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There are a number of strong opinions on the extension of the $8K first time home buyer tax credit. Ultimately, the debate is about whether or not it is creating long term value for the economy, versus a short term artificial prop up for home prices.  In my view, and the view of many on Trulia Voices, it’s a logical step in bringing long term stability into the market.

Given the fluid nature of Congress, who knows what the final proposal that hits the Senate–>House–>Obama’s desk will look like.  But today’s Reid/Baucus plan which includes an extension of $8K credit to the end of 2010, with a $2K/quarter phase out starting March 2010 seems to make the most sense.

Here’s why:

1) Stability - there is little debate on whether the tax credit has been successful in spurring sales and contributing to what looks like a stabilization in home prices nationally.  Real estate was the first plank in the stool to fall with this economic downturn, and it will take a real estate recovery to stabilize the overall market.   This bodes well for the economy.

2) Foreclosures - the glut of foreclosures across the country has driven down home values across communities.  These are trashed homes that are now being purchased for cash by investors, updated, and ultimately sold to first-time home buyers.  We all know the negative externalities like vandalism and crime are tremendous and the only thing that will reverse this trend is home buyers invested in these homes and communities to bring values back.

3) Consumption - Trulia conducted a study last year which showed that consumers on average, spend $30K within the first six-months of their home purchase.  New homeowners buy furniture, paint, rugs, lawnmowers, hot water heaters, kitchen appliances and tiles, etc.  This spending contributes to stimulating the economy and ultimately job creation around the whole ecosystem of housing.

But government actions are always paired with warning:

- Let’s phase out the tax credit, and not stop it cold turkey.  Lessening the dependency on the tax credit will help avoid a major drop in prices.  The economy is generally on a recovery path - over a long enough period of time, withdrawal of the tax credit will be countered with increased spending power from the individual and decreased unemployment.

- Congress needs to be wary of too aggressively expanding the program.  What we don’t want to see is a drop off, like we did with the cash for clunkers program — where people who were planning to buy a car rushed to jump in and take advantage of the stimulus, then promptly dropped off leaving sales where they were before the program began.

- Now that the tax credit can be used for down payments, 1st time home buyers should not be tempted to buy a house beyond their means.  That would only put us back into what caused this mess to begin with.

What do you think?

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