If you wondered how bad this recession is going to get - why we're going to have an all-on 1930s repeat - let me present to you CNN's "What I Bought With My $8,000 Tax Credit":
Location: Newport News, Va.
Property: 3 bed, 2.5 bath townhouse
Price: $257,000
When buying, the biggest problem I had was how to come up with a down payment. The house was $257,000, and I needed to put down 3.5% to meet the FHA rules. I didn't have all of the $9,000 required, but then I found out about the FHA's new program where you can use the tax credit for the down payment. Using the plan, which the FHA announced in May, I was able to buy the house without draining all our savings.
I got a great deal on the mortgage. The interest rate is just 3.5% for the first year and costs about $1,500 a month, with taxes and insurance. The rate goes to 4.5% the second year and caps after that at 5.5%, about $1,900 monthly, which we should be able to swing as our earnings go up.
Two problems: Townhouses come with assessments, which are an added bug-a-boo compared to a house. There are two sorts: Regular assessments which (usually) are level and easily planned for, and then special assessments that come from needs in the common areas (sometimes including roofs and such) or if someone (for instance) gets hurt in the common areas and sues.
If you can't save up the $9,000 down payment you also can't cover a blown-up washer, dryer, water heater or stove. You further have no chance of covering a special assessment.
Finally, what if your earnings don't go up? Pay any attention to the employment situation my friends? There is enormous slack in the employment market and a much greater chance you will experience an income decrease than increase over the next five years. One of you might lose you job, for openers. While you probably clear the income bar for sound ownership ($86k or so between the two of you) with both working, I'll bet neither of you does alone. You're a layoff away from instant disaster with no reserves.
Location: Portland, Maine
Property: 3-family home
Price: $255,000
I didn't want to dip into my retirement account for a down payment, and the tax credit let me buy a three-family house without emptying my retirement.
Again, no skin in the game. What happens if the price continues to decline? While a 3-family home for $255,000 is reasonably safe I suspect, the fact remains that now you're a landlord and if you have no savings (you need to hit a retirement account) you've also got no cushion against one of your units being empty for a while or (god forbid) a new roof or other significant repair. I also question the income-to-price ratio if you needed to do this in order to make the numbers work - cancel that objection if you make $85,000 a year or more and your job is secure, but the fact remains that with no liquid savings any interruption in income means trouble - fast.
Location: Adelanto, Calif.
Property: 4 bed, 2 bath Spanish-style
Price: $73,000
We lost out to higher bids several times, but we finally got initial approval four weeks ago on a short sale of a Spanish-style house. It cost $73,000. We're waiting for final approval. I don't know if it will come before the tax credit expires. I hope it does, but banks are so slow at processing things right now.
Ok. This one actually will likely work. Ignoring the $8,000 for a moment if this couple has a combined income of $30,000 (or more) they're well within the parameters of safe borrowing to buy a home that they will actually own some time in the future. I recommend a 15-year mortgage so you start building equity faster.
Location: Portland, Mich.
Property: 3 bed, 1.5 bath, 1,449 s.f.
Price: $115,000
My now ex-boyfriend was always after me to buy a home, but it wasn't until after we broke up that I did. I lost a louse and bought a house!
I'm a conscientious shopper and very careful about what I spend. I saved for several years to pay for the house and maintained great credit so I was able to get a low mortgage rate.
Ding ding ding ding ding! We have a winner! She saved for several years, did not need leverage, bought within her means, and has a home - not a speculative investment or something she has to stretch to buy. I know where Portland Michigan is, by the way - nice little town.
Location: San Carlos, Calf.
Property: 3 bed, 2 bath, 1,600 s.f.
Price: $750,000
We felt like we had to hurry and buy before the end of the year so we wouldn't miss out on the tax credit. That turned out to be truer than we thought: As we got closer to the end, we realized how much closing costs and other fees would add to the purchase price, which was high enough already.
The $8,000 tax credit is saving us. Wedding, new house, we're tapped out. We're definitely big fans of the tax credit!
Got a number for a good divorce lawyer on speed-dial and have you already borrowed the money on your credit card necessary to pay him or her, stuffing it where your wife/husband can't find it? You're going to need both.
To support a $750,000 home you need a combined household income of $250,000 or more. She cuts hair and he operates a crane. Odds of that adding up to $250,000 gross, even in the land of fruits and nuts? Zero. Oh, and they mentioned they're tapped out from getting married and all that's involved with buying the place. Great. Another "no equity, no savings, and God help me if I lose my job - or the credit card company decides to stop financing my lifestyle" story.
PS: Whether the house down the street sold for $1.2 million is immaterial.
Location: Baltimore
Property: 3 bedroom, 2 bath rowhouse
Price: $119,000
We looked for a year, but didn't find anything that was perfect. The tax credit helped change our minds, and we bought a rowhouse that was right where we wanted it, in the Canton neighborhood. The tax credit, along with some local grants available for restoring historic district homes, made it more practical to buy a fixer-upper.
A modest home that can be done on $40,000 in combined income. A graduate fellow and registered nurse don't make all that much, but between them they certainly should clear the income bar, and they're treating this as a home, buying a rehab and gutting it. I like it.
So let's add it up.
I have three impending disasters, with one certain enough that I'll give you 5:1 odds on it, and the other two even money.
That's a 50% FAIL rate and is just what we need in America - more foreclosures.
If the program was limited to the three sound loans it would be ok. Let's define "sound loan:"
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20% down payment or more without using the credit.
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Income of both earners at least 1/2 the price of the house if both are working, 1/3 the price if only one of a couple is working. (Why the higher requirement if both work? Because if EITHER person loses their job you're screwed if you rely on two incomes! There is more risk of one of a couple losing their job than the sole earner in a one-earner household being laid off or fired.)
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28% front end and 36% back end ratio maximum (undisclosed in this series)
Notice that none of the stories that are likely to have happy endings needed the credit to buy, but it provided incentive to do so. For the disasters-in-waiting, however, the credit was the enabling device that will ultimately lead these folks into ruin.
Congratulations Washington.
PS: I bet the situation of about half the people who traded in their fully-paid-off "Clunker" for a nice new car payment are about to get a similar (and equally-ugly) surprise.
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