The following analysis for first time home buyers is so important that I felt the need to expose it to more home buying prospects. Whild the economy is still unsteady, certain factors can be measured and quantified, including how much equity and savings can be gained by purchasing a home before April 30, 2010 and getting it settled before June 30, 2010.
Ever since the first version of the first time home buyer tax credit, home buyers have been eager to engage but uncertain about home values and for some, this has caused them to sit on the sidelines. I am not writing to suggest that this consideration is good or bad cause for not taking advantage of the first time home buyer tax credit. I’m strictly writing from the perspective of a financing nerd. Two influences will converge in April of next year that should serve as the decisive factors for causing first time home buyers to understand that this time, waiting will have a cost. What’s more, that cost can be quantified.
The first factor concerns the expiration of the first time home buyer tax credit. Sen. Benjamin Cardin introduced S.B. 1678 with bi-partisan co-sponsors (including Harry Reid) and it will only extend the credit for 6 months from its expiration date. The 6 month extension was a disappointment for those who were hoping for a 12 month extension but Zillow estimated that a 12 month extension would cost approximately 14.86 billion based on current trends if that were to happen and 6 months seemed to be the fiscally responsible compromise. This bill would set the tax credit to expire at the end of May and it doesn’t look likely that it would be extended barring a double dip recession. It did not pass overwhelmingly and there was a of of opposition to the cost.
The second factor has to do with Ben Bernanke and the Fed. In an effort to keep mortgage rates low and the secondary market machinery of the mortgage industry working, the Fed agreed to purchase 1.25-1.45 trillion dollars of mortgage backed securities. Estimates of the impact of this effort on interest rates ranges from lowering them by 0.375% to 1 % but I find 0.5% to be credible. The MBA rate forecast also lends credence to this assumption (shows rates going to 5.7 by year's end). The Fed has announced that they will bring an end to this effort by March of 2010. Consequently, we can expect a bump in rates in April of 2010 barring a double dip recession. What’s worse is that there have been rumors that the Fed is doing to start selling some of what they bought and this could have the effect of driving rates up faster.
These two changes could cost first time home buyers tens of thousands of dollars if they don’t act in time. Not only does an interest rate that’s ½ of one percent lower create a lower monthly payment but it pays down the principal balance faster on the front end of the amortization cycle. If these two factors are added to the value of the tax credit the exact loss (financially speaking) to first time home buyers can be calculated if the assumptions are to be trusted. Here are some examples:
Purchase Price
$125,000.00
$150,000.00
$200,000.00
$225,000.00
$250,000.00
$275,000.00
$300,000.00
$325,000.00
Loan Amount
$120,625.00
$144,750.00
$193,000.00
$217,125.00
$241,250.00
$265,375.00
$289,500.00
$313,625.00
10 year monthly payment differential assuming ½ point change to rate
$4,482.53
$5,379.03
$7,172.04
$8,068.55
$8,965.06
$9,861.56
$10,758.07
$11,654.57
10 year amortization differential assuming ½ point change to rate
$1,446.21
$1,735.45
$2,313.93
$2,603.17
$2,892.41
$3,181.65
$3,470.89
$3,760.13
tax credit
$8,000.00
$8,000.00
$8,000.00
$8,000.00
$8,000.00
$8,000.00
$8,000.00
$8,000.00
Potential Loss of Waiting
$13,928.74
$15,114.48
$17,485.97
$18,671.72
$19,857.47
$21,043.21
$22,228.96
$23,414.70
While it may have been unclear before as to when the right time to jump into the market might be, these factors combine to calm some nerves because even if home values do dip again at the end of the year, the savings from the combination of capitalizing on lower rates combined with the tax credit should offset value drops, should they occur.
Zillow’s analysis of current market trends shows that, if the credit had been extended for 12 months, a total 1.86 million first-time home buyers would purchase homes between Dec. 1, 2009 and Nov. 30, 2010. We didn’t get the credit extended that far. I wonder how many are going to pack those plans into the first part of the year.
Well we've got less than six months now so let’s saddle up!
Copyright2010BrianSchulman©
|
Brian Schulman offers expert real estate representation for buyers and sellers of homes in Lancaster County, PA. To learn more, visit http://www.FindLancasterHomes.com/ |
Sometimes putting the numbers in front of people pushes them to commit. I look at my job as one where I am constantly looking for ways to quantitatively convince them to make a move that is in their best interest. Buying a home is so emotional for most, particularly first time homebuyers, that the only way to get them to move is to "show them the money".
Ginevra, the quoted article is by Charles Dailey. There is a link to him in the blog.
Susan, the numbers are there in black and white. There are multiple factors at work that will make homes harder to buy or qualify for after April 30.
Brian...thanks for the informative blog...Cherise
Hi Cherise - it truly seems like the present conditions to purchase a home - low interest rates and the Home Buyer Tax Credit - very likely will not last indefinitely. If a buyer is considering a home purchase, this is a good time to take advantage before the conditions change.