Can First-Timers End The Foreclosure Mess?

The National Association of Home Builders has kicked off a new campaign to continue the first-time buyer tax credit, now as much as $8,000 for every first-time buyer who purchases a home within the next few months.

“Due to expire at the end of November, the current $8,000 first-time home buyer tax credit has proved to be an effective policy targeted toward a specific demographic group that is showing tangible results,” says Joe Robson, NAHB chairman. “Enhancing this credit would help to stoke the economic engine at a key point in our recovery.”
So how do we “enhance” a temporary one-time tax benefit? We can make the benefit larger, extend the program or maybe both. In fact, legislation has now been proposed to raise the first-time credit to $15,000 but a more-likely option is simply to continue the current program past the 2010 mid-term elections.

The first-time buyer program would seem to largely benefit, well, first-time home purchasers. In fact, the implications of the program are much broader: It is perhaps the central federal initiative now preventing an outright collapse of the housing market and with it much of the economy.

We Need ‘Em
First-time buyers are a big deal. Spokesman Walter Molony with the National Association of Realtors tells us that first-timers represent 40 percent of today’s housing market. No less important, without first-timers many of today’s homeowners could not sell their homes and buy replacement properties, meaning that without first-timers the market would absolutely stagnate.

The situation with foreclosures parallels the market for existing homes. Lenders are never going to unload the massive number of properties they hold without buyers. The more buyers, the better, and if those buyers happen to be first-time purchasers the important point is not their lack of prior buying experience it is instead that they’re taking homes off the market and reducing real estate inventories.

Given this quickie background it’s obvious that the government will extend the first-time buyer credit, most probably through the end of 2010, the year of the next congressional election.

The alternative to buying is renting, an option that means no mortgage interest or property-tax write-offs, no potential for equity appreciation — and no worries about declining home values. Think about someone who has rented during the past decade and someone who has owned. Real estate values in most local markets have plummeted during the past few years so there’s a case to be made that renters may come out ahead. The facts in most markets are otherwise: In 1999 the typical existing home sold for $138,000 according to NAR. The typical home today, even in a weak market, is now $170,200. The benefits from tax write-offs are additional, an owner subsidy of great value.

We don’t know what will happen tomorrow. There are varying predictions regarding home values and it would be a mistake to suggest where real estate prices nationwide or within a particular ZIP code are headed. What we can say with certainty is that there’s risk in the marketplace whether you rent or own.

If you own there’s the risk that home values could decline by the time you’re ready to sell or that monthly costs could rise substantially if you finance with an ARM. There’s also a risk for renters, what’s called an opportunity cost. For tenants the risk of not owning is that home prices and rental rates will increase when costs could have largely been locked in by purchasing with a fixed-rate loan.

Cash-Back Homes
It’s fairly obvious that the typical price, NAR’s $170,200, is not going to get you much in many markets. Nope, no Manhattan penthouses for that price, no beachfront homes at Malibu.

But in many markets $170,000 is no longer an implausible figure. Condos, townhouses, smaller homes and properties in outlying areas are more affordable than in years.
The decline in home prices and the availability of the federal tax-credit for first-time homebuyers raises an interesting point: Homes are available in a way that is largely unprecedented.

To understand what’s happening consider the Smiths. A young couple, they buy a property for $170,000 and qualify for the $8,000 tax credit. They finance their home with an FHA-insured mortgage. Because the local market is slow, they extract a “seller contribution” from the owners which covers all closing costs. The numbers look like this:

Property Price: $170,000

Down payment: $5,950

Federal Tax Credit: $8,000

Smiths must come up with cash for closing unless they can get a “bridge” loan from a state housing agency or an approved nonprofit secured by their tax credit. When the tax credit is paid by the government so is the bridge loan. But let’s say that no bridge loan is available, the Smiths really need to come up with $5,950.

Let’s see: They spend $5,950 to buy a home and they get back $8,000. That means buying a home puts the Smiths ahead by $2,050.

Rental Rates
Look in the local classifieds, or look online, and you can see that rental rates around the country are not in decline.

The National Association of Home Builders says that rental vacancy rates have actually fallen during the past year, from 10.3 percent to 8.5 percent.

“The stock of existing homes for rent and for sale is greater than the consumer demand right now and is in direct competition with new supply,” says NAHB’s chief economist, David Crowe. As that inventory is absorbed, and as new households form during the economic recovery, the demand for multifamily rentals will rise, and production will return to a more ‘normal’ level.”

A growing population and insufficient housing stock means that rental rates should be rising in many if not most markets. The first-time credit requires that buyers own their homes for at least three years, otherwise they must repay their tax credit. However, a growing need for rental property creates a potential option for first-time buyers if they would rather lease than sell after three years.

The Shadow Inventory
Mr. Crowe relates rental demand to such factors as household formation (population growth) and the inventory of available homes. In today’s market, however, looking at the supply of homes can be misleading.

Check out the foreclosure figures from In the past three months more than 1 million foreclosure notices have been filed — more than in all of 2005. Foreclosure filings now exceed 300,000 per month — if the numbers keep up that’s 3.6 million in a year, 7.2 million in two years. Unemployment numbers play a big role here and even President Obama, in a recent interview with Bloomberg News, agrees that unemployment levels are likely to rise and top 10 percent.

In addition, lenders today have huge stocks of real estate owned — REOs. These properties are often vacant, in part because lenders have traditionally sought to remove owners from foreclosed properties as quickly as possible. With the former owners out the old theory was that the properties could be turned around and immediately re-sold. Today, the inventory of foreclosed homes is huge, by some estimates lenders hold so many units that perhaps 500,000 homes are not even available for sale as lenders wait for market values to improve.

“We have a massive shadow inventory of lender-owned homes that are both unoccupied and unsold,” says James J. Saccacio, chief executive officer of, the nation’s largest source of foreclosure listings and data. “Home prices are being pushed down by these properties while at the same time rental rates are being pressured up because many empty homes held by lenders are not actually being used for housing. The addition of more first-time buyers will add balance to the marketplace by reducing the supply of unsold homes, including foreclosures now held by lenders. This is good for everyone.”

Four Considerations
The decision by the federal government to offer an $8,000 tax credit to first-time homebuyers changes marketplace assumptions. A large number of buyers now have an additional reason to buy houses. More buyers equals more demand and, usually, pressure to raise prices. But we do not have a “normal” market, whatever that is. We have a market where a huge number of owners are being displaced and the number of vacant homes is vast. If now is the time for first-time buyers to act, they need to look at four central issues:

First, where is your local market headed? Consider population, job trends, home building, and the local foreclosure inventory. Local real estate brokers can provide useful market data.

Second, where are local home prices today. Are there objective reasons why prices might rise, fall or remain stable for the next few years?

Third, does it make sense to buy a foreclosure? Think about acquisition price discounts but also think about property condition and the potential cost of repairs.

Fourth, if you buy now and qualify for the $8,000 tax credit will such a benefit equal some or all of your down payment? Is $8,000 actually larger than your projected down payment? Can you get a bridge loan in your state to buy with FHA financing and little or nothing down?

As we said, there are no guarantees of profit and every decision to buy or not buy has certain inherent risks. But good hedges against risk for buyers include such things as depressed prices, low mortgage rates and free money from the government, an unusual combination of factors now in place for qualified first-time buyers.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site,

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