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Deadline Could Spur Rush to Buy First Homes

October 06, 2009 - PORTLAND -- Looking ahead to a new job and ready to move from her Portland apartment, Harris Parnell had been casually house-shopping since early summer. But the search became more serious when she learned that the $8,000 federal tax credit for first-time homebuyers expires Nov. 30, and that it could take at least a month to close a sale.

In late September, Parnell and her partner, Meredith Small, put a three-bedroom home in Bath under contract. They're hoping to close Nov. 11.

"We knew the timing was looming," Parnell said. "We're glad to be closing near the beginning of the month, rather than the end, when it will probably be crazy."

Time clearly is running out. First-time homebuyers who can qualify for a loan need to get a house under contract within the next several days, lenders and real estate agents say. New regulations and a slower appraisal process can extend the time between a contract and a typical closing to 45 days, they say.

"There's a lot of activity," said Debby Abbondanza, a mortgage development officer at Bangor Savings Bank. "For quite a few people, they wouldn't be buying without the tax incentives."

At least 60 percent of the loans she's dealing with today are first-time buyers who can qualify for the credit, she said.

The tax credit was introduced in February as part of the government's economic stimulus package. It's available to anyone who hasn't owned a home in the past three years.

The National Association of Realtors estimates that 2 million first-time buyers will take advantage of the $8,000 tax credit. The group estimates the program will spark 350,000 sales that wouldn't have taken place otherwise.

But as the deadline nears, Abbondanza and others in Maine's real estate industry are keeping their eyes on Congress.

Realtors groups are pushing to extend the program's deadline and expand it to all homebuyers. Another proposal calls for raising the tax credit to $15,000.

These measures also are supported by the construction industry, including the Home Builders Association of Maine. Besides helping homebuyers get into new starter homes, the tax credit reduces the inventory of existing homes, which creates demand for new construction, the group says.

The extension idea, at least, is gaining some traction in Maine's congressional delegation.

U.S. Reps. Mike Michaud and Chellie Pingree, both Democrats, say they generally support extending the program.

U.S. Sen. Susan Collins, a Republican, said that while the current program has helped boost home sales, she's weighing the benefits against the cost of a six-month extension, with an estimated cost to taxpayers of $15 billion.

U.S. Sen. Olympia Snowe, also a Republican, supported the first-time homebuyer tax credit in the economic stimulus bill. The Senate Finance Committee, on which Snowe serves, will soon turn from the health care debate to address the extension of several tax provisions, including the homebuyer credit, a spokesman in her office said.

"Finding the resources to extend these provisions without adding to the federal deficit is going to be a challenge," said John Gentzel.

The tax credit gained broad political support last winter, in the depths of the recession, as a way to help breathe some life into the near-dead housing market. Home sales trigger related economic activity, such as buying appliances and furniture.

But critics, such as the Washington, D.C.-based Brookings Institution, argue that the existing program has largely benefited people who would have bought homes in any event. Critics say low interest rates, government-backed lending programs and falling prices are making homes affordable to many first-time buyers, without an additional taxpayer subsidy.

In Maine, new homebuyers also can get up to an additional $5,000 in the form of a grant from the Maine State Housing Authority's Gift of Green program. The money, which can be used for closing costs, requires a 1 percent down payment and enrollment in a special first-time homebuyer class.

Parnell and Small didn't quite meet the income guidelines for Gift of Green. But they still wanted to take advantage of the federal program.

That led them to narrow their search to the Bath area and to zero in on a circa-1870 Cape-style home that was vacant but had undergone recent renovations. The asking price was $125,000.

To help pay closing costs, the women liquidated mutual funds. They plan to use the $8,000 credit to reinvest, after they file their tax returns. They felt this strategy was worthwhile to take advantage of an opportunity that may not come again.

"I think getting $8,000 back is great," Parnell said. "My parents didn't have that when they bought their house."

Other buyers are getting creative to tap into the federal money, Abbondanza said. She has dealt with buyers who took distributions from their retirement accounts and will apply for the tax credit through amended returns, to pay back the IRAs.

First-time homebuyers have been a major factor in the recent uptick in home sales. Some have been able to find bargains through foreclosures and distressed sales.

But it's too late now to go after these properties and close before Nov. 30, warns Mike LePage, a broker at Re/Max Heritage in Yarmouth. Short sales, in which lenders must agree to release the property for less than the mortgage, take too long to review and negotiate, he said.

Having said that, LePage added, some homes have had their prices reduced to the point where a buyer could save more than $8,000 in a distress sale. So it's not a good idea to jump on a house just to meet a deadline.

"Don't let $8,000 prevent you from having the home you want," he said.

As to speculation that the program may be extended or even sweetened, Abbondanza said she's been fielding calls from clients who want her opinion. There's no guarantee, she tells them.

"I'm a bird-in-the-hand kind of person," she said. "Why wait?"

By TUX TURKEL, Staff Writer, Portland Press Herald, October 4, 2009


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