Five Factors Reshaping The Housing Market

You’re Forgiven

Another change to the US tax code gives the nearly 4 million homeowners who have already entered foreclosure some added relief.

“If your home is foreclosed upon and if your mortgage is higher than the proceeds realized on your property, that debt would have been considered taxable income to the seller prior to 2007,” says Mark Luscombe, a principal tax analyst with CCH, a tax and accounting firm in Riverwoods, Ill. “Now, they’ve created an exclusion for principal residences so that debt is not considered taxable income. That’s fairly unique in recent times and it’s clearly in response to the housing crisis.”

First-time Homebuyer Tax Credit

AP

To jump start the housing sector and decrease the over-supply of homes for sale, President Obama also signed into law the American Recovery and Reinvestment Act in February 2009.

Among the provisions was a bill that increased the existing first-time homebuyer tax credit to $8,000 (from $7,500) for the purchase of a principal residence between January 1, 2009 and December 1, 2009.

The credit, which does not require repayment, will be claimed on a homebuyer’s tax return to reduce their income tax liability. Unlike a deduction, each dollar of a tax credit reduces one’s income taxes by a full dollar.

Though the program is designed to jumpstart the entry-level housing market, which fuels real estate liquidity, it’s still unclear how many first-time buyers will take the plunge.

“Many of these programs are so new that that they haven’t even had a chance to impact the environment for residential real estate yet,” says Drew.

Record Homeownership

One of the biggest trends in the modern day housing market, however, and the one most likely to restore stability in the years to come has nothing to do with government intervention at all.

Fueled by underlying strength in the US economy, record low interest rates and the expansion of mortgage credit, the rate of homeownership—a major contributor to economic growth—has been on the rise since 2000.

After averaging 1.15 million per year between 1995-2000, the Joint Center for Housing Studies reports household growth notched up to 1.37 million annually between 2000-2006.

“While some of this increase may be due to the unusually favorable home-buying conditions in the first half of the decade, much of it was expected as the echo boomers began to form independent households and immigration continued to climb,” the Center notes in its “2008 State of the Nation’s Housing” report.

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The Center projects household growth will climb from 12.6 million between 1995-2005 to 14.4 million between 2010 and 2020.

Minorities overall are expected to account for more than two-thirds of the net increase in households over the next decade, while the foreign born will contribute at least one-third of that gain.

Although lower average incomes among the minority population “may force them to spend less on non-housing items as housing costs rise, minority households will nevertheless provide broad demand support to housing markets in the years ahead,” the Center reports.

A New Tomorrow

Given recent volatility in the housing sector and the litany of new federal assistance programs aimed at borrowers, it’s anyone’s guess what shape the real estate market of tomorrow will take.

One thing, however, is clear: As the industry responds to current challenges, the groundwork is already being laid for a new reality in residential real estate—one in which lenders are more accountable, investors are more cautious and homeowners are better positioned to manage their monthly payments.

• Slideshow: Million-Dollar Homes

© 2012 CNBC.com

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