The Tax Credit is Ending... Now What?

A $8,000 Federal tax credit to first time home buyers resurrected a housing market across the country. California added it's own home buyers tax credit that had two buckets... one bucket was for the first time home buyer and the other bucket was for people purchasing new construction. Potentially this meant up to $16,000 in tax credits available to the first time home buyer in California. With the Federal tax credit no longer available and the California money running out people are wondering what is going to happen. Though no one exactly knows I think this there is a possibility that this creates an unbelievable opportunity for the first time home buyer.

I was talking with a potential client last night and we are both economic theorists. I told him that I thought it is possible that he isn't missing out at all. Theoretically speaking if you are competing against other home buyers during the period in which everyone is trying to get the tax credit than this is keeping pressure on pricing because demand is up. If demand retracts after the expiration of the credit and it allows you to negotiate a better deal than it may have been a good thing to wait.

Again this is theory:

Let's just say you could buy a great home for $600,000 home pre-expiration of the credit. Tax credit savings = $16,000.

Let's speculate that the same property at some point later this year after the expiration of the credit the same house could be negotiated because of a lack of competition in the market down to 550K. This 50K savings over the life of the loan is equivalent to $120-130K in actual savings. The argument could be made that if you took the 16K and invested it that that might be a larger return at the end of the day but the reality is that most people will not do this. Instead the potential savings negotiated off the purchase price is real money today in saving you on your monthly payment as well as saving over the life of the loan.

As always… Do your due diligence.

From the Desk of Zach Trailer
By Lanny Berg

A dynamic market

For years I have explained to people that housing prices and the run-up that ensued functioned similarly to the bond market. How so? For simplicity sake lets say a historically a competitive interest rate has been in the 10% range. If rates drop to 5% this essentially doubles your purchasing power. Add in fundamentally unsound loan products, ridiculously low teaser rates, and this fueled appreciation in the housing market. A person able to afford a 200K home in 2000 could now afford a 400K+ home.

Today we have seen a price correction in some places of up to 50%. Interest rates are hovering in the 5% range, which creates a very interesting situation. 5% is historically low and most believe that the days of this rate are numbered. Knowing that 5% is historically low I did a quick calculation to see the impact of interest rates relative to housing prices.

Loan Term Rate Pmt
100K 30yr 5% $537
90k 30yr 6% $540


When interest rates rise 1%, this will offset a 10% further decline in housing prices. This 1 pt. increase is actually a 20% increase in rates.

It would be easy to make the argument that an increase in rates will cause another leg down in the market. However, in resilient markets such as the Bay Area I believe there is greater risk of interest rates affecting affordability and so long as you are planning to be here for the long term the data suggests that this is an extraordinary time to buy and have an affordable monthly payment.

As always, do your due diligence. There are a lot of great properties out there!

From the desk of Zach Trailer
by Lanny Berg

Median Prices are Rising

The headline from the article link below states "Median Price Rises in nearly 60 percent of US metropolitan areas in first quarter".

This is an exuberant headline that would lead one to believe that the macro real estate market is out of the woods and on the road to recovery. We all hope this is the case but we will only have an idea as to the true health of the national market after we have 3-4 quarters with successive gains without the Government's underlying support mechanisms in place. First time home buyers have accounted for a huge percentage of transactions spurred on by huge incentives. Also, the mortgage market has benefited from a plummeting Euro in the last month.

There are some good signs in the market but I think it is a bit early to say that the broad market is out of the woods and that we are in full recovery mode. So, how do you know whether to buy or not? It needs to make sense... what does that mean? It means that you're criteria alone will determine if it is a good time to buy. The reality is that now is a much better time to buy than 4 years ago if you are gainfully employed. Generally, your dollar goes a lot farther now than it did then...

http://www.fox59.com/business/sns-ap-us-home-stretch,0,1815580.story

From the desk of Zach Trailer