Congress Votes to Extend and Expand the Tax Credit for Homebuyers

The bill also expands coverage to those who have owned a home for at least five years. This group will be eligible for a credit of up to $6,500. New homeowners (those who have not owned a home during the past three years) will still be eligible for a credit worth up to $8,000.

The income limits have been increased from $75,000 to $125,000 for single buyers and from $150,000 to $225,000 for married couples. The bill is expected to cost $10.8 billion.

Since the bill's outlines were available last week, we were able to incorporate them into our November forecast.

A temporary tax credit shifts activity across time, but does not generate much new activity. This bill will mainly shift demand from the second half of 2010 into the first half. As a result, home sales and prices will get a boost in the first half of 2010, with payback in the second.

We still expect home sales to fall during the first half of 2010, payback from the first tax credit, which shifted 300,000–400,000 sales from 2010 into 2009.

Although the bill is targeted towards helping first-time homeowners, buyers and sellers will split the gains because the increase in demand will keep prices higher than they would have been without the credit.

Although home sales will still drop in the first half, single-family housing starts should continue to rebound throughout next year, because of strengthening underlying demand and shrinking inventories of unsold new homes. Underlying demand (demand coming from household formation and second homes plus replacement demand) has been suppressed because of the recession. Inventories of new homes have fallen to levels last seen in 1983, and need re-stocking.

But the rental vacancy rate, which is already at a record high of 11.1%, will continue to rise as renters vacate apartments.

Republican Senator Johnny Isakson of Georgia, a former real estate agent and one of the bill's staunchest supporters, has said that the tax credit will not be extended again.