Push on to expand $8,000 tax credit

Some want to expand the tax credit for homebuyers. Supporters say it could stem price declines. Critics say it would just be a costly, temporary fix.

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By Jeanne Sahadi, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Congress is considering proposals to greatly expand a soon-to-expire $8,000 tax credit for first-time homebuyers -- potentially applying it to all but the wealthiest homebuyers.

Supporters say doing so would further boost home sales, stabilize housing prices and generate jobs. Opponents say extending and expanding the credit would be a waste of money and only temporarily stave off further price declines.

The credit now can be claimed by anyone buying a home who has not owned one for three years and who closes the deal by Nov. 30.

Beyond extending that deadline, some lawmakers want to make the credit available to all homebuyers who meet income eligibility requirements. And some want to increase the amount of the credit from $8,000 to $15,000.

Currently the first-time home buyer credit is available in full to those buying their primary residence who make $75,000 or less ($150,000 for joint filers). A partial credit is available to those making between $75,000 and $95,000 ($150,000 to $170,000 for joint filers).

The case for expanding the credit

Through mid-September, 1.4 million tax returns had qualified for the credit, according to the IRS.

Some portion of those returns, which the IRS couldn't specify, represents buyers who took advantage of an earlier version of the tax credit, which was only worth $7,500 and has to be repaid over time.

By the end of November, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, according to estimates by the National Association of Realtors.

Mark Zandi, chief economist of MoodysEconomy.com, favors extending the current credit until June 1, 2010, and making it available to all home buyers regardless of income or at least to everyone except those at the highest end of the income scale. He estimates the cost of doing so wouldn't exceed $30 billion over 10 years.

Zandi's reasoning: Foreclosures are expected to rise next year because of rising unemployment, and that will drag home prices down further. Extending and expanding the credit will help mute that decline. And by June, there's a chance the job market will have stabilized.

"The most fundamental argument for the credit is that nothing works in the economy if housing is falling -- it hurts household wealth and credit becomes tight," Zandi said. "[The credit] is a good insurance policy. It's vital to stem the housing price declines."

To kick start economic activity, Zandi believes lawmakers should set aside an amount of money for an extended credit and tell potential home buyers "first come first served."

The National Association of Home Builders would like the credit extended for all of 2010.

"We estimate that this would increase home purchases by 383,000 in the next year and help mitigate the foreclosure crisis by whittling down inventory," NAHB Chairman Joe Robson said in a statement. "This stimulus alone would create nearly 350,000 jobs over the coming year, which is exactly what the economy needs right now."

A study funded by the industry-supported Fix Housing First Coalition found that the current credit helped stimulate demand for homes at the lower end of the price spectrum.

"An expansion of the tax credit would spur an increase similar to what occurred in the lower end of the market, by motivating buyers in the 'trade-up market' to purchase a higher priced primary home," said Kenneth Rosen in testimony before Congress. Rosen runs the consulting group that conducted the study and is chairman of the Fisher Center for Real Estate and Urban Economics at the University of California in Berkeley.

The case for letting the credit expire

Opponents of extending and expanding the credit worry that such moves offer poor bang for the buck and won't stem housing declines.

"Everything spent on this program will ultimately have to be paid for later through higher, economically harmful taxes," Ted Gayer, co-director of economic studies at the Brookings Institution, wrote in a Brookings blog.

Assuming there are 5.5 million home sales in 2010, Gayer said, expanding the credit to all homeowners "is poorly targeted because it would give a credit to 5.5 million homebuyers who would have bought a home anyway."

The current credit was estimated to cost federal coffers $6.64 billion over 10 years. But Gayer notes that the cost is likely to be much higher since more people than expected took advantage of it but only about 15% of people wouldn't have bought a house otherwise.

It would cost an estimated $16.7 billion if the credit is extended until the end of June 2010 and made available to single filers making up to $150,000 and joint filers making up to $300,000. Those are the parameters that Sen. Johnny Isakson, R-Ga., and Sen. Chris Dodd, D-Conn., are proposing in an amendment they introduced to a bill the Senate is expected to take up this week. (Please see correction.)

Another argument against an extension: It would only temporarily boost home prices and potentially set up those using it for a fall. That's because home prices are likely to decline once the credit expires and interest rates ultimately trek north, according to Dean Baker, codirector of the Center for Economic and Policy Research.

"Temporarily propping up house prices, so that a new set of homebuyers can incur losses, is a policy of questionable merit," Baker said in a CEPR column.

The sooner the market adjusts the better, Baker said. He did offer one caveat: "We may want to step in to prevent prices from overshooting on the downside in a select group of markets where this is a real possibility."

Zandi said that's already happened in a number of markets, and that an extended credit might help turn around the deflationary psychology in those markets where buyers are worried about catching a falling knife.

- CNNMoney.com's Les Christie contributed to this report.

Correction:This article originally misstated Sen. Isakson's home state.  To top of page

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