Killing the First-Time Buyer Tax Credit Is a Mistake

Last Updated May 19, 2010 11:10 AM EDT

I may be going out on a crazy limb here, but I'll say it anyway: the IRS should have extended the $8,000 first-time home buyer tax credit through the end of 2010 instead of letting it expire April 30.

Yes, the credit, which kicked off early last year, artificially propped up the housing market, which eventually has to stand on its own. But pulling the plug before unemployment has really eased will have turned out to be a mistake.

The phaseout has already depressed home prices and slowed mortgage applications, despite enticingly-low rates (although rates will start climbing again, now that the Fed has stopped -- or paused -- its Mortgage Buyback Program.)

As a stimulus strategy, the credit spread to a much broader base than real-estate agents and mortgage brokers alone. Home builders got cracking in April, producing the most housing starts since 2008, partly counting on the tax credit as incentive and partly assuming the job market picture would improve. Now that the tax credit is history, building permits are way down. Lowe's (LOW) and Home Depot (HD), inextricably linked to the health of the housing market, both released better-than-expected profit for the quarter this week. But both are forecasting a gloomy summer, traditionally their busiest period.

I'm not arguing that this is all due to one little tax credit. I'm just saying that a $20 billion program that is thought to have saved $1 trillion in housing wealth was probably worth extending.

Image via Flickr user mirsasha, CC 2.0