CNN recently ran a slideshow featuring seven families who utilized the $8,000 first time homebuyer’s tax credit to purchase a home. I found the slideshow to be pretty interesting because it featured a good diversity of people, but quite a few of the examples were from California. Here is a breakdown of the slideshow and my comments.
First, there is a family of four from Adelanto, CA that is buying a home for $72,000. Obviously for this family the tax credit is a great deal. They can only claim $7,200 because that is 10% of the price of the home, but hey, it is free money. They are still waiting for approval on their purchase, and I hope they get it because it seems like an awesome deal for a 4 bedroom house. However, the story indicates that they would have bought the house with the credit or not because they needed a new home and the price was right.
Next, there is a single woman from Michigan who bought a $115,000 home for herself. From the description she gave it seems that she has a good head on her shoulders and she has been saving for a downpayment. This person also said that she would have bought the home anyway, and the $8,000 is really a bonus to her. I think that is great for her, but this means that the stimulus did not really spur an additional sale here.
The next couple is actually from San Mateo County. They bought a $750,000 home in San Carlos with an FHA loan. This means that they put down 3.5% and their loan is somewhere around $723,000. At 5.5% this is a mortgage of around $4100. Throw in property taxes and that’s another $600 a month. They will be paying pretty much all interest to begin with and it definitely does not cost $5000 a month to rent a three bedroom in San Carlos. This story makes me worry a bit because this couple is planning a wedding and they said that the $8000 tax credit is saving them. If you do the math, $8000 is 1.06% of their purchase price. Honestly $8000 would not even cover their closing costs on this purchase so it would seem that perhaps they are buying too much. The story did indicate that they felt rushed into the decision because of the tax credit, and I don’t know if that is a good thing.
The next couple is from Baltimore and they purchased a $119,000 home that they fixed up with the tax credit and other grants for historic homes. Again, I think in this case the $8000 is significant enough that it makes a lot of sense.
Another local couple from San Francisco is up next. They got a $550,000, 2200 square foot home in San Francisco. This is actually a pretty good deal if it is in a good area of San Francisco. They used the $8,000 to partially pay for a $12,000 roof. They indicated that they waited to buy their home because they heard that a refundable credit was coming out, but once again, $8000 is just a drop in the bucket for their purchase. It’s great that they were pay for 2/3rd of their roof, though.
The next couple took advantage of the fact that the $8,000 could be used as a downpayment . Essentially they got a 0% down loan from the government. The home is $257,000 and they could not save up $9,000. It also seems that they got an adjustable loan? In this case their only equity is the $8,000 tax credit, so it was definitely crucial in their purchase decision.
The next guy also used the tax credit as a downpayment, but he bought a triplex and is renting out two units to pay for most of his mortgage. So basically he became a little landlord on the dime of the US government. That is a awesome deal for him and I hope he does well.
In conclusion, I would say that most of these folks would not have purchased a home this year if the tax credit weren’t there. The two groups that used the tax credit as a downpayment could not have afforded what they bought. In the two Bay Area cases where the purchase prices were $550,000 and $750,000 the $8000 really was just a drop in the bucket so I feel like they shouldn’t have based their purchase decision solely on the credit. Anyway, it is nice to see that some people are able to take advantage of this in a smart manner even though I find it ironic that the government is giving out 0% down loans on one hand and wagging a finger at the “greedy bankers” with the other hand. Honestly I cannot wait for this credit to expire so that the housing market returns to normal.
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6 comments ↓
Great post and great examples! Despite the credit being low as a percentage of the purchase price for the Bay Area buyers, everybody loves getting something for free, no matter how wealthy you are. The classic case is the free lunch…. offer a free lunch to the richest or most senior individuals at your company, and they will likely accept.
I’m pretty confident property will come back… it might take 10 years, but it will come back. My co-writer and I are definitely on the hunt now, but in Nevada, of course
Shogun
I don’t get this $750K thing at all. It’s being brought up on several blogs. Even if they make exactly $150K, unless they had a huge down payment thanks to Bank of Mom and Dad, they will be paying more than 50% of their income to this house.
I think this one is worth watching as a potential foreclosure in a year or two. This sounds exactly like what most people did in California during the bubble.
I also doubt they make $150K combined as a hairdresser and a “crane operator” (??!) They bit off WAY more than they can chew.
-Erica
Erica – You’ll be surprised how much people make. We all learned from the Dockworker strikes 4-5 years ago, that the average salary for an Oakland dockworker is around 120K, and they only work 35 hours a week.
You’ll be surprised how much some people make.
I was looking at your catagories for this post. One of them is the catagory “stupid”. I then perused your “studip” catagory which entails 4 articles about the government. I think I see a trend.
And yes I do agree with you and I am anxious for the housing market to get back to normal. I sold my home in 2007 with the intent of repurchasing a new one in 2010. At the time our country’s household debt ratio was unsustainable and I assumed that the recession would clean up household our country’s balance sheets and reduce house prices to a sustainable level. I never would have thought that after 2 years of pain from the recession that our country’s households would have more debt in relation to their net worth than in 2007. It’s like a twilight zone episode with Paul Krugman doing the Rod Serling intro.
I only mentioned Paul Krugman because I just read his New York Times article and I am amazed at how our financial elite just don’t understand the situation we are in today. Krugman didn’t even mention Austrian economics which is the only school of thought that can explain some of the problems that are happening in our economy today. Of course the other problems can be explained by behavioural economics. Keyes and Friedman are dead literally and figuratively.
I think you are doing a great job, keep it up.
[...] the $8000 first time housing credit spur you to buy a home this year? I wrote this post about seven families profiled on CNN who used the $8000 housing credit. 5 out of the 7 either felt [...]
Hey Xin – Gave you a shout out on my latest post. I’m sure you will be in full support of this family I mention!!
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