Are Home Values Stabilizing? Well Sort Of.

Zillow Real Estate (www.zillow.com) reports that Americans with negative equity in their single-family homes fell to 21% in the third quarter which is 2 percentage points better than the second quarter at 23%. The bad news is that some of that improvement is because more homeowners were forced into foreclosure so the homes were taken out of the negative equity category and landed in the REO (real estate owned) column at the lending institutions.

The federal government’s $8,000 tax incentive program for first time home buyers originally scheduled to end by November 30, 2009 but extended to April 30, 2010, combined with the new $6,500 incentive for current/repeat home owners has had a positive effect on home sales. However some of those homes, 21%, were previous foreclosures.

The overwhelming majority of homes in certain geographic areas such as Merced, Stockton, Madera, and El Centro, all in California, saw at least 67% of all home sales generated from resold foreclosures, with about that same level in Las Vegas. Overall nationwide slightly over 26% were sold for less than what the seller originally paid.

A first time home buyer for the tax incentive program is defined as someone who has not owned a house for the previous three years. For couples, neither of the spouses could have owned a home in the previous three years. The incentive is 10% of the purchase price of the home with a maximum of $8,000. The income can be no more than $125,000 for an individual and $250,000 for a married couple. Other restrictions apply.

The tax credit is a one for one dollar reduction in the amount owed for federal income tax. If the amount owed is less than the tax credit the government will send a check to the homeowner for the difference.

The new $6,500 incentive for current/repeat home buyers is effective until April 30, 2010. There are purchase price maximums and income level requirements that must be met, as well as other restrictions.

In some cases the incentive can be applied toward the down payment of the home rather than waiting until the income returns are filed and the incentive check received.

Even with the motivation of the tax incentives selling a home will be a challenge. Foreclosures are expected to drop slightly. That means there will still be an overabundance of REO homes on the market. Banks are motivated to sell those homes to get them off their balance sheet. The competition from REO homes makes it more difficult for home owners to sell.

Even though home values may be stabilizing it’s still not a good time to be a home seller. It will be interesting to see how many people take advantage of the current/repeat home buyer tax incentive. After all in most cases they’ll have to sell their current home to buy a new one.