Congress should extend the $8,000 tax credit for first-time home buyers through Jan. 1, 2011

By Money Matters Editors

Perhaps it’s time for the U.S. Congress to renew the $8,000 federal income tax credit for first-time home buyers. The credit expires November 30.

And the reasons are obvious enough. First, the current economic consensus projects only tepid U.S. GDP growth of 1.0-1.5 percent in the early stages of the next economic expansion – hardly the stuff of massive job creation outside of the housing sector. In other words, the output gap in the U.S. economy is likely to persist, even as the recovery progresses.

Second, the housing sector, while showing signs of stabilization, still isn’t experiencing enough traffic/demand from potential home buyers. Many prospective home buyers have adopted a ‘wait-and-see’ approach – delaying purchases, hoping for a further decline in prices. Translation: there are a lot of fence-sitters, and the $8,000 credit may be just the incentive needed to nudge these likely-but-waiting home buyers into the market.Further, the extra home buying activity will create some jobs by increasing demand for appliances, furniture, home services, and insurance, as an increase in home buying historically has done.



Third, the most recent jobs report from the U.S. Labor Department indicated that the U.S. lost another 263,000 jobs in September – well above the roughly 170,000 estimate – and that has thrown a scare into investor and business executive circles that job losses are not subsiding. The significance? Demand – the key to increasing corporate revenue and earnings – is already light, and could get even lighter if job losses do not subside soon. Some economists are even concerned about a possible double-dip recession.

Finally, the specter of continued job losses has also sparked talk of at least extending certain items of the $786 billion fiscal stimulus package and/or passing a new package. Republicans in Congress are certain to oppose Democrats on any additional spending, on grounds that the U.S. has reached its fiscal limits with current $1 trillion deficits projected for last year and this year, Fiscal 2010. Still, an extension of unemployment benefits, along with elongated aid-to-the-states would help maintain demand at a time that it’s sorely needed.

More stimulus needed…from somewhere

Meanwhile, extending the $8,000 federal income tax credit for first-time home buyers would supplement the above. It’s unlikely Congress will approve more than $200-300 billion more in fiscal stimulus, hence the $8,000 credit will provide much-need stimulus. At minimum, the Congress should extend it with tapers - $8,000 for home buyers who purchase before April 1, 2010, $6,000 for home buyers who purchase before July 1, 2010 etc., to signal to fence-sitters that a bargain awaits them, but it won't last forever.

Again, ideally, Congress should pass a second large stimulus package, but in absence of that, the $8,000 home buyer credit and extended benefits will create demand. The U.S. economy needs all the demand it can get in order to end this pronounced contraction and return the nation to a condition in which it’s creating at least 150,000-200,000 jobs per month, with expanding prosperity.