First-time Homebuyers Tax Credit Extension: Good or Bad News for the Real Estate Market?

When the housing bubble popped, it touched off a series of catastrophic financial collapses throughout the U.S. economy. From the major losses on Wall Street due to the subprime mortgage backed securities fallout and the fall of Fannie Mae and Freddie Mac to the record number of foreclosures due to unsustainable mortgage lending practices, turmoil in the housing industry has shaken the nation's economy to the core.

And then came the bailouts.

The federal homebuyer tax credits - which gave first-time homebuyers a $8,000 tax credit and repeat home buyers a $6,500 tax credit - seemingly stimulate the real estate market. But the true test of whether the housing tax credit was a remedy to mortgage woes or merely a temporary quick fix came when the tax credit expired at the beginning of the second quarter of 2010. And according to the numbers, it seems we may have failed.

Without the federal incentives, sales of existing homes in July plunged, hitting a record low for the past 15 years.

Clearly, we're not out of the woods yet.

Financial pundits and economists are currently debating over the best course of action. Some argue that the bailouts and federal tax credits were ultimately detrimental. Critics of government aid claim that we would have been better off if we simply allowed the housing market to hit rock bottom, rather than building an artificial floor underneath housing prices and then kicking it out down the road. The pain would have been more severe in the short term, but it would have put the market on the path to a healthy, sustainable economy sooner. Other criticisms arise from the fact that many of those who took advantage of the homebuyer tax credit were those who were planning to buy homes anyway, thus the program didn't generate more sales, it just took future sales and expedited them, which will in turn contribute to a more severe dry spell in sales after the credit expires.

Others uphold the success of the tax credit and other government subsidies and are calling for an extension of the homebuyer tax credit, which has already been extended once before. The program helped 1.8 million people buy homes, reinvigorating real estate markets throughout the country. Still, representatives of the U.S. Department of Housing and Urban Development have stated that it's too soon to discuss renewing the wildly popular tax credit. Instead, the federal government is rolling out two tools to help struggling homeowners: a refinancing program for mortgagees who are underwater on their home loans and an emergency loan program for unemployed borrowers.

One thing is clear, however: there are troubled waters ahead for the real estate industry. On the bright side, the low demand for existing homes may create a buyer's market that's favorable to those with good credit scores and enough of their own money to make a down payment. But for those who relied upon government relief, it may be a rough ride.