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Tax Credit, Low Interest, and Big Inventory Lure Rookies into Housing Market

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By Steve Campbell

firsttimebuyersRISMEDIA, June 2, 2009-(MCT)-Even in a sputtering economy, one segment of the U.S. housing market is feeling a bounce. First-time home buyers-loaded for bear with a new $8,000 tax credit, historically low interest rates and a big inventory to choose from-are happily diving into domestic life, according to real estate agents, economists and mortgage lenders.

Craig Brown, a 26-year-old marketing developer for an online sales company, feels as if he were getting a free, federally funded fresh start.

“The tax credit was what brought me into the house hunt. I could pay off my debt and get an extremely low loan rate. I couldn’t pass it up,” he said.

The $8,000 tax credit for first-time buyers, passed by Congress as part of its plan to jump-start the slumping U.S. housing market, has new graduates, newlyweds and young professionals alike scrambling to get their financial houses in order-sometimes with the help of their parents-to purchase a home by the program’s Dec. 1 deadline.

The tax credit does not have to be repaid by buyers who live in the home for at least three years.

The tax credit got even more attractive Friday, when Housing and Urban Development Secretary Shaun Donovan announced that the Federal Housing Administration will allow first-time buyers to apply the credit toward the purchase costs of an FHA-insured home.

That move allows state housing finance agencies and some nonprofits to “monetize” the tax credit so buyers can apply it toward their down payments, according to a HUD news release.

The National Association of Home Builders estimates that the tax credit will stimulate 160,000 home sales nationwide-101,000 of which will be by first-time buyers. Fifty-nine thousand homeowners will then be able to buy another house because a first-time buyer purchased theirs.

“It’s really a big deal,” said Linda Davidson of Service First Mortgage Co. in Garland, Texas. “The $8,000 tax credit is making things crazy. In almost every conversation we have with borrowers, it comes up. Even if they are not first-time buyers, they ask about it. Everybody wants it.”

But not everyone can get it.

The program is open only to people who have not owned a principal residence for three years before the purchase, Davidson said.

There are also income limitations, but they are fairly generous: Single taxpayers with incomes of up to $75,000 and married couples with incomes of up to $150,000 qualify for the full tax credit. Singles with incomes below $95,000 and married couples with incomes below $170,000 can be eligible for a partial credit.

‘Surgical impact’

The tax credit is “driving interest” nationwide, said Lawrence Yun, senior economist for the National Association of Realtors.

“In our most recent data from a month ago, we found that roughly half of all home buyers were first-time buyers. That is much higher than the usual one-third to 40% of first-time buyers in a normal market,” Yun said.

He said qualitative data suggest that the tax credit is also increasing foot traffic at open houses and phone inquiries to brokerage agencies.

“This is one program coming out of Washington that is apparently having a surgical impact on getting first-time buyers back in the market,” he said.

“That’s definitely one factor that has improved our market,” said Ruth Story, a broker associate at Keller Williams Realty. “This is the busiest second quarter I’ve seen in 25 years. It’s a combination of things: The low interest rates are very attractive, the tax credit combined with that and the fact that buyers still view our market as being affordable.”

Peer demographic

It’s a nice niche market for a young real estate agent like Grace Taylor, a 26-year-old agent at Helen Painter Group Realtors who is working with four first-time buyers ages 25 to 30.

“They all know it’s a great time to buy and that interest rates are low. But when someone is giving you free money, it pushes them over the edge,” Taylor said.
Nathan McDaniel, a 23-year-old loan officer at Cendera Funding, is also tapping his peer demographic. He says his age helps him connect with younger buyers, who make up a large part of his business. And all of them are interested in snagging the tax credit, he said.

“It really seems anyone who was thinking about getting a place is moving up their timetable so they can get it,” McDaniel said. “Even people who don’t have the down payment, they are getting gift funds from relatives so they can take advantage of it.”

He has made several loans to recent college graduates who were initially holding off “to see if they were going to get married.” Two of them bought a home, McDaniel said. “The tax credit has speeded up the timeline of age and lifestyle,” he said.

Prabhath Boya, a 28-year-old Fort Worth attorney, shopped for a house last year but didn’t find what he wanted. After a “hard” 3 1/2 -week hunt, however, he now has a house near TCU under contract.

“I’ve been living in an apartment for almost two years and looking at interest rates and opportunities,” Boya said. “This is as good a time as anyone can imagine, rates-wise and pricing-wise.”

‘Weeded out’

The national housing meltdown has spurred tougher lending restrictions, culling the herd of would-be first-timers with less-than-stellar credit.

When the tax credit was announced in February, Davidson said her office was flooded with people who wanted to pre-qualify for loans. Unfortunately, most of them are still renters.

“It was overwhelming. Our pre-qualifies were double what we see in a normal month-but 70% of them didn’t qualify,” she said.

Now that the bad applicants have been “weeded out,” Davidson said she’s qualifying people who have done their homework and have their finances in order.

Story is seeing the same thing.

“It’s a different kind of first-time buyer,” she said. “The credit restrictions are so tight, so we are seeing real quality buyers. The profile of the first-time buyers has changed. They have been waiting, watching and saving. And they are ready when the right house comes along.”

Michael and Ambra Cole fit that profile. After living in Switzerland for five years, they moved to Fort Worth in July 2007 when Michael, 36, went to work as a management professor at the Neeley School of Business at TCU. Ambra, 34, works as an account manager for an employment agency.

The couple spent nearly two years saving, watching the market and scouting locations. They scoured Internet listings and then viewed about 25 houses over four months before the right home popped up in the Berkeley Place neighborhood near TCU.

They were the first house hunters to see the home, and they quickly cut a deal. Location and resale value were the prime attractions, Michael Cole said.

“We really tried to do our homework in advance rather than falling in love with the first house we saw,” he said. “The low interest rates, the right house in the right neighborhood — it all came together.”

Within budget

Yun says first-time buyers nationwide seem to have adapted to a more realistic view of real estate.

“We are seeing more lower-price home transactions,” he said. “The lower price point sales indicate to me that many homeowners are trying to stay within their budgets.

“The old-fashioned American way was that one starts in a starter home and after a few years people build equity and trade up,” Yun said. “That is the old-fashioned way to accumulate wealth without stretching themselves. I think we are moving back into that stage, and that’s healthy.”

Craig Brown, the young house hunter, is a model for that new long-run reality.

“The reason that I didn’t buy before was that I would have been stretching myself too thin,” he said. “I didn’t want to be in a position of having no room for error.”
He’s already looking ahead even as he searches for a home in the $130,000 to $140,000 range in Carrollton and north Dallas. And flipping that first house isn’t part of the equation.

“I’m thinking about finding a couple of roommates, and that can pay my mortgage,” he said. “And whenever I get married, I can use this property as a rental property.”

The $8,000 tax credit – key elements of the 2009 First-Time Home Buyer Tax Credit:

Who qualifies?

- First-time home buyers who have bought or will buy between Jan. 1 and Dec. 1. The IRS defines a first-time home buyer as someone who has not owned a principal residence during the last three years.
- The credit does not have to be repaid if the buyer occupies the home for at least three years.
- The credit is 10% of the home’s purchase price, up to $8,000.
- The credit may be applied to primary residences, including single-family homes, condos, town homes and co-ops.

Copyright © 2009, Fort Worth Star-Telegram, Texas
Distributed by McClatchy-Tribune Information Services.

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