Quotes of the Day

Congress is under the gun from homebuilders and Realtors to extend the $8,000 first-time home buyers' tax credit beyond its Nov. 30 expiration and even expand the credit to existing homeowners — a move that could happen before the week's end.

Proponents say the tax credit has helped breathe life into the comatose housing sector and that its extension is critical. "Failure to act now could derail the fragile housing recovery even before it has time to take root, " said Jerry Howard, president and chief executive of the National Association of Home Builders, in a recent statement.

About 1.4 million households used the credit between February (when the program was launched) and September. And from 350,000 to 400,000 of those transactions involved purchases that would not have been made without the credit, says Lawrence Yun, chief economist with the National Association of Realtors (NAR).

The latest housing data has also been positive: sales of existing homes shot up 9.2% in September to a seasonally adjusted rate of 5.57 million units — the highest level since July 2007, according to NAR. At the same time, inventory levels declined 15% from the same month a year earlier.

Congress is mulling plans to extend the $8,000 first-time home buyers' tax credit to April 30 (which covers home purchases closed by June 30) and to allow individuals with incomes of up to $125,000 (or $250,000 for couples) to apply for the credit, up from the previous threshold of $75,000. Also, a proposal is on the table to offer a new credit — $6,500 — to move-up buyers who have lived in their home for at least five years. The Senate is near a vote on its version, which includes an extension and expansion of the credit, and the House could quickly accept the Senate version once it is passed.

But analysts wonder if the $11 billion price tag for the credit's next phase is worth it. Some say many of the people using the tax credit would have purchased a home anyway.

"I don't know how much of the success you would attribute to the [tax-credit] program and how much of it would have happened anyway because [home] prices went down significantly and interest rates went down at the same time, so the affordability became much better even without the program," says Bill Norwalk, a tax partner with Ireland San Filippo LLP.

"I think they greatly overestimate the beneficial impact of it," concurs Michael Widner, an analyst at Stifel Nicolaus & Co. "I think that the people who were going to buy have already been lured in by the tax credit. As we extend it each additional month, you'll get a smaller and smaller effect." Also, while some experts applaud the idea of extending the credit beyond first-time buyers, they wonder if the $6,500 credit is large enough to make a serious dent. "The move-up buyer is buying a more expensive product and yet the amount of money being offered [as a credit] is smaller," says Bob Curran, managing director at Fitch Ratings.

The tax credit has also been a fraudster's dream. A recent report from the Treasury Department's inspector general identified 167 suspected cases of fraud and was looking into more than 100,000 potential civil violations related to the tax credit. In one case, a 4-year-old child was able to claim the credit.

"There are possibly hundreds of millions of dollars that have been paid to taxpayers who are not entitled to the credit," said Representative John Lewis, a Georgia Democrat, while chairing a House committee earlier this month. Still, Stuart Saft, a partner at Dewey & LeBoeuf, thinks the tax-credit program can be cleaned up without eliminating it. "It's a question of monitoring its use more closely."

Even if the tax credit is extended, don't expect it to trigger a quick housing rebound. Although home prices have plunged about 30% on average from their peak in mid-2006, with certain markets in Florida, California and Nevada seeing prices plummet as much as 70%, they haven't troughed yet. With foreclosures still rising and unemployment expected to approach 10.5% in mid-2010, home prices are expected to tumble another 10% over the next six months before bottoming, says Robert Stevenson, managing director at Fox-Pitt Cochran Caronia Waller. And he expects prices to remain depressed until at least 2011.

Many analysts are hoping Congress extends the program to April — but not beyond that. "Any kind of stimulus must be for a brief period of time or it doesn't work," says Saft. "If they're given a long period of time, there wouldn't be much movement early on because people would sit on the sidelines and watch the market."

There are also some who see the credit as disruptive to market cycles. Sales and pricing ultimately have to be set organically, not by short-term government subsidies, says Bose George, an analyst at Keefe, Bruyette & Woods. "Pricing has to be determined by how much money people have to spend and the interest rates they have to borrow to buy the home," he says. "The tax credit — while it could help in the short-term — is not meaningful in the longer-term." Says Widner: "It postpones the inevitable reconciliation."

• Janet Morrissey
• Though critics contend that the home buyers' tax credit is wasteful, Congress is poised to hand the real estate industry an $11 billion lift