The Cost of Waiting for First Time Homebuyers

Ever since the first version of the first time homebuyer tax credit, homebuyers have been eager to engage but uncertain about home values and for some, this has caused them to sit on the sidelines.  Two influences will converge in April of next year that should serve as the decisive factors for causing first time homebuyers to understand that this time, waiting will be expensive.  What’s more, that cost can be quantified.

The first factor concerns the expiration of the first time homebuyer tax credit.  Sen. Benjamin Cardin introduced S.B. 1678 with bi-partisan co-sponsors (including Harry Reid) and it will only extend the credit for 6 months from its expiration date.  The 6 month extension was a disappointment for those who were hoping for a 12 month extension but Zillow estimated that a 12 month extension would cost approximately 14.86 billion based on current trends if that were to happen and 6 months seemed to be the fiscally responsible compromise.  This bill would set the tax credit to expire at the end of May and it doesn’t look likely that it would be extended barring a double dip recession.

The second factor has to do with Ben Bernanke and the Fed.  In an effort to keep mortgage rates low and the secondary market machinery of the mortgage industry working, the Fed agreed to purchase 1.25-1.45 trillion dollars of mortgage backed securities.  Estimates of the impact of this effort on interest rates ranges from lowering them by 0.375% to 1 % but I find 0.5% to be credible.  The Fed has announced that they will bring an end to this effort by March of 2010.  Consequently, we can expect a bump in rates in April of 2010 barring a double dip recession.

These two changes could cost first time homebuyers tens of thousands of dollars if they don’t act in time.  Not only does an interest rate that’s ½ of one percent lower create a lower monthly payment but it pays down the principal balance faster.  If these two factors are added to the value of the tax credit the exact loss to first time homebuyers can be calculated if the assumptions are to be trusted.  Here are some examples:

While it may have been unclear before as to when the right time to jump into the market might be, these factors and their costs should make the decision crystal clear.  Zillow’s analysis of current market trends shows that, if the credit were extended, a total 1.86 million first-time homebuyers would purchase homes between Dec. 1, 2009 and Nov. 30, 2010.  Well folks, it looks like you have 6 months so you better saddle up with your Realtor and loan officer and get it done.