The $8,000 federal tax credit for first-time home buyers is being extended, and the deal is being sweetened: Now existing homeowners can get $6,500 from the government if they buy another house.
Congress approved the $10.8 billion tax break Thursday, and the president is expected to sign it into law today.
The $8,000 incentive for first-time buyers has been in effect since January, but it was due to end Nov. 30. Now buyers have until April 30 to sign a purchase contract and until June 30 to close escrow.
"I am so excited about this," said Mary Morales, 34, of Patterson. She had been "on pins and needles" worrying whether her pending house purchase would be completed by the Nov. 30 deadline. The extension means she has plenty of time to qualify for the tax credit. "I'm a single mom with kids, so that $8,000 will really help."
Debbie Miller also was thrilled to hear the news. She has been trying to buy a Modesto home for months, but she keeps getting outbid.
"Because of all the competition, it takes a long time to buy. A lot of people are looking and bidding for homes," said Miller, 59, who works for the Girl Scouts in Modesto. "The tax credit will be extremely helpful in getting me into my own place."
Miller's agent, Audrey Hermanson of Prudential California Realty in Modesto, said the tax credit has motivated many first-time buyers to enter the market.
"People I've spoken to feel this is one of the few bailouts they've been given, and they want more of it," Hermanson said. "Many of my buyers have been very anxious about the ending of the credit, and now they can actively continue searching for their home."
Expanding the tax break to existing homeowners "is really positive news for buyers," said Robert Wallace of Re-Max Executive in Modesto. He said "it seems more fair" to help current owners purchase a new place to live, rather than restricting the incentive to first-time buyers.
"We want to keep getting this inventory sold," said Wallace, noting that many more foreclosed homes are expected to hit the market.
To be eligible for the $6,500 tax credit, homeowners must have used the home they currently own as their primary residence for at least five of the past eight years. The next home they buy must become their primary residence, whether they sell their previous home or keep it as a second home or rental property.
To get either tax credit, the home purchased cannot cost more than $800,000. The tax credit will be equal to 10 percent of the home's purchase price, up to $8,000 for first-time buyers and $6,500 for current homeowners.
Those who don't owe federal income taxes will be given the money anyway. But the tax credits will be phased out for individuals earning more than $125,000 a year and for couples earning more than $225,000.
"We needed this. It will be a boost for our local economy," said Craig Lewis, president of Prudential California Realty. He said the Northern San Joaquin Valley real estate market is driven by first-time buyers and losing the $8,000 tax credit would have reduced the eligible buyer pool by half.
By offering $6,500 to current homeowners, Lewis predicted that many people may be motivated to "move up" into larger homes or "move down" into smaller homes that better fit their needs.
Lewis said the number of buyers seeking homes priced at more than $250,000 has been increasing the past two months. He said there is less competition for those homes, particularly because investors typically prefer less-expensive properties.
More Bay Area home shoppers have started looking in the valley for bargains, according to John Melo, chief executive officer of Century 21 M&M and Associates in Oakdale. He thinks the new tax credits may boost that commuter trend.
"This will give a lot of hard- working people an opportunity to buy," Melo said. "That's great for our economy because we all know there are a lot of local businesses that benefit from every home sale."
Home buyers, Melo explained, spend money fixing up their houses and yards, which stimulates business.
"Now we need to focus on fixing unemployment so folks that want to take advantage of this tax credit can," said Chad Costa of Re-Max Executive. "If potential buyers do not have much faith in their job security, then it does not matter if there is a credit or not. They will not buy a home."
About 1.4 million first-time home buyers qualified for the tax credit from January through August.
Critics contend that the tax credits are poorly targeted because the vast majority of people who get it would have bought homes anyway.
"Essentially, we're giving money to people for doing nothing different," said Ted Gayer, co-director of economic studies at the Brookings Institution, a Washington think tank.
Extending and expanding the tax credit for home buyers is projected to cost the government about $10.8 billion in lost taxes.
Taxpayers can claim the credit on their federal income tax returns. If the credit exceeds their tax bill, the government will issue a payment. Taxpayers who want immediate refunds can amend their tax returns for 2008 to claim the credit.
Associated Press writer Stephen Ohlemacher contributed to this story.
Bee staff writer J.N. Sbranti can be reached at firstname.lastname@example.org or 578-2196.