The Housing Crisis Is Over!

That’s what I hope to be telling my clients in the coming days and weeks, anyway. Why, you ask, when all of the press has been so negative about the housing sector for so long? Well, Congress, of all people, has done something this week that might actually pull us out of this mess. Unbelievable!

You see, this week the US Congress passed (and the President has agreed to sign into law) the Housing and Economic Recovery Act of 2008. This new (or not so new, as you’ll read) law is an enormous step forward that will benefit hundreds of thousands of current & potential homebuyers nationwide. Below are some of the key points of the bill:

It includes a first-time homebuyer tax credit. Buyers who are purchasing for the first time (or who haven’t owned property in the last three years) can qualify for a tax credit of up to 10% of the purchase price of their new home, capped at a maximum credit of $7,500.00. Now, of course, there are some stipulations. These are that the buyer must purchase their home between April 9th, 2008 & July 1st, 2009 and the home must be the buyer’s primary residence. The credit phases-out if the buyer earns more than $75,000 in income as an individual or if they earn $150,000 as a married couple filing their taxes jointly. This is a tax credit, and not a tax deduction, so your income taxes will actually be reduced by the full amount of the credit. Pretty cool, huh? Of course, what Uncle Sam giveth, he also taketh away. Specifically, you’ll repay the tax credit back in the form of a fixed amount with no interest added over a 15 year period. So, this is really an interest-free loan. Oh, and by the way – if you sell your home before the 15 year repayment period is up, you’ll owe the balance of the tax credit on your income taxes for the tax year in which the home was sold. But hey, who couldn’t use an interest-free loan right about now?

Wondering what impact this tax credit will have on the housing market? Well, it could be significant. Our economy & housing markets were in the doldrums back in the 1970’s, too. Anyone remember the Carter years? Anyway, in 1975, Congress passed a similar law (The 1975 Housing Act) which created a 5% tax credit, capped at $2,000 for first-time home buyers. 535,000 people took advantage of that tax credit and became new homeowners as a result. Sales increased 10% nationally and the inventory or new homes on the market was cut from a 10 month supply to fewer than 6. The 2008 legislation could boost the number of homes sold to 700,000, or 10%. Additionally, the government plans to offer a tax deduction of up to $500.00 ($1,000.00 for joint filers) for state and local property taxes in 2008 for tax filers who claim the standard deduction & don’t itemize their taxes. Nationwide, about 50% of homeowners stake the standard deduction, so this applies to a lot of people.

Another key point of the new Housing Act is the permanent increase of loan limits for FHA, Fannie Mae & Freddie Mac loans. What this means, in a nutshell, is that buyers can buy a more expensive house and still receive the favorable interest rates of “conventional” loans. This means more buying power. In King County, the loan limit will move up to more than $522k. That means a buyer can now buy a home with a mortgage of $522k and pay the same lower interest rate s/he would have paid on a loan of $417k last year. This will incent more people to buy that next, larger home – a segment that’s been really hard hit in our region lately. As this sitting inventory moves and as more first time buyers pick up the sitting condos & entry level homes the market will once again begin to pick up steam – and prices will be back on the rise.

Foreclosures have been at near-record levels nationwide for the last year to 18 months. I myself have been listing & selling foreclosed homes for Countrywide Home Loans over the last year and the pace at which they are assigning new homes to me has been quickening lately – nearly one new assignment every week over the last month.

Knowing that this is a big problem nationwide (and much bigger in most of the rest of the country vs. here in Washington), Congress is addressing this issue, too. The new Housing Bill will provide assistance to more than 400,000 homeowners who are in danger of foreclosure. Of course, there are a few rules here, too. Principally, they are that the owners must live in the home and it must have been financed between January of 2005 and June of 2007; they must be spending at least 31% of their gross income on their mortgage payments and their home will need to be re-appraised to determine its current value. On the positive side, lenders will have to write-down the value of the loan to 90% of the home’s current value and the FHA will insure each loan. The government plans to issue up to $300 Billion in refinanced mortgages to help stem the tide of foreclosures. Decreasing the number of foreclosures will help to reverse their negative effect on housing prices where large numbers or foreclosures are prevalent.

Finally, the government plans to prop-up Fannie Mae & Freddie Mac by extending unlimited credit lines to them. Fannie Mae & Freddie Mac buy mortgages from banks, so that banks can keep issuing new loans. New loans mean more home buyers. To be sure that Fannie & Freddie are behaving, a new government regulator will be appointed to oversee their operations. This, in turn, should boost investor confidence in home lending, making even more funds available to loan to consumers.

So, will history repeat itself here like it has in so many other aspects of human existence? I’m inclined to think so. What should you do next? If you’ve been sitting on the fence about buying your first or a new home, now is the time to do it! As these measures take effect, existing homes are going to start selling at a faster pace again. In fact, I’m already seeing a significant up-tick in buyer activity. In an area like ours, where we only have a 5-8 month supply of homes, it will not take much to use up the sitting inventory and for prices to begin rising again. We are at the beginning of the next real estate cycle! Get in now while prices are low and selection is at its best – because these conditions aren’t going to last long!

Happy Buying!

Tim