First-Time Homebuyers Buoy Real Estate Market

The housing market is getting a much-needed boost as first-time homebuyers rush to take advantage of an $8,000 federal tax credit that is set to expire Nov. 30, 2009.
By: David Bracken: RISMEDIA
The incentive is helping to slow the decline in home sales. In August, sales were down 1% over the comparable period last year, the smallest year-over-year decline in any month since late 2007. As Congress considers extending the credit, real-estate agents and home builders worry sales could slump again if it's allowed to expire.

A full accounting of the program’s popularity won’t be available for several months, but brokers say first-time buyers have been driving much of the activity in the market in recent months, especially for cheaper homes.

Kelly Cobb, a broker with Fonville Morisey Realty in Cary, North Carolina, said four of the six listings her office put under contract in the last month involved first-time buyers. Cobb said that as the deadline gets closer, she’s seeing more lower-end homes with multiple offers on them. “It has really, really fueled our market,” she said. “I think anybody who waited until now is going to pay top dollar.”

In order to qualify for the tax credit, a buyer must close on their property by Nov. 30. Brokers say in most cases that gives potential buyers about five more weeks to begin the closing process. The tax credit has been available since the start of the year, and for many families it has been too good to pass up. Terri Hutter and her husband, Fred Neumann, had been repaying credit-card debt and trying to build up savings in recent years. Hutter said the couple originally planned to continue renting for a year or two longer. “With that deadline I’m like, ‘Oh, let’s do it,’” said Hutter, who runs the culinary job training program for the Inter-Faith Food Shuttle. Hutter and Neumann expect to close Oct. 9 on a 1,360-square-foot home in Durham, N.C. The couple paid the listing price of $145,000 for the house and got a 30-year mortgage at a 4.875% interest rate.

Albert Blackmon and his fiancee, Rachel Blair also expected to wait a few years before buying a home. But Blackmon, who works as a Web developer in Apex, N.C., said the tax credit put buying a home within reach. The couple got a U.S. Department of Agriculture Rural Development loan with a 5% interest rate that required no money down. They paid $134,500 for a 1,250-square-foot home in Clayton, N.C. “We’re basically borrowing some money from some family members interest free, and when the credit comes back, we’re going to pay them right back and we have some instant equity in the house,” Blackmon said.

Those hoping to take advantage of the tax credit will need to have their financial house in order, as skittish lenders are closely scrutinizing a potential borrower’s credit and income history.

Tom Simon and his fiancee Tera Caldwell recently used the tax credit to purchase a home near downtown Raleigh. Simon admitted that getting financing was a long process, but he said that made him more confident that the couple could realistically afford the $193,000 house they ended up buying. Simon said the tax credit was not the deciding factor in the couple’s buying a home, but it did make them start seriously looking for a house sooner than they would have otherwise.

There’s still a chance that Congress could extend the tax credit in its current form or amend it. Some lawmakers worry about the program’s cost, which may hit an estimated $15 billion, more than double the amount projected in February’s economic stimulus bill, according to the Associated Press. Critics of the program also say it is artificially inflating demand at the expense of the taxpayer. “I would argue that it has the same effect of manipulating the real estate market that we’ve had with some other problems,” said Dallas Woodhouse, state director for the conservative group Americans for Prosperity. “There will be a day of reckoning for that.”

If the program is allowed to expire, real estate professionals will be watching closely to see what happens to home sales after it’s gone. George Pittman, CEO of Ammons Pittman GMAC Real Estate in Raleigh, said increased sales of lower-priced homes have not translated into more sales at the higher prices. Pittman said he would normally expect those selling $150,000 homes to then buy more expensive homes. “The thing we’re trying to figure out is why it is not snowballing up,” Pittman said. “It’s had some impact, but the upper end is still a bit soft right now.”

The tax credits have already had an effect on new home construction. As the inventory of modestly priced homes shrinks, builders are able to convince lenders that there is a need to replace them. The average cost of homes built in Wake County, N.C., was $165,000 in July, down from $195,000 during the same month a year ago, according the Home Builders Association of Raleigh-Wake County. There’s also been a spike in the number of building permits issued in Wake County in recent months. Tom Anhut, a division president in Raleigh for Toll Brothers home builders, said he believes the increase is a result of builders rushing to get homes finished by the end of November. “I think that there is a demonstrable increase in construction activity at the lower end right now because of that,” he said.

Tim Minton, executive vice president of the Home Builders Association of Raleigh-Wake County, said there’s no question the credit has helped stabilize a volatile market. “The question is, from a long-term standpoint, at some point that spigot does have to be turned off,” he said.
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Worried Mortgage Rates Will Rise? You Have Options

Prospective home buyers can protect themselves from an interest rate spike by investing in a mutual fund that tracks rates, or buying options on one of those funds, writes Brett Arends.
By: Brett Arends: WSJ.com
Good news for prospective home buyers: You can find 30-year mortgages for less than 5% again. But those rates may not last . And these days it's almost impossible to lock in a rate while you hunt for a home. Banks—for understandable reasons—now want to evaluate a property before pre-approving borrowers.

Mortgage rates have been falling in concert with sinking interest rates on long-term Treasury bonds. The two are closely related, through a complex mechanism involving mortgage-based securities. And if mortgage rates start rocketing again in the next few months, a rebound in long-term Treasury yields will likely be the cause.

People who worry that rates will spike again before they find a home can protect themselves by investing in a mutual fund that tracks long-term interest rates. Or they can buy call options on one of those funds instead. If Treasury rates suddenly skyrocket, you may make back what you would lose on the mortgage rates.

This may sound like some incredibly complex footwork, and most people will shy away from trying these moves. But considering the cost of even a slight rate change over the life of a mortgage, they're worth considering.

After all, if you're looking to buy a typical $200,000 home, a rise in mortgage rates from 5% to 6% will cost you an extra $1,300 a year for the next 30 years.

Several funds track long-term interest rates. Among them are two exchange-traded funds that you buy like shares on the stock market, the ProShares Short 20+ Year Treasury fund (TBF) and the ProShares UltraShort 20+ Year Treasury fund (TBT). There is also the Rydex Inverse Government Long Bond Strategy mutual fund (RYJUX). (Technically, these funds track the inverse of the price of long-term government bonds, which in turn is inversely related to the yield.)

These funds come with risks. The two exchange-traded funds, TBF and TBT, are specifically designed to track daily moves in the long-term bond market rather than long-term moves. The TBT is particularly volatile because it is what is known as an "Ultra" fund—it will give you double the market move, up or down. The drawback: If rates fall further while you are house hunting, you will save extra money on your mortgage —but you'd lose money on these funds.

That's why the options market looks especially interesting.

You can purchase call options on the TBT fund. These calls wager that the $4 billion fund will see a sharp rise in share price in the next few months, and could operate like a form of insurance if mortgage rates suddenly spike during your real-estate search.

Here's how it works: Today, with 30-year Treasury rates at just 4%, the TBT is about $44 a share. But for $1.20 a share you could buy a $50 call option on the fund, good for any time between now and January. That would simply give you the right to buy the TBT at $50 between then and now. So if long-term interest rates were to skyrocket over the next few months, and the TBT soared to, say, $60, you'd pocket a profit of $10 a share (less the $1.20 in costs for the option).

Because the TBT tracks daily performance, there is no absolute way of knowing what long-term Treasury rate would correspond to any given price on the TBT. But the fund was about $59 in June.

Issues like compliance and complexity probably deter most financial intermediaries from offering any such product. That's a shame, because an options hedge could be very useful to a lot of middle-class Americans.

No strategy can offer perfect protection against mortgage rates: it's a work-around, based upon derivatives of derivatives of the Treasury market. But anyone who thinks or fears that long-term interest rates will rise dramatically in the next few months might look at buying call options on the TBT.
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