These changes obviously made a lot of buyers very mad; those who purchased in 2009 but didn’t meet the income eligibility now look like suckers (but take heart…at least you had low prices, fantastic interest rates, and likely a lot more choice in inventory than today’s buyers have.)  And what about those souls that purchased back in 2008 when the “credit” was just a $7500 loan? (Again, take heart…low rates, low prices, and you really did have the pick of the litter on inventory.  Just look at the inventory lines on this graph of Northern Virginia Homes for Sale and compare the 2008 line to today.  What good is a big credit if everything available to buy is not worth buying?)

With inventory so tight, why do we need an extension and expansion, and on top of that a new category (the so called “move up” buyer, though in reality it could just as easily be a “move down” buyer, or even just someone who wants to convert their current residence into an investment property)?

The first reason is that the DC area is unique with its suddenly tight inventory.  DC has long been predicted to lead the nation’s real estate recovery given the incredibly strong job market, well above average incomes, and stimulus money flowing freely.

The second reason is that the pool of buyers has dwindled towards the end of the credit period (which was due to expire at the end of this month) so we needed to find a way to increase it again.  Why didn’t this initial rush of buyers lead us to a full recovery?  Again, it varies by area…the progress towards a stable market in DC was much more evident than in the rest of the country.  But two complicating factors: (1) the pool of entry level housing dropped too quickly and buyers were left circling and competing against other buyers for remaining homes and (2) much of the inventory they were buying were vacant, foreclosures, or short sales–meaning that those sellers were not, in turn, trading up to buy the next level of housing. So the recovery stalled at the entry level price point (in our area, I’d approximate this at $450k and below).

The extension and, more importantly, the new category attempts to address the second issue in particular.  First, now that a higher AGI buyer has an incentive, that category might be buying up inventory in the “next tier” of pricing, driving a recovery up the ladder, so to speak.  Second, by creating a new category of credit eligible buyers–the $6500 crowd–it’s likely that those trading up will also be selling their entry-level homes in order to afford their new purchase, relieving some of that inventory pressure on the first time buyer category.   So in other words, just as the $8000 stabilized entry level pricing, the hope is that the $6500 will stabilize “trade up” level pricing.

But those people are all underwater on their homes and can’t sell, you say!  Ah, the eligibility restrictions cover that: one must have owned and occupied the property for 5 of the last 8 years (meaning they purchased in 2004 or earlier), and while there will certainly be some who cashed out equity and are indeed underwater, there will be many more who have plenty of equity in their property and want to use this opportunity to move into the home more appropriate for the next stage of their lives. This last point, of course, might not play out if those owners decide to hold on to their current property as an investment, and simply buy a second property.  I suspect the people who do that will be limited though: the AGI limit, even when raised, along with the $800,000 maximum purchase price will limit people in the DC area from taking full advantage of that.

It will be interesting to see how this all plays out, but I suspect we’ll see an increase in the entry level category of inventory in early 2010, both from continuing foreclosures, trade up buyers, and simply sellers who recognize that the market at the lower price points in our area has stabilized and maybe is even on the upswing in certain neighborhoods.

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Ready to start your home search? Contact us to be notified of our next free First Time Home Buyer Seminar or to meet for a cup of coffee to discuss market conditions where you want to buy.

Thinking of selling? If you have a property priced below $450k or so and in a desirable neighborhood, there very well could be a lack of inventory.  Sell “high”, and use the proceeds (along with historically low interest rates) to buy “low” at the next pricing category.   Read more below:

Read more: How Do I Protect Myself if I Buy and Sell a Home at the Same Time?

Sign up for a free MLS Market Snapshot to see what’s been going on in your neighborhood (Northern Virginia, DC, and Maryland only)

Read more: Six Myths About Choosing a Listing Agent

Read more: Marketing Your Home

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But many sellers worry:

• What happens if I can’t sell my home and I’m already under contract on another?
  
• What if I have a contract on my home but it falls through?
  
• What if I can’t even find a home that I want to buy and someone has already bought mine?
  
• How do I coordinate the closings so that I’m not homeless?

These are tricky issues to work through, but there are several tools we have at our disposal, which I’ll cover over a few posts.

The first tool we have is called a Home Sale Contingency, aka Sale of Purchaser’s Property and Kick Out. This contingency protects the seller (let’s call them “Bob & Mary”) in case they can’t sell their current home (let’s say “Old House”).  It allows the Homeowner to effectively cancel their next purchase (“New House”) if a buyer doesn’t sell Old House.  It’s Bob & Mary saying “I”ll buy your house if I can sell mine.”

While this is a standard contingency, it is NOT included in the main Regional Sales Contract in our area–you MUST include it in a separate addendum.  In short, it allows, for a negotiable number of days, for Bob & Mary to try to sell Old House while still being under contract on New House. Meanwhile, New House’s owner is typically afforded the opportunity to continue to market the home and accept backup offers.  If New House’s owner accepts a back up offer, then they deliver a notice that gives Bob & Mary “x” number of days to either remove the contingency or void the contract.  This is called a “kickout.” However, in our area, the status is changed from “Active” to “Contingent/Kickout” and many buyers will not look at properties that have any sort of contingent status.

Obviously a clause that  protects Bob & Mary so well is not desirable to New House’s owner, so sometimes it’s difficult to negotiate these clauses in our area.  New House’s owner may not want to change the status and potentially lose other buyers who don’t have a home sale contingency.  And New House’s owner should of course do their own due diligence to make sure Bob & Mary are doing all they can to sell Old House before they accept this type of contingency.  Can you imagine the string of events if Bob & Mary, for example, also accept this type of contingency from a buyer?  New House’s owner may not be willing to take this risk.  But if New House’s owner is convinced Bob & Mary’s house will sell, and it’s the only offer they have, there’s a chance they will take the offer.

(Note to sellers: there are serious pros and cons to accepting this type of contingent offer, and steps you can take to provide maximum assurance.  Consult your agent!)  If not, then  Bob & Mary need to consider other options, which we’ll cover in other posts.   (Contact me to be notified of new posts on this topic, or to discuss other tools at a seller’s disposal.)

Read Part II in the Series

Disclaimer: This post is not intended as legal advice.  Consult your agent or attorney if you need assistance with contract clauses or negotiations.

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