If you are considering purchasing a new home in the Phoenix area and taking advantage of the $8,000 first time homebuyer tax credit, you better think about getting busy looking for a home now.
Why? Because as the program is originally slated for termination on December 1st, there isn’t much time.
Now, I realize that many people will read this and think that ‘Wait a second, that’s four months away! I’ve got plenty of time.” The problem is that you really don’t. Let’s back up the clock to see why. From the IRS on timing to qualify for the credit:
“Any home purchased as the taxpayer’s principal residence and located in the United States qualifies. You must buy the home after April 8, 2008, and before Dec. 1, 2009, to qualify for the credit. For a home that you construct, the purchase date is considered to be the first date you occupy the home.”
So, you have to have purchased or ‘closed’ on the home by the December 1st deadline.
Simple Timing is Just Part of the Picture
Generally, you need at least 30 days to close on a home. So, a contract needs to be in place on the home by November 1st at the latest but preferably sooner to give an additional buffer should a lender not meet their commitments. So, October 25th and earlier would be ideal and really a minimum here to purchase a home and get the credit.
That gives you almost 3 months to find a home. That surely is enough time, right? The answer is “no.” This is due to current market conditions.
Market Conditions Make the Timing More Complex
The fact is that the Phoenix real estate market is in a strange place for the moment. Inventory has held relatively stable at 31,000 properties on the market. Buyer activity has been strong which means that many buyers are vying aggressively for the choice properties.
Foreclosure inventory is relatively low as compared to the past which means that many buyers are gravitating toward short sales and normal homeowner properties for sale. Foreclosures and normal transaction sales represent more certain transactions as the owner is clear and can make decisions with respect to selling the home. Short sales represent transactions that could take anywhere from 2-6 months with no guarantee of success.
This means that to find the right home, homebuyers will soon have to exclude approximately 35% (short sales)of the homes for consideration because their timing won’t likely line up in time. Bottom line - There will be even fewer homes to choose from and the ones that are available may see heigtened competition which means disappointment is possible while prices might move slightly higher.
Bottom line - It can take finding several homes, with multiple offers, before a homebuyer ‘wins’ the right home. And this can take weeks and even months.
Watch for a Decline in Short Sale Activity and a Pickup in Normal Sales Activity
When first time homebuyers realize that most short sales will not meet their deadline for getting the first-time homebuyer tax credit, they will gravitate away from these properties to foreclosures and normal transactions. However, if the number of foreclosures remains low, then their only option will be to give more attention to normal transactions where the owner is not underwater in the home.
So we could see a boost in sales of non-distressed homes while short sales wane. Short sales simply won’t make sense to many homebuyers who want the free ‘money’ that the IRS is offering.
We should see the peak of home buyer activity related to a push to take advantage of the tax credit in the latter October timeframe.
Then an Easing of the Market…
Come November 1st, we can expect to see home buyers ease away from the market as those who were planning on taking advantage of the first time homebuyer tax credit and didn’t get a home in time take a step back from the process. This is the point at which homebuyers realize that it isn’t realistic to be able to get a contract on a home and close in time.
An Extension Could Change Everything
Only time will tell whether the U.S. Congress and the President feel that the program should be extended. The reality is though that if the economy and housing market show signs of steady improvement by that time, the President and Congress will be less inclined to extend the program.
New Foreclosure Inventory Could Boost the Market
A push by the banks and financial institutions to move more foreclosure inventory through the market could help to satisfy the market once again. These are homes that can more readily be sold without a lengthy and uncertain process to do so. If many more foreclosures are pushed through, however, one can imagine that short sales and normal homeowner transactions will suffer.
What You Should Do If You Hope to Get the First Time Homebuyer Tax Credit
My recommendation would be not to count on an extension happening and instead plan to find a home now and get one of the best deals going in the market right now. It’s time to get busy as it will take time to find and ‘win’ the right home.
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As a CPA, I have seen the positive impact these tax credits have made on the real estate market. I am constantly amending 2008 tax returns to take the credit. Without these credits for Phoenix area homebuyers who knows where the market would be!
The foregoing effect of tax credit have uplifted the status of most real estate business based from their increased home sales this year. Same as what’s happening in Phoenix which home buyers are getting higher due to the emerging and ongoing tax credit law. Keep up the good post! Very informative and it helps a lot!
It’s just as well that this credit is over. The market was just artificially propped up for a year or so and now it is falling through the floor. I guess we’ll have to wait and see how low it goes.