New Home Buyer Tax Credit: 7 Things You Need to Know

How to get up to $8,000 off your home purchase.

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Anyone brave enough to jump into today's free-falling housing market can take advantage of some serious incentives. At the national level, home prices are off nearly 27 percent from their 2006 peaks, with certain markets--like Las Vegas and Miami--down more than 40 percent. That means most of today's buyers will be able to pick up properties at significant discounts compared with just a few years ago. Meanwhile, 30-year fixed mortgage rates are hovering at historically attractive levels of roughly 5 percent. But with the still-swooning housing market threatening to exacerbate an already-frightening recession, Uncle Sam recently tossed an additional incentive into the mix. To stimulate demand, President Barack Obama's $787 billion economic stimulus plan--which was signed into law in mid February--included a tax credit of up to $8,000 for first time-home buyers. Here are seven things you need to know about this new tax credit:

1. The specs: The tax credit is equivalent to 10 percent of the purchase price of the home--which must be a principal residence--but is capped at $8,000. It applies only to first-time home buyers, who are defined as buyers that haven't owned principal residences for three years before making the purchase. The tax credit, however, is subject to income limitations. A single buyer would need an adjusted gross income of $75,000 or less to be eligible for the full credit (For married couples it’s $150,000.) Those who make more may qualify for partial credits.

[For more details, check out First-Time Home Buyer Tax Credit: 6 Things to Know.]

2. 2009 buyers: The credit only applies to those who buy a home on or after Jan. 1 and before Dec. 1, 2009. That means anyone who bought a home last year is out of luck. But Richard Moody, the chief economist at Mission Residential, says a more significant shortcoming of the tax credit is that it won't help 2010 buyers. Moody argues that the biggest factor keeping people from buying homes these days is the weakening labor market. In other words, as long as Americans are worried they could lose their jobs they won't buy homes, he says. "I don't expect to see any appreciable improvement in the labor market until sometime next year at the earliest," he says. "[As a result], I think this [tax credit] is going to expire before a lot of people feel confident to go out and make this purchase."

3. $15,000 letdown: The tax credit is much smaller than a similar $15,000 measure that was included in the Senate's version of the stimulus bill. The $15,000 tax credit was scrapped during negotiations between the House of Representatives and the Senate. "We would have liked to have seen [a bigger tax credit]," says Tom Kunz, the president and CEO of Century 21 Real Estate. "But $8,000 is still $8,000."

4. No payback: The good news for prospective homebuyers is that unlike a previously-enacted $7,500 tax credit, this one doesn't have to be repaid. That makes the credit much more attractive from a would-be buyer's prospective, says Keith Gumbinger of HSH Associates. "[It's a] more traditional sort of incentive," he says.

5. One of many: With home prices declining and job losses rising, the tax credit is just one of many factors to consider when deciding whether or not to buy a home, says Mike Larson of Weiss Research. "It should factor into your decision, but it shouldn't drive your decision," he says. The trend of property values in a local market, the buyer's job security, and the number of years the buyer plans on living in the house are more important. "This [tax credit] can help, but those are the real things that are going to be a fundamental driver," Larson says.

6. Market impact: Gumbinger expects the measure to have only a modest impact on the housing market. That's because it can't do anything to address the weakening labor market, falling consumer confidence, or tightening lending standards that are working to prevent many would-be buyers from entering the market. "It certainly helps to serve an audience which can [already] participate in the market," Gumbinger says. "But it doesn't do anything to help to develop demand from those borrowers who are at the fringes--or far away from the fringes--of participating."