Home Buyer Tax Credit Extension Signals Opportunity

The Big News of the week is the extension (and expansion) of the Home Buyer Tax Credit. The bill, signed by President Obama Friday, extends the $8000 tax credit for 1st time home buyers through April 2010. Additionally, existing homeowners will now be allowed a tax credit of up to $6500 if they choose to purchase another home. Qualifying income levels have also been increased to serve a broader home buyer market.

This is good news for both sellers and prospective buyers. Had the program been allowed to expire as scheduled, at the end of November, it is likely recent monthly increases in home sales would stall, or at least slow considerably.

It is important to understand that the tax credit is not merely a reduction in taxes owed come April 15th,  but is in fact an actual cash payment to the home buyer from the IRS upon the purchase of a qualifying home. The payment is made based on the cost of the home, not upon the amount of taxes paid by the tax payer. For lower or moderate income households, the credit may well exceed the tax obligation of the buyer.

When combined with historically low housing prices this represents an extraordinary incentive to home ownership. Better than a discount, in many cases the tax credit will contribute substantially to the down payment and closing costs of the home purchase. It’s another form of “instant equity”.

It’s difficult to imagine what more the government can do to support recovery of the housing market. The effects are already taking hold, with property values on the rise in many markets. As backlogs of unsold homes diminish, property values increase. Call it traction or momentum, the signs are encouraging.