little political will in the house to oppose extending it through September 30, 2010. This will allow transactions already in progress to close. It only applies for buyer's who met the requirement of having a signed contract in place by April 30, 2010. The Senate is expected to approve this measure tomorrow.

http://www.reuters.com/article/idUSN2916439020100629

The news cycle continues to focus on the not yet stopped BP oil leak in the Gulf of Mexico (see this recent tech update on what they have been doing) and the warlike hostilities on the Korean peninsula. The stock market fell sharply in May because of investor fears that Greece or other members of the European Union might default on sovereign debt. These coupled with the flurry of real estate activity at the expiration of the homebuyer tax credit leave us with a lot of unanswered questions as we start into the summer. Kitsap County has the most housing inventory since 2008, and pending sales last month were the highest since mid 2007. Despite these upbeat indicators and interest rates near a record low, US home prices as measured by the Case Shiller Index have fallen for 6 straight months, and some are guessing that prices will continue to fall. The good news for buyers is that affordability continues to get better.

The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. We’ve updated the income and 1st time buyer assumptions for this comparison to conform with current methods at WCRER. These updated data and calculations show not only that affordability has suffered because median household incomes have fallen the past few years, but also that affordability has not yet returned to where it was at turn of the century. Note that these calculations only compare the affordability of standard conventional loans. During the era of zero down subprime lending, other products with adjustable interest rates, interest only, or option ARM loans were used to qualify buyers for higher loans. History has shown that many of these were ultimately unaffordable. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 10% down on a house priced at 85% of the median and obtains a 30 year fixed rate mortgage with mortgage insurance. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2001, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2010 are estimates using the latest monthly data for median prices, interest rates, and median income.

 The interest rate for a typical 30 year fixed rate conforming loan has fallen to about 4.87%, mostly the result of investors fleeing the Euro and buying US Treasuries after the Greek debt crisis. With the median price falling to $228,750, it’s ironic that first time home buyers can probably save more now than before the end of the homebuyer tax credit. Rates have been expected to rise at some point in the coming year, with some experts predicting they'll reach 6% by the end of 2010. However, fear of default by Greece or another of the suspect countries in the European Union may result in a longer period of low US Treasury and mortgage rates. Keep in mind that median prices can be deceptive and that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges (see graph showing distribution of May sales by price range).

The affordability index improved to 1.24 in May from 1.14 in April. First time buyer affordability improved to 0.84 in May from 0.77 in April. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress so far this year. Affordability has still not recovered to the levels of 2001 and 2002.

Year	2004	2005	2006	2007	2008	2009	2010
Annual Average interest rate	5.84	5.87	6.41	6.34	5.80	5.03	4.87
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$228750
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$968
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.24
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1002
1st time buyer affordable payment	$794	$853	$901	$885	$862	$842	$842
1st time buyer affordability index	0.79	0.70	0.64	0.60	0.68	0.77	0.84

May's APR is 5.065% on a 30-Year and 4.573% on a 15-Year, both conforming. April's rates were 5.191% on a 30-Year and 4.573% on a 15-Year, both conforming. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. The homebuyer tax credit was reworked last year to give some incentive to move up buyers as well as first time buyers.  A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.643% on one major bank web site - same as last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com.

 

Recent news from the National Association of Realtors is that December home sales were down 16% nationally compared to November, yet 15% higher than December 2008. You'll recall that November ended the initial first time homebuyer tax credit, so sales then were inflated by buyers rushing to meet the deadline. Even though the tax credit has been renewed and expanded, there isn't the same urgency on the part of buyers. With so many Americans having lost equity in their homes (we calculated 8949 homeowners underwater in Kitsap County - but many more have lost a sizable amount of equity), few are in a position to benefit from the new tax credit for move up buyers.

There is still a great deal of uncertainty in our economy, and there will be more trials over the next year. Congress (through the Stimulus bill), Treasury and the Federal Reserve (though a near zero Federal Funds target rate and the purchase of debt and mortgage backed securities from Fannie Mae and Freddie Mac) have pumped a huge amount of money (more than $200 billion by Treasury and about $1.25 trillion by the Fed) into our economy. As demand for goods and services increases, there will be a threat of inflation (too many dollars chasing too few goods). One uncertainty is whether the Federal Reserve will have the resolve to raise their target rate in spite of political pressure to keep rates low. Related to this, the Treasury has stopped purchasing mortgage backed securities from Fannie Mae and Freddie Mac, and the Federal Reserve has announced it will stop purchasing these securities at the end of March. Another uncertainty is how much interest rates will rise to attract private investors back into this market. While some experts expect mortgage rates to rise only a few tenths of a percent, others have predicted that rates will be 6% by year end. These uncertainties are playing a role in the doubts currently circulating about whether or not to confirm the nomination of Ben Bernanke to continue as Chairman of the Federal Reserve Board of Governors.

There is also uncertainty about what will be done to alleviate the perception that some of our financial institutions are too big to fail. Despite being saved by the the taxpayers late last year, many of these institutions have profited and grown this year, now making the influence of the largest bank (actually bank holding companies) considerably greater than it was when markets failed in fall 2008. The administration has recently proposed curbs on the lending and investing activities of these big banks, and while it might appear that this was a reaction to the Democrats recent loss of a Senate seat in Massachusetts, the program, at least according to one source, has been in preparation and review for many months. Just a case of bad timing.

Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. December's inventory of homes for sale fell by 25% from a year ago and was 10% lower than in November. The listing inventory fell sharply late last year and has never recovered this year, implying that there is a considerable shadow inventory of homes with sellers waiting for a better market. The County has a listing inventory turnover rate of about 6.0 months, somewhat better than November's 6.1 months, and considerably better that we've seen for the past year and a half. Inventory turnover varies greatly by price, with an inventory turnover as low as 4 months for the lower price ranges and as much as 25 months turnover for homes priced above $800,000. December's closed sale median price ($239,950) was about the same as in November and was 8% higher than a year ago (median price dipped very low in December 2008 before rebounding somewhat to near its current level).  The number of pending sales in December was up 38% from a year ago (recall that December 2008 was a very bad month for our economy) even though pending sales have fallen steeply the past 2 months (as the first time homebuyer tax credit deadline passed). Regional pending sales have tailed off after peaking in October.  The links to regional market trends below will show both tables and graphs that further enhance the data reported below.

See Kitsap County graphs at http://www.bprowse.com/kitsap_market_trends.

Bainbridge Island Real Estate
Bainbridge Island residential properties were selling for an December median price of $505,000, about 3% higher than in November. The more stable three month moving average of closed sale price fell 1% from last month to $495,000 and is 5% lower than it was a year ago. Sales at the top of the market, while still pretty slow, did improve somewhat compared to previous months. The Kitsap County 3 month moving average median price is just about the same as it was a year ago. Note that prices tailed off at the end of last year so this parity is not unexpected. The 3 month moving average for Bainbridge Island's number of  closed sales is 50% higher than a year ago. Recall that sales were very weak at the end of 2008 and the number of closed sales at the end of last year was improved. The 3 month moving average number of pending sales in December rose 53% from a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago. The number of active listings on Bainbridge (162) is down 16% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 7 months, improved from the 11.7 month turnover rate of last month. Bainbridge Island is a buyers market.

See tables and graphs at http://www.bprowse.com/bainbridge_island_market .

Bremerton Real Estate
Statistics are for the Bremerton downtown core and west to Kitsap Lake. The market for other parts of Bremerton and its suburbs should be similar. Bremerton homes were selling for a month end median price of $153,150 at the end of December, about 2% higher than a year ago and down 4% from last month. The more stable 3 month moving average was 22% lower than a year ago. The Kitsap County 3 month moving average median price is just about the same as it was a year ago. Bremerton's 3 month moving average for number of closed sales is up 13% from a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago.  The 3 month moving average number of Bremerton pending sales is up 13% from last year. Recall this number includes pending short sales that may not close. The number of Bremerton active listings (138) is 25% lower than a year ago. The inventory turnover (total Bremerton homes on the market divided by number sold last month) is 5.1 months (better than the 6.1 last month and from 8.7 months a year ago). The Bremerton market is probably still a buyers market because of shadow inventory that has been pulled off unsold.

See tables and graphs at http://bprowse.com/bremerton_market  

North Kitsap Real Estate
Statistics here are for Kingston, the largest housing market in North Kitsap. Activity in Kingston should be representative of the other areas in North Kitsap. Kingston homes were selling for a month end median price of about $299,000 at the end of December, 94% higher than a year ago - December 2008 was a terrible month for Kingston home sales. The low sales volume can produce large fluctuations when one or two high priced homes sell.  The more stable 3 month moving average of closed sale prices is up 13% compared to a year ago.  The Kitsap County 3 month moving average median price is just about the same as it was a year ago.  The 3 month moving average number of Kingston closed sales rose 175% from a year ago, while the number of pending sales is 100% higher than a year ago. Recall again that December 2008 had very low sales and that our current pending sales include pending short sales that may not close. The 3 month moving average of closed sales is up 39% Countywide from a year ago. The number of active listings in Kingston (62) is down 21% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 4.8 months (better than the 8.7 months last month, not to mention the 78 month turnover of last year). Our guess is that Kingston is still a buyer's market because of the shadow inventory.

See tables and graphs at http://bprowse.com/north_kitsap_market  

Poulsbo Real Estate
These statistics are for Poulsbo, including the downtown core, from the head of Liberty Bay southeast to Ne-Si-Ka Bay, and parts north to Sawdust Hill Rd. Other parts of Poulsbo and its suburbs should have similar trends. The December median sales price for Poulsbo was $254,250, down about 30% from a year ago. The more stable three month moving average closed sale price was $282,709, about 18% lower than in December 2008. The Kitsap County 3 month moving average median price is just about the same as it was a year ago. The 3 month moving average number of closed sales in Poulsbo rose 50% from a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago.  December pending sales were up 50% in Poulsbo. Recall this number includes pending short sales and new construction that may not close soon. The Poulsbo listing inventory (98) is 36% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 5.9 months, somewhat worse than the 4.2 months reported last month - but still very good. Poulsbo is probably still a buyers market because of the shadow inventory of homes pulled off the market in the past year without selling, but looks like it has improved recently.

See tables and graphs at http://bprowse.com/poulsbo_market  

Silverdale Real Estate
Homes in Silverdale were selling for a December median price of about $274,000. This median is down 4% percent from a year ago. Silverdale's more stable 3 month moving average median closed sale prince in December of $275,417 was up about 5% from a year ago. The Kitsap County 3 month moving average median price is just about the same as it was a year ago.  The 3 month moving average for Silverdale's number of closed sales was 8% higher than a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago.  The number of Silverdale pending sales in December is up 44% from a year ago, but recall this number includes pending short sales that may not close. The number of active listings in Silverdale (62) is 25% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 5.2 months, better than the 5.7 months last month. Silverdale is looking now like a seller's market, but there appears to be a large shadow inventory of unsold homes not currently on the market that will deter prices from rising.

See tables and graphs at http://bprowse.com/silverdale_market  

We've passed earlier information about the economic impact of the $8,000 first time home buyer tax credit. Basically the analysis is that most buyers would have purchased anyway, so the actual cost of each home purchased because of the tax credit is over $40,000 per sale. Still it's hard to evaluate the impact of incentives on motivating people to act.

However, it appears that the first time home buyer credit will be extended, if for no other reason than to make sure that the people currently in the que can obtain the credit. At least one form of proposed extension will phase out the credit over a longer period in 2010.

Most everyone probably assumes that the $8,000 first time homebuyer tax credit will be renewed before it expires at the end of November.

The Senate bill sponsored by Johnny Isakson actually proposes to increase the credit to $15,000 and have it apply to all home buyers, not just first time buyers. The main arguement for doing this is that we currently have a market of about 40 percent first time buyers, 30 percent investors, and only 30 percent regular buyers who normally make up the bulk of the market. The move up buyer market is very thin. A $15,000 credit might get the move up buyers back into the market. Still with deficits running high there seems little chance that Congress will tack on to the existing arrangement.

In fact, there is opposition to any renewal from some camps, including from many economists. The argument is that most people who have purchased would have bought the house anyway, so as we've reported earlier, the cost for each additional buyer resulting from the credit is much higher than $8,000.

The Washington State Housing Finance Commission has posted on their website that the IRS has turned down their effort to allow 1st time homebuyers to assign their $8000 tax credit to their lender to serve towards the buyers downpayment (referred to as the tax credit bridge loan program). The article refers readers to other state sponsored downpayment assistance programs.

The National Association of Realtors reports that Congress is considering an expansion of the current $8000 credit for first time buyers to raise the limit to $15,000 and extend those eligible to - everyone!

The National Association of Realtors (NAR) has provided additional information about the new first time buyer tax credit. First time buyers include anyone who has not owned a home in the past 3 years, and the credit for many buyers will mean they get most if not all that year's income tax back - pretty good deal! Here are some details from the slides sent by NAR.

Overview

• In 2008 Congress created a $7,500 First-Time Homebuyer Tax Credit.
• It went into effect April 8, 2008 and was set to expire July 1, 2009.
• The big problem: It had to be repaid over 15 years. People viewed it as a debt and not a benefit.

The 2009 Tax Credit

• The credit has been extended to on or before November 30, 2009 and can be claimed by those who closed on homes on or after January 1, 2009.  It is still repayable for 2008 purchases
• The credit has been expanded to $8,000 
• But, it is still only for first time homebuyers

Credit Details

• The new Credit is an $8,000 REFUNDABLE Tax Credit (or up to 10% of the purchase price).
• So if the property is $75,000, the credit is only $7,500 (Assume a property over $80,000 for the rest of the discussion).
• Refundable means that if your total tax liability in the given year is less than $8,000, the IRS will send a refund for the balance.
• This means that for singles making over $75,000 and couples making over $150,000, the credit is proportionately reduced as incomes approach $95,000 and $170,000 respectively.
• So if a couple makes $165,000, the excess amount is used to create a fraction  15,000/20,000 (75) times the credit amount  75% or $6,000 of the credit would be disallowed.  They would still get a $2,000 credit.

Refundability Why it's Important - Many taxpayers do not have tax liability that exceeds $8,000

• For example, according to the 2008 IRS Tax Tables:
• A single filer would need $46,600 in taxable income to have $8,000 in tax liability
• A couple would need $58,600 in taxable income to have $8,000 in tax liability

Those with less tax liability will in most cases get a refund meaning they get the full value of the credit

Who cannot take the credit? If any of the following:

• Your income exceeds the phase-out range. This means joint filers with Modified Adjusted Gross Income (MAGI) of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
• You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
• You stop using your home as your main home.
• You sell your home before the end of three years.
• You are a nonresident alien.

First-Time Homebuyer Definition

• Defined as someone who did not own another main home at any time during the three years prior to the date of purchase.
• For example, if you bought a home on January 15, 2009, you cannot take the credit for that home if you owned, or had an ownership interest in, another home at any time from January 15, 2006 through January 15, 2009.
• So if the last time you owned a home was 2005, you are eligible for the credit even though it is really not your first home.
• For married joint filers, both must meet the 1st time homebuyer test to take the credit on a joint return.

More on Income Limits

Type	Income Limit	Phaseout Start
Single Filer	$95,000	$75,000
Married Filer	$170,000	$150,000

The Home

• Must be the main home i.e., principal residence, which is generally considered to be the home where you spend 50% or more of your time  It can be a condo, Single Family detached, co-op, townhouse or something similar 
• The home must be located in the United States. 
• Vacation homes and rental properties are not eligible.

For new construction, the purchase date is the date you occupy the home. So the move in date must be before December 1, 2009.

Recapture-3 Year Residency

• If the home is sold prior to three years of ownership, the tax credit must be repaid
• This is an improvement from the prior credit. That credit needed to be repaid in total over 15 years or the balance had to be repaid on sale.

This provision is designed to prevent flipping homes in order to get the credit.

Other Provisions

 

• The new credit is available to residents of the District of Columbia.
• Purchasers who utilize state/local revenue bond financing can now use the credit.
• Purchasers who bought before January 1, 2009 are still subject to the terms of the repayable credit.

When Can You Claim the Credit?

• It can be claimed on your 2008 Tax Return (to be filed by April 15, 2009), an amended 2008 Tax Return, or your 2009 Tax Return 
• NAR and industry partners tried to get the credit made available at closing but policymakers balked  In addition, it was explained that even if a system could be devised, it would delay closings by several weeks 

Conclusion - The new credit is greatly improved compared to the old credit

• It is a true credit and does not need to be repaid as long as you occupy the home for 3 years 
• NAR estimates that hundreds of thousands of potential buyers will take advantage of the credit

CAVEAT

• This is information is accurate based on information available as of February 19, 2009.  As with any tax law change, check with a tax advisor if there are any questions regarding using this provision.
  

 

Washington Realtors published this summary of the Economic Stimulus Bill signed today by President Obama:

The $790 billion stimulus package signed by President Obama today increases the home buyer tax credit to $8,000, drops the repayment feature, reinstates last year's 2008 loan limits for FHA, Freddie Mac, and Fannie Mae loans, and provides $2 billion in additional funding for states and localities to be used to purchase, manage, repair and resell foreclosed and abandoned properties. (Note: If FHA and conforming conventional limit of 2008 for Kitsap County are restored, FHA will rise from $307,000 to 475,000 and conforming will rise from $417,000 to $475,000).

Other elements of the package are listed below:

Homebuyer Tax Credit. The bill provides for a $8,000 tax credit that would be available to first-time home buyers (those who haven't owned in at least three years) for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009. The credit does not require repayment for buyers who hold onto their property for at least three years. Most of the mechanics of the credit will be the same as under the 2008 rules: the credit will be claimed on a tax return to reduce the purchaser's income tax liability. If any credit amount remains unused, then the unused amount will be refunded as a check to the purchaser.

NAR has sought removal of the repayment requirement because it discourages buyers from taking advantage of the tax credit. The three-year minimum holding period is a safeguard against speculators' use of the credit. The legislation also extends the effective date of the credit to December 1 from June 30, and extends eligibility to borrowers who buy their home with the help of state or local financial assistance that comes from the proceeds of tax-exempt mortgage revenue bonds.

The start date for the first time homebuyer credit is January 1, 2009 through and before December 1, 2009.

FHA and conforming loan limits. Specifics have not been released but reports indicate that the 2008 limits have been reinstated for 2009 except in those communities where the 2009 limits are higher. Additional increases in individual communities may also be available at the discretion of the secretary of the U.S. Department of Housing and Urban Development.

Foreclosure mitigation and neighborhood stabilization. Funding for states and localities to be used for neighborhood stabilization activities for the redevelopment of abandoned and foreclosed homes are authorized. Some news reports put the funding level at $2 billion.

Rental assistance. Up to $1.5 billion to provide short-term rental assistance and other aid for families during the economic crisis.

Transportation infrastructure. Up to $29 billion for highway construction projects, $8 billion for rail projects.

Rural housing development. Increased funding for the Rural Housing Service direct and guaranteed loan programs.

Low-income housing grants. Allow states to trade in a portion of their 2009 low-income housing tax credits for Treasury grants to finance the construction or acquisition and rehabilitation of low-income housing, including those with or without tax credit allocations.

Tax-exempt housing bonds. Tax-exempt interest earned on specified state and local bonds issued during 2009 and 2010 will not be subject to the Alternative Minimum Tax (AMT). In addition, financial institutions will have greater capacity to purchase tax-exempt state and local bonds.

Energy efficient housing. Grants for energy retrofits for federally assisted housing (Section 8), funding for energy efficiency and conservation block grants to states, increases in the residential tax credit through 2010 for certain energy efficient upgrades and $5 billion to weatherize low-income homes.

The Senate hasn't voted whether to approve the President's stimulus bill yet, but today, as part of the wrangling between parties, a credit of $15,000 was added for home buyers. According the the New York Times:

"The tax break for homebuyers, which the Senate approved by voice vote without opposition, was the second amendment in two days intended to encourage consumers to make major purchases. On Tuesday, the Senate approved a tax incentive for car buyers, sponsored by Senator Barbara A. Mikulski, Democrat of Maryland, that would allow the deduction of sales tax and loan interest on purchases made this year.

But while both of those incentives were applauded by lawmakers who said that the bill should quickly induce consumer spending, some economists said they were short-sighted and lacked the forward-thinking approach Mr. Obama has demanded."

This provision would allow 10% of the price of a new home, up to $15,000 to be deducted. Political maneuvering prior to the Senate vote has been considerable, so it's anyone's guess whether this tax credit will make it into the final bill.

Republicans are proposing that the government offer 4% mortgages, as has the NAR. Here is an article discussing pros and cons.