Tax credit of $6,500 not likely to motivate people to switch homes

When President Barack Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009, it extended the $8,000 first-time home buyer tax credit as well as offering a new tax credit up to $6,500 for current homeowners who buy a new primary residence.

The law also extended the strongest driving force in housing today. How big of a force is it?

According to the Internal Revenue Service, more than 1.5 million claims were processed from individuals and families who have purchased a home between January and September 2009, and the National Association of Realtors estimates that some 350,000 of these buyers would not have purchased the home without the tax credit. In addition, analysts say that more than two-thirds of all current homeowners and nearly all first-time buyers will be eligible for the credit extension.

While there’s no doubt that the first-time component will continue to be popular, how many existing homeowners who qualify for the new $6,500 credit will actually use it?

Before we present some basic projections from a professional survey, let’s consider some realistic time frames. Here are the important dates to remember:

Nov. 7, 2009: For current homeowners, the home must be purchased on or after Nov. 7, 2009, to qualify for the credit.

April 30, 2010: Purchase and Sales Agreements must be dated by all parties with a date on or before Friday, April 30.

June 30, 2010: Purchases must close on or before Wednesday, June 30.

The big question for current homeowners is if the window is wide enough to even consider the incentive. Would you, especially if you had not considered selling your home, now uproot your family for $6,500? Would you even consider the anxiety of marketing your home during the holidays or gambling that an acceptable offer would be signed all around by April 30?

The actual amount of the existing homeowner credit equals the lesser of: (1) $6,500, or (2) 10 percent of the price of the replacement home, or (3) $3,250 for a buyer who uses married-filing-separate status. To qualify, the buyer must have owned and used the same home as a principal residence for at least five consecutive years during the eight-year period ending on the purchase date for the replacement principal residence. If you’re married, your spouse also must pass the consecutive-year test. Homes valued at $800,000 or more do not qualify.

The $6,500 existing homeowner credit is worth only about 2 percent of the average purchase price for current homeowners who want to buy a new home, according to results from the Campbell/Inside Mortgage Finance Monthly Survey of real estate market conditions. Survey results show that the average price for homes purchased by first-time homebuyers was $186,000 in the third quarter of 2009. In contrast, the average price for current homeowners buying a new principal residence was $309,000.

“On a percentage basis, the effect of the tax credit would be much smaller for current homeowners,” observed Thomas Popik, research director for Campbell Surveys. “We estimate that the first-time homebuyer tax credit will result in a 10 percent increase in home sales from March through November of 2009. We’d expect the effect of the proposed tax credit for current homeowners to be about half as large — from December until the tax credit expiration in the spring of next year.”

A first-time buyer does not mean a person who has never purchased a home. The IRS defines a first-time buyer as anyone who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. The first-time extension is one thing, but if you’ve lived in your home for five consecutive years, would a $6,500 tax credit really jump-start your decision to move?