Not Much ‘Relief’ in this Housing Bill

The President signed the Housing Bill last week.  I’ve been reluctant to talk too much about it until I had a chance to understand some of the particulars.  I’ve learned a lot in the last week about it and consumer beware be aware.  There is a lot of hype and I’m not sure much help here.

The Associated Press release states that the housing bill is ‘intended to provide mortgage relief for 400,000 struggling homeowners’.   Supposedly, homeowners can get in touch with lenders to have their loans modified to a lower 30 year interest rate – government backed.   Which homeowners exactly?  Couple of caveats:

• Homeowners’ debt-to-income ratio must be greater than 31%
• Borrowers must be able to prove they can repay the loan
• The value of the loan cannot exceed 90% of the value of the property (duh?! This is part of the problem!)
• Another biggy – Lender participation – totally voluntary!
• FHA has a 3.0% refinance fee on this with a 1.5% annual surcharge.  Not sounding like much of a deal to me…
• Oh, and at the time of sale, (my favorite part – hear the sarcasm please) the seller is only entitled to 1/2 the appreciation.

Then there is the much touted $7500 tax credit for first time buyers.  This is a tax credit – but to be clear, it’s really a interest free loan to be paid back over the course of 15 years.  And if you sell prior to that time, it’s still to be paid in full that tax year.  Most first time buyers aren’t buying the home as a long term residence, hence the term ‘starter home’.  I guarantee they won’t be loving that loan when it comes due no matter how much they may love it now.

And then there is the Capital Gains revision which is not getting a ton of press from what I can see.   Conventiently for lawmakers, it’s in the very last pages of the nearly 700 page document where most people are nearly asleep when they get there. 

The Capital Gains exclusion the homeowners and investors have enjoyed will be in place for the remainder of 2008.  It stated that a homeowner could take the gain from the sale of the a property tax free (up to $250,000 if single, $500,000 if married) as long as you had lived in the property 2 out of the last 5 years.  Many people have kept their homes as rentals for as much as three years to benefit from this law.

This has changed as of January ’09.

The new calculation is as follows:

Given this, let’s look at example.  If you have a $100,000 profit from the sale of your home and you’ve lived in the home for 2 of the last 5 years, your Capital Gains Exclusion is $40,000.   Your taxable gain is $60,000.

Currently, the federal tax on capital gains is 15% (but watch the coming election; that may very well change).  So for the example, it would be $9,000.  California currently will tax the gain as ordinary income adding another $3600 to $4200 on top of this.  What would have been a $0 tax liability, is now a $12,600 to $13,200 tax liability under the new provision.  I’m not loving this relief plan just yet. 

(Heads up:  Please consult a tax advisor for calculations of Capital Gains and Income Tax.  I am not an Accountant.)

For those homeowners in California, owners of Orange County real estate specifically, this is a conservative calculation.  There are many of us that have lived in our homes for enough time that there is sizable gain, even with the price declines we’ve seen.  $100,000 may be a conservative gain for many.

For additional explanation on the Capital Gains side of the bill you can go to see Brad Nix’s site, or even better, take a look at the bill.  I’m always interested in your feedback.  Maybe someone will come up with something I haven’t appreciated yet.

Oh, oops, one thing I do like (it’s not perfect but I’m satisfied), the conforming loan limit although reduced from $725,000, has been permanently placed at $625,500.  We needed that 2 years ago, but thank you.

As for the relief, I don’t think this will bring it.  Unfortunately, this is a market cycle – albeit a tough one.  Let it runs its course.  I’m not sure this is the kind of help we needed.