Ilyce Glink Show Notes - February 28, 2010: Investing, Home Buyer Tax Credit, Tax Questions

Ilyce Glink Show Notes – February 28, 2010

Investing, Home Buyer Tax Credit, Tax Questions

This Week’s Housing News:

The news wasn’t that great for housing this week. New home sales fell 11.2 percent in January, to 309,000 units. That’s the lowest number on record, and records go back decades, and well below the 350,000 units sold that economists were expecting. This is on top of a huge drop in December’s new housing sales.

At the peak of the housing book in the summer of 2005, new homes were selling at an annualized rate of 1.5 million homes per year.

There wasn’t much good news on existing home sales either. The National Association of Realtors reported that existing home sales fell 7 percent in January to 5.05 million (annualized). That was about 20 percent below economists prediction of 5.5 million in annualized sales. That was also the second biggest decline (second only to December 2009, in which existing home sales fell 16.2 percent) in the 11 years the data has been collected, Barron’s noted.

The looming issue of shadow inventory (homes that have been foreclosed on but haven’t been released yet for sale by the banks or Fannie Mae or Freddie Mac) makes real estate observers wonder about the true level of housing inventory. It’s rising, but no one really knows by how much.

Legendary investor Warren Buffet said in his annual letter to shareholders this week that he believes the housing industry will largely be back by 2011 in terms of supply and demand. I guess he means that supply will roughly equal demand.

We’ll see. As far as I’m concerned, if you don’t have a job, you’re not buying a house. And, if you’ve been delinquent or foreclosed upon or completed a short sale, you’re not buying either. It will be interesting to see where demand comes from.

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Department of Labor – COBRA Continuation Legislation

We had a call about qualifying for a COBRA tax credit. According to the Dept. of Labor’s website: Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit. To qualify, individuals must experience a COBRA qualifying event that is the involuntary termination of a covered employee’s employment. The involuntary termination must occur during the period that began September 1, 2008 and ends on February 28, 2010. The premium reduction applies to periods of health coverage that began on or after February 17, 2009 and lasts for up to 15 months.

The DOL’s website has video and a host of explanations about the COBRA tax credit.

Unemployment Insurance Extension Hits A Wall In the Senate

There are more than a million unemployed Americans whose unemployment benefits will run out this week unless Congress passes another extension. On the show this morning, I said that I didn’t see any way this would pass before the benefits ran out but that I thought not passing another extension was lunacy.

Unless you want some sort of civil uprising brought about by people who simply can’t feed themselves or their children, Congress needs to get their act together and pass an extension.

It isn’t as though people aren’t trying to get a job. It’s that the JOBS SIMPLY DON’T EXIST AT THE MOMENT. There are still about 6 people applying for every job.

After the show, I found this story on Daily Finance about how the Senate was trying to pass an extension of unemployment benefits, only to be thwarted by Sen. Jim Bunning (KY-R):

“Kentucky’s Republican Sen. Jim Bunning managed to stop passage of a measure that includes a 30-day extension of unemployment benefits. Bunning demanded that the Senate find $10 billion worth of cuts to pay for the larger package of government programs that includes loans for small businesses, money for highway projects, an extension of the National Flood Insurance Program and subsidies for health insurance premiums made through the COBRA program.”

Apparently, the House passed a resolution extending unemployment benefits on Thursday. The Senate’s version is being held up only by Sen. Bunning.

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Lynn’s Question on Refinancing

Lynn called the show today. She’s 18 months into a 15/1 adjustable rate mortgage at 4.75 percent. She’s wondering if she should refinance again to a 5/1 ARM at 3.5 percent and try to pay off the loan in the next 5 to 7 years.

I told her I’d run the numbers for her using the Tools and Caluators at ThinkGlink.com:

Let’s assume that 18 months ago, Lynn got at 15-year loan for $150,000 at 4.75 percent. Her monthly payments would be $1,166.
Now, let’s assume that Lynn is looking to refinance her loan for the remaining balance, which would be $138,716. She has 13.5 years left on the loan so let’s assume she amortizes to pay off the loan in that time, so she isn’t adding to the loan term.

She’s going to save $58 per month. Assuming it costs her $2,000 to pay for her refinance, it will take 40 months, or more than 3 years, to pay off the costs of the refinance. But she would save a lot in interest on refinance. on her current loan, she has nearly $50,000 in interest left on the loan. But on the new loan, she’d pay just $35,000 in interest, a savings of $15,000.

However, there is a risk that the interest rate won’t hold steady at 3.5 percent over the entire 15 year term. In fact, I can promise you it will go up.

As you’ll recall, Lynn said she thought she could pay off the loan entirely in maybe 6 to 10 years, which is when she’s planning to retire. If that’s the case, then there’s very little to lose by refinancing. While taking 3 years to recoup costs isn’t great, Lynn will save anywhere from $15,000 to $20,000 in interest, depending on how quickly she can pay off the loan.

Lynn – go for it.

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IRS.GOV: Saver’s Credit

Ted wrote in to ask about the tax credit I mentioned for lower-income Americans who put away some cash in qualified retirement accounts. It’s called the *Saver’s Tax Credit. *

Ilyce Glink Show Notes – February 28, 2010: Investing, Home Buyer Tax Credit, Tax Questions