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July 25th, 2009 10:02 AM by David W. Welch
Let me first start by saying that I have nothing against the cash for clunkers program. In fact, I think this may be one of the most effective and innovative aspects of the stimulus package. Anyone can walk into a car dealership, and receive a $3,500 to $4,500 voucher to trade in their gas guzzler for a brand new, more fuel efficient car valued at $45,000 or less. I recently helped my mom with the purchase of a new car (she would have qualified for this) and the process took just a couple of hours and was fairly painless. What I would like to see is this kind of incentive translated to the real estate market.
The $8,000 tax credit may sound like it is the same type of program, but it is not. First, it is 10% of the purchase price of the home, so if you buy a $50,000 condominium the most you qualify for is $5,000. Cash for clunkers gives you $4,500 for purchasing a new car, foreign or domestic that provide 10mpg more than your trade regardless of price. If you purchase an $18,000 Hyundai, the voucher is picking up 25% of the price. Second, the voucher is immediate and may be all the down payment you need. The tax credit is refunded to you when you file your income taxes or ammended return. The tax credit also cannot be used as part of your downpayment under FHA. The state of Florida has passed legislation to allow access to the $8,000 up front, but there are two issues with that: first, the banks have no idea how to get that money into your hands (bridge loan, 2nd loan, etc.); second, you can only use it for additional down payment or closing costs. The plan here in Florida could be helpful if somebody know how to make it work. If cash is tight though, it still won't pick up your 3.5% down payment required by FHA. The other way that cash for clunkers beats the tax credit is that it is available to anyone with a car built since 1984. The tax credit has several limitations: first time home buyers only; if married, both spouses have to qualify; the credit is reduced if you are single making over $75,000 or married making over $150,000; and if your married you only get one tax credit.
The purchase of a home is an investment, but the purchase of a car is just a purchase. The size of the assistance should be raised to $18,000 which is about 10% of the national median sales price. Make this assistance in the form of a voucher that is used at closing, so it is immediate. Allow this money to be used as downpayment on the home. There are two reasons I have heard not to allow this money to be used as the downpayment. First, the money is supposed to be used by the new home owner to fix up the home or make purchases for the home to stimulate the economy. If they don't have the money to close the deal in the first place, the stimulus money won't be spent and another house sits on the market. If this gets more people in homes, absorption of the inventory goes up and stabilization in the real estate market happens faster. It also stimulates the individual economies of the sellers whose homes are getting purchased. Second, FHA argues that if buyers have none of their own money into the home, it is easier for them to walk away from it if prices go down more or things get tight. This is a lousy argument. 100% financing was not at the core of the mortgage crisis. Greed and fear caused people to borrow more than they could afford and lenders to make loans they never should have made. VA and USDA have been making 100% loans for years, the Nehemiah and Ameridream programs were creative solutions to getting around the FHA downpayment for more than 10 years. At this point, it is unlikely home values are going to go down much more if at all. Those new cars being purchased depreciate when you drive off the lot. The $18,000 is instant equity in a likely appreciating asset. Finally, make this money available to all home buyers. Sellers need help too. Their home has dropped in value significantly, and the person buying their home needs help with closing costs. There are also second home buyers that have had their IRA's and 401k's slammed by the stock market, why not give them a reason to go ahead and take advantage of the prices and mortgage rates in the housing market.
Make the home buying program look more like cash for clunkers, and see what happens. Maybe Washington could throw in some of those funny looking light bulbs too.
Orlando Real Estate, David Welch Real Estate Optimist