Congress expands first time homebuyer program too far

Despite criticisms of the program, the Senate on Wednesday unanimously approved an extension and expansion of the popular homebuyer tax credit. Since January, the tax credit has given first time homebuyers with incomes of $75,000 for individuals and $150,000 for couples an $8,000 tax break. The House approved the bill with a 403 - 12 vote on Thursday, with Washington's Congressional delegation voting in favor of the bill.

Under the bill, the program which expires at the end of November would be extended to May 1, 2010, with expanded eligibility requirements. Homebuyers not making their first home purchase would now be eligible for the credit, and its income limits would be almost doubled.

The tax credit has brought the number of homebuyers into the market that it was originally projected to, but only around a quarter of the 1.4 million buyers that used the credit through August would not have bought a home without it. This has led to criticism of the bill:

Extending and expanding the tax credit for homebuyers is projected to cost the government about $10.8 billion in lost taxes. While the measure passed the Senate by a 98-0 vote, Sen. Kit Bond, R-Mo., questioned its efficiency in stimulating home sales.

"For the vast majority of cases, the homebuyer tax credit amounted to a free gift since it did not affect their decision to purchase a home," Bond said. "And for the small minority of buyers whose decision was directly caused by the credit, this raises the question of whether we are subsidizing buyers who may not have been able to afford buying a home in the first place.”

And from the New York Times:

While real estate groups and some economists say the credit has helped stabilize the housing market, critics say it is too costly a subsidy when low interest rates and home prices are incentives enough for most.

Expanding the bill to include buyers who are not purchasing their first home will not decrease the number of homes on the market, a major goal of the program. Current homeowners will have to sell their own home before using the tax credit to buy another. Housing and real estate lobbies have been pushing hard for the bill’s expansion and it has had a strong advocate in Senate Majority Leader Henry Reid (D-NV). Reid’s state has had the most claims for the tax credit per capita.

This expansion of an expensive program with an unvalidated cost vs. benefit looks like a giveaway to the housing lobbies and the powerful Senate majority leader.