US GOVERNMENT PROVIDES STIMULUS TO HOUSING MARKETS

Last week Congress and the President approved two initiatives that could help breathe new life into the residential real estate market. The first is the First Time Home-Buyer Tax Credit, which is part of the American Recovery and Reinvestment Act. The second is the $275 billion loan modification program.

The new ARRA program raises the current maximum $7,500 first‐time homebuyer tax credit to $8,000, and extends it at that level through November 30, 2009. It also eliminates any required repayment to the IRS as long as the purchaser remains in the home for 36 months. This is a significant enhancement to the prior program which required eventual repayment of the credit. These enhancements apply to purchases of a principal residence by a first‐time homebuyer after December 31, 2008.

A “first time homebuyer” is defined as someone who has not owned a principal residence in the three years prior to the date of purchase. A purchase takes place when transaction closes rather than when a contract of sale is executed.

Purchases on or after April 9, 2008, and before January 1, 2009, continue to be governed by the original first‐time homebuyer credit enacted last year. The credit phase‐outs that start for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for joint filers) continue to apply to both years.

While the tax credit program described above is designed to bring more purchasers to the market, the loan modification program is designed to help stabilize the market by curbing the numbers of foreclosures. It is estimated that as many as five million homeowners with negative equity will be able to refinance their existing loans through Fannie Mae and Freddie Mac.

In addition to the $200 billion earmarked above, the government will be spending $75 billion in incentives to encourage lenders to modify existing loan terms for homeowners at risk of foreclosure due to their inability to make their monthly mortgage payments.

By bringing more buyers to the market and reducing the available inventory, it is possible that home prices could become stabilized. The goal of stabilizing the housing market is a foundational element to the entire economic recovery program.