Understanding the First Time Home Buyer’s Credit… Before it is Too Late!

September 7, 2009

1.   Who is eligible to claim the tax credit?
If you are a first-time home buyer purchasing a new home or a resale-you are eligible for the tax credit.  The purchase must take place on or after January 1, 2009 and before December 1, 2009 to qualify for the tax credit. As it applies to the tax credit, the purchase date is the date when the home closes and the title to the property transfers to the home owner.

2.   What is the definition of a first-time home buyer?
The tax credit law defines a “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. If you are married, both spouses cannot have owned a home.

For example, if you didn’t own a home but your spouse did, you do not qualify.  For unmarried purchasers, the credit amount can be given to any buyer who qualifies as a first-time buyer, for instance, if a parent jointly purchases a home with a son or daughter. If you owned a vacation home or rental property not used as a principal residence you are not disqualified as a first-time home buyer.

3.   How is the amount of the tax credit determined?
The tax credit is 10 percent of the home’s purchase price, however, there is a maximum $8,000 credit.

4.   Are there any income limits for claiming the tax credit?4.
The full tax credit amount is given to buyers with a modified adjusted gross income (MAGI) of less than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. For taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) the credit is reduced to zero.  Taxpayers between these figures are prorated accordingly.
  
5.   What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS.   For most buyers this will be the figure at the bottom of the first page of form 1040 or 1040A.  For Form 1040 EZ this is reported on line 4 as of 2008.

6.   If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income.

7.   Can you give me an example of how the partial tax credit is determined?
There is a $20,000 difference between those who are eligible for a full tax credit and those where the credit is reduced to zero.  If you take the amount you are over the limit by and divide it by the 20,000, this will give you the percentage that you are over the limit by.  Subtract that number from 100% and then multiply it times the $8,000.  That will give you your tax credit amount.

For example: A married couple has a modified adjusted gross income of $165,000. Their income exceeds $150,000 by $15,000. Dividing $15,000 by $20,000 yields 0.75.  This means they are over the limit by 75% and so are eligible for a tax credit of 25%.  Multiplying $8,000 by 0.25 shows that the buyer is eligible for a partial tax credit of $2,000.

Please remember that this is an example. You should always consult your tax advisor.

8.   How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid.  This tax incentive is a true tax credit. But home buyers must use the residence as a principal residence for at least three years or face having to repay it. Certain exceptions apply.

9.   How do I claim the tax credit? Do I need to complete a form or application?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.

10.What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence qualifies for the credit. This includes single-family detached homes, attached homes (i.e. townhomes and condominiums), manufactured homes (also known as mobile homes), modular homes and houseboats.  If it qualifies for the capital gains tax on a primary residence, it qualifies for this.

11.I read that the tax credit is “refundable.” What does that mean?
It means that the credit can be claimed even if the taxpayer has little or no federal income tax liability to offset.

For example, if you owe $6,000 in taxes and had $4,500 in taxes withheld for the year you still owe $1,500 in taxes.  You would receive a check from the government for $6,500.  ($8,000 – $1,500 = $6,500.)
Or perhaps more common would be that you have a tax liability of $6,000 and you had $7,500 withheld so you would be getting a refund of $1,500 before the credit – the credit gets added to your refund so you would get a refund of $9,500 ($1,500 + $8,000 = $9,500)
And you don’t have to have any tax liability in the year you claim the credit – but you do have to have income.

12.I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns.How can I claim the new $8,000 tax credit instead?
You may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
 
13.Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. The “purchased” date is the date the owner first occupies the house.  The date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit isdetermined by the settlement date.

14.Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.

15.I live in a district where I am already receiving a first time home buyer credit (Washington D.C.)   Can I claim both credits?
No. You can claim only one.

16.I am not a U.S. citizen. Can I claim the tax credit?
Consult your tax accountant.  If you are NOT a nonresident alien (as defined by the IRS), have not owned a principal residence in the past three years and meet the income limits you may be eligible to claim the tax credit for a qualified home purchase.

17.Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Assuming the same $8,000 tax liability from above, a taxpayer is in the 33 percent tax bracket would have their liability reduced from $8,000 to $5,360. ($8,000 minus 33%).
So the tax CREDIT is much more helpful to the buyer

18.I bought a home in 2008. Do I qualify for this credit?
No, but you may qualify for another tax credit  if you bought  your first home between April 9, 2008 and January 1, 2009.
 
19.Is there any way for a home buyer to get the money before they file their 2009 tax return?
Yes. If you believe you will qualify for the tax credit you can reduce your withholding taxes on your paycheck by adjusting your withholding amount on your W-4 via your employer or through your quarterly estimated tax payment.  You can put this saved money aside to use as a downpayment.
 
IRS Publication 919 contains rules and guidelines for income tax withholding. Please note that if the qualified purchase does NOT occur, then you will be liable for repayment to the IRS of income tax and possible interest charges and penalties.  Consult your account prior to doing this.
 
20.If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers the opportunity to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008.

Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
 
21.For a home purchase in 2009, Can I choose which year to claim the credit (2008 or 2009) to make sure I get the largest credit possible?
Yes.  You can choose to claim the credit in the tax year that will give you the greatest credit based upon your MAGI.  The purchase must take place in 2009.

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Using First-Time Homebuyer Tax Credit

May 29, 2009

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
www.hud.gov espanol.hud.gov

May 29, 2009
MORTGAGEE LETTER 2009-15

From: Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner

TO: ALL APPROVED MORTGAGEES
SUBJECT: Using First-Time Homebuyer Tax Credits

The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides for as much as an $8000 tax credit to qualified first-time homebuyers. FHA supports this important initiative to promote homeownership. This mortgagee letter provides:
• Basic information on the first-time homebuyer credit obtained from the Internal Revenue Service (IRS) website. Complete information on how the first time homebuyer tax credit works, including the eligibility requirements for the tax credit, the amount of the tax credit that a first-time homebuyer may be eligible to receive, and how a homebuyer may claim the tax credit is available on the IRS website at http://www.irs.gov/newsroom/article/0,,id=204671,00.html?portlet7.
• Guidance on how FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local government agencies or instrumentalities may assist homebuyers that are eligible for the tax credit.

I. About the First-Time Homebuyer Tax Credit Please check the IRS website to ensure you have up-to-date information. A brief overview of the tax credit from the IRS website and a copy of IRS Form 5405 (including instructions) are attached for reference. Pursuant to 31 U.S.C. 3727 and 26 U.S.C. 6402, a refund of the first-time homebuyer credit will be made by the IRS only to the taxpayer, not to a third party. In other words, any refund issued in response to a claim for this credit cannot be assigned by a taxpayer to a third party.

II. FHA Tax Credit Guidance
Secondary Financing Consistent with existing FHA policy, FHA will permit entities covered by Section 528 of the National Housing Act to use the current authority to offer tax credit advances with second liens in a
manner consistent with the requirements in 12 U.S.C. 1709(b)(9). Eligible government agencies and instrumentalities of government are described in handbook HUD-4155.1 5.C3 and 5.C4.

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Conditions:
• The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower.
• The second lien may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses.
• Secondary financing may be “soft” (silent) or require a monthly repayment.
• If payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.
• Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
• If the tax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a “soft” second.
• The secondary financing may not require a balloon payment before ten years.

Purchase of Tax Credit
FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local governmental agencies and instrumentalities thereof may purchase the tax credit anticipated by the homebuyer.

Conditions:
• The proceeds of the sale of the tax credit may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405;
• The borrower must submit a signed certification that the tax credit is not subject to offset due to other indebtedness.
• A copy of the borrower’s tax refund and/or the IRS 5405 must be collected and retained in the FHA case binder.
• Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the homebuyer. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees
and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)
• Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity).
Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.

Due Diligence
FHA expects that entities purchasing tax credit assets will employ appropriate due diligence measures including, but not limited to:

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• Require the homebuyer to draft and provide the IRS form 5405 “First-Time Homebuyer Credit.”
• Contact the borrower’s employer and review pay stubs to confirm there are no outstanding garnishments.
• Review the homebuyer’s credit report to ensure there are no unpaid student loans, or other obligations that could be offset against the credit.
• Validate that all of the eligibility requirements for the tax credit are fulfilled
• Review previous tax returns and IRS tax assessment letters, if any, to determine that the borrower does not have unsettled obligations to the IRS

III. Monitoring
In order to track the tax credit monetization activities, FHA will require FHA-approved mortgagees to input into FHA Connection the following data:
• Name and EIN of the party who purchased the tax credit, • The amount of the anticipated credit, and • The amount the homebuyer paid for the monetization services. The lender must also collect and maintain in the FHA case file the documentation that validates all of the tax credit monetization data submitted via FHA Connection. FHA will monitor the purchase of tax credit transactions closely. Charging of excessive fees or costs in the purchase of the tax credit or increasing other fees or charges in the transaction without FHA approval may result in referral to the Mortgagee Review Board, and particularly with respect to entities that are not FHA-approved mortgagees, referral to the Federal Trade Commission, or referral to the appropriate State Attorney General office, as may be applicable.

If you have any questions regarding this mortgagee letter, please call FHA’s Resource Center at 1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).


HOUSING RESCUE PROGRAM DETAILS RELEASED

March 6, 2009

– President Obama earlier this week unveiled details of his home loan aid plan designed to help millions of Americans who are at risk of losing their homes.

Administration officials say the Homeowner Affordability and Stability Plan could help nearly nine million households restructure or refinance their mortgages to avoid foreclosure.

The plan includes a $75 billion homeowner stability initiative that targets at-risk homeowners, many of whom have adjustable-rate mortgages that have increased house payments to as much as 50 percent of their monthly incomes.

This initiative offers cash incentives to lenders and borrowers for working out loan modification agreements that result in lower monthly mortgage payments and allow homeowners to keep their homes. Any bank that receives federal money under the Treasury Department’s $700 billion financial rescue program will be required to take part.

Another component of the plan is intended to help as many as five million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those institutions.

To finance that effort, the Treasury is providing the two companies with up to $200 billion in capital on top of $200 billion that it had already pledged to them.

“This is not going to save every person’s home,” said White House spokesman Robert Gibbs. “The plan is not intended to . . . augment somebody’s loan for a house that they couldn’t afford under any economic situation, good or bad.”

According to the latest data from the Mortgage Bankers Association, nearly 12 percent of homeowners — a record 5.4 million — were at least one month late or in foreclosure at the end of last year.

New York Times/Associated Press


The American Recovery and Reinvestment Act of 2009, H.R. 1 – How does it affect you, the home buyer?

February 12, 2009

The Economic Stimulus Bill (The American Recovery and Reinvestment Act of 2009, H.R. 1.) has been reconciled by the House and Senate. The details of the legislation have not been finalized but we expect the legislation to include a number of important housing provisions, including the remedies for the housing crisis that NAR prescribed at the annual meeting in Orlando, Florida.

  • Homebuyer Tax Credit – a $7500 tax credit that will be available for qualified purchase of a principal residence by a first time homebuyer between January 1, 2009 and September 1, 2009.  The credit does not require repayment. Individuals who purchase in 2009 using financing assistance from state and local mortgage bonds will be permitted to use the credit, as well.
  • FHA, Fannie and Freddie Loan Limits – Revised loan limits for FHA, Freddie Mac, and Fannie Mae.  Specifics have not been released but reports indicate that the 2008 limits have been reinstated for 2009 except in those communities where the 2009 limits are higher. Additional increases in individual communities may also be available at the discretion of the HUD Secretary.
  • Foreclosure Mitigation & Neighborhood Stabilization – Funding for states and local communities to be used for neighborhood stabilization activities for the redevelopment of abandoned and foreclosed homes are authorized.

These elements of the American Recovery and Reinvestment Act of 2009 are the pillars of the NAR Housing Stimulus Plan presented to the 111th Congress.  Additionally we continue to work closely with the Department of Treasury and Secretary Timothy Geithner to implement a mortgage buy-down program. NAR also recommended that the Treasury Department expand the Term Asset-Backed Loan Facility (TALF) to include commercial mortgage-backed securities as eligible collateral.  The Treasury has approved this recommendation and this will encourage investment in the commercial real estate market.

The Economic Stimulus Bill (The American Recovery and Reinvestment Act of 2009, H.R. 1)
Additional Housing and Other Provisions of Interest to NAR

  • Rural Housing Service – Increased funding for the Rural Housing Service direct and guaranteed loan programs.
  • Low Income Housing Grants – Allow states to trade in a portion of their 2009 low-income housing tax credits for Treasury grants to finance the construction or acquisition and rehabilitation of low-income housing, including those with or without tax credit allocations.
  • Tax Exempt Housing Bonds – Tax-exempt interest earned on specified state and local bonds issued during 2009 and 2010 will not be subject to the Alternative Minimum Tax (AMT).  In addition, financial institutions will have greater capacity to purchase tax-exempt state and local bonds.
  • Energy Efficient Housing – Grants for energy retrofits for federally assisted housing (section 8), funding for Energy Efficiency & Conservation Block Grants to states, and Increases in the residential tax credit through 2010 for certain energy efficient upgrades.
  • Transportation –   Spending for upgrades and repairs of road, bridges and transit facilities.  
  • Broadband Deployment – Grants to make broadband available in unserved communities

As the leading advocate for homeowners and the real estate industry, the National Association of REALTORS will continue to address the issues facing Americans who are trying to purchase a new home, protect their current home or preserve investment opportunities in residential and commercial properties.

NAR recognizes the efforts of the members of Congress and the Senate who understand that without a housing recovery, an overall economic recovery is impossible.

 


Houston Real Estate Update – November 18

November 18, 2008

The Houston housing market continued to feel the effects of the troubled national economy in October and residual business interruptions caused by Hurricane Ike. New monthly data released by the Houston Association of REALTORS®  (HAR) reflects improvement from market performance in September, when Ike derailed thousands of real estate transactions. However, the number of property sales across the greater Houston area declined last month when compared to October 2007, with sales of single-family homes down 20.1 percent.

The average price of a single-family home dipped 1.6 percent last month to $194,607 from $197,751 in October 2007. That still marks the second highest average price for an October in Houston. At $142,000, the median price of a single-family home in October fell 2.7 percent. Year-to-date home prices are still up compared to 2007 and national figures show Houston continues to fare better than many other U.S. markets, some of which have experienced deprecations of as much as 40 percent.

Sales of all property types for October 2008 totaled 4,962, down 21.6 percent compared to October 2007. Total dollar volume for properties sold during the month was $943 million versus $1.2 billion one year earlier, a 22.9 percent decline.

“Houston remains the envy of real estate professionals around the country, who discussed their sales and pricing concerns with us at this month’s National Association of REALTORS® conference in Orlando,” said Michael Levitin, HAR chairman and principal of HTownRealty.com. “Month’s inventory in Houston is about half the national average, and on a year-to-date basis, prices here are up about three percent from 2007. Nonetheless, we must watch closely to see what further action the federal government may take to stimulate the economy, particularly on behalf of homeowners.”

October Monthly Market Comparison
The month of October brought Houston’s overall housing market disappointing results when comparing all listing categories to October of 2007. Total property sales and total dollar volume fell, as did average and median single-family home sales prices.

The number of available properties, or active listings, at the end of October fell 8.2 percent from October 2007 to 49,016. That’s 1,139 fewer active listings than September 2008, and is seen as an indication that inventory levels are balanced and that home prices should remain stable.

Month-end pending sales – those listings expected to close within the next 30 days – totaled 3,579, which was 21.5 percent lower than last year and suggests another likely sales decline next month. The month’s inventory of single-family homes for October came in at 6.3 months, the lowest level since March of this year. That compares to the October 2007 single-family homes inventory of 6.2 months.

 
ALL CATEGORIES October 2007 October 2008 PERCENT CHANGE
Total property sales 6,327 4,962 -21.6%
Total dollar volume $1,233,550,946 $943,444,534 -22.9%
Average single-family sales price $197,751 $194,607 -1.6%
Median single-family sales price $146,000 $142,000 -2.7%
Total active listings 53,407 49,016 -8.2%
Total pending sales 4,562 3,579 -21.5%
Months inventory* 6.2 6.3 +1.2%
* Months inventory estimates the number of months it will take to deplete current active inventory based on the prior 12 months sales activity. This figure is representative of the single-family homes market.
 

Single-Family Homes Update

At $194,607, the average sales price for single-family homes reached the second highest level recorded for an October in Houston, down 1.6 percent from October 2007 when it was $197,751. The overall median price of single-family homes in October was $142,000. That compares to the national single-family median price of $190,600 reported by the National Association of REALTORS®. These data continue to demonstrate the higher value and lower cost of living that prevail in the Houston market.

har-graph

Additionally, total October sales of single-family homes in Houston came in at 4,202, down 20.1 percent from October 2007 and the fourteenth straight monthly drop.

har-graph-21

HAR also reports existing home statistics for the single-family home segment of the real estate market. In October 2008, existing single-family home sales totaled 3,526, a 17.3 percent decrease from October 2007. At $175,392, the average sales price for existing homes in the Houston area fell 5.3 percent compared to last year. The median sales price of $130,000 for the month was also down 3.7 percent from one year earlier.

Townhouse/Condo Update

The number of townhouses and condominiums sold in October fell compared to one year earlier. In the greater Houston area, 421 units were sold last month versus 534 properties in October 2007, translating to a 21.2 percent decrease in year-over-year sales.

har-graph-3

The average price of a townhouse/condominium increased to $161,428, up 0.7 percent from one year earlier and the highest figure for the month of October. The median price dipped 1.5 percent to $129,000 from October 2007 to 2008. That figure is the second highest historically for the month of October.

Lease Property Update

Demand for single-family and townhouse/condominium rentals increased in October, continuing an upswing triggered by Hurricane Ike, as many sought short-term housing while engaging in storm-related recovery projects. Single-family home rentals rose 36.0 percent in October compared to a year earlier, while year-over-year townhouse/condominium rentals were up 34.1 percent.

Houston Real Estate Milestones in October

  • Second highest average single-family home sales price for an October ($194,607);

  • Highest average townhouse/condominium sales price for an October ($161,428);

  • Second highest median townhouse/condominium sales price for an October ($129,000);

  • Lowest month’s inventory of single-family homes since March 2008 (6.3 months).

  •  
    The computerized Multiple Listing Service of the Houston Association of Realtors® includes residential properties and new homes listed by 26,000 Realtors throughout Harris, Fort Bend and Montgomery counties, as well as parts of Brazoria, Galveston, Waller and Wharton counties. Residential home sales statistics as well as listing information for more than 53,000 properties may be found on the Internet at http://www.har.com.The information published and disseminated to the HAR Multiple Listing Services is communicated verbatim, without change by Multiple Listing Services, as filed by MLS participants.

    The MLS does not verify the information provided and disclaims any responsibility for its accuracy. All data is preliminary and subject to change. Monthly sales figures reported since November 1998 includes a statistical estimation to account for late entries. Twelve-month totals may vary from actual end-of-year figures. (Single-family detached homes were broken out separately in monthly figures beginning February 1988.)

    Founded in 1918, the Houston Association of Realtors® (HAR) is a 27,000-member organization of real estate professionals engaged in every aspect of the industry, including residential and commercial sales and leasing, appraisal, property management and counseling. It is the largest individual membership trade association in Houston, as well as the second largest local association/board of Realtors® in the United States.


    Texas Still A Healthy Market

    May 27, 2008

    Texas nonfarm employment rose 2.6 percent from April 2007 to April 2008 compared with a much lower 0.3 percent annual growth rate in nonfarm employment for the United States as a whole.

    The state’s seasonally adjusted unemployment rate fell from 4.4 percent in April 2007 to 4.1 percent in April 2008.

    The state’s mining industry, benefitting from higher oil prices, ranked first in job creation, followed by the professional and business services industry, the leisure and hospitality industry, construction and the education and health services industry.

    All Texas metro areas had positive employment growth rates from April 2007 to April 2008. Odessa ranked first in job creation followed by Laredo, College Station–Bryan and Houston–Sugar Land–Baytown. Midland had the lowest unemployment rate followed by Amarillo, Odessa, Lubbock and College Station–Bryan.