Across the country, state governments are helping homeowners buy houses with new subsidies, sometimes allowing them to buy without putting any money down at all.
This means that new homeowners can wind up with zero equity in their homes, a situation which can quickly mean they owe more on their house than it is worth and may encourage higher levels of defaults.
What’s happened is that well-intentioned local governments, after heavy lobbying from the real-estate industry, are offer loan programs that allow homebuyers to receive advance payments on federal tax credits for first time homebuyers that they otherwise wouldn’t get until next year. Missouri was the first state to launch such a program. Delaware, New Mexico, Pennsylvania and Tennessee are on board. Washington is putting a program in place now.
Andrew Jeffrey at Minyanville explains how it works:
The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.
Critics, however, argue that rebates don’t end up in a buyer’s pockets until his or her 2009 tax returns are filed – even though rebates are credits, not just deductions.
Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn’t go far enough.
In an effort to boost home buying — even for marginally qualified borrowers — a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year’s refund check. This allows buyers to pay for things like closing costs, mortgage points – or even the down payment.
Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.” So, of course, we’ve got to get rid of these barriers to home-ownership.
What could go wrong?
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