Time to let the tax credit for 1st-time homebuyers expire

Housing prices are going up, the economy is recovering: It's time to take off the training wheels

The economy will not begin to recover until home prices stop falling. That's what smart people counseled a year ago as things collapsed from Wall Street to Los Angeles, and they were right.

Well, home prices have stopped falling. Yesterday's Case-Shiller report, the best measure of nationwide housing values, showed that prices rose in July for the third month in a row. They're still way down from a year ago. But starting in May, prices began to rise from month to month. For the three-month period they're up 3.5 percent - $7,000 on a $200,000 house.

So it may seem perverse to recommend ending the tax credit for first-time homebuyers that helped turn things around. But since the country no longer seems in danger of entering a new Depression, letting the credit expire Nov. 30 is the right thing to do.

It's expensive. We have to start weaning the economy from the high-test at some point. Let's see if low prices and low interest rates can keep people buying houses without a big, fat $8,000 gift from taxpayers.

The housing industry that enabled the boom and crash is pleading with Washington to extend the credit. There are several bills that would do so, including one pushed by Maryland's Sen. Benjamin L. Cardin. The National Association of Realtors would also like to expand the credit to $15,000 and offer it to those who already own a home and want to trade up or down.

"There is more to be done," Cardin said of the tax credit in a prepared statement. "While we look for additional ways to help the housing industry, a six-month extension is a fiscally responsible way to provide adequate time to nudge even more prospective homebuyers off the sidelines."

Let's talk about fiscally responsible.

Nobody knows how much the credit is costing. Like the "cash for clunkers" auto stimulus, the housing incentive is proving more popular than expected.

This month the Internal Revenue Service reported that 1.4 million families had benefited from the credit so far. If most qualified for the maximum, $8,000 credit - a reasonable assumption - that's $11 billion and counting. Don't be surprised if it's more than $15 billion before it's over.

True, this is peanuts compared with the overall stimulus cost of $787 billion and all the other money the government is blowing on bank bailouts and whatnot. But we can't stimulate the country forever. And the economy has reached the point where it's appropriate to remove some of the training wheels.

The stimulus package of which the homebuyer credit was part was signed into law on Feb. 17. Panic pervaded. The Dow Jones stock average was 7,600 and plunging. The economy was shedding jobs at a rate of 700,000 a month. Many expected the wholesale seizure by Washington of Citigroup, Bank of America and numerous other institutions.

Extraordinary times call for extraordinary measures. That's what the homebuyer credit was: a massive subsidy from renters and people who already owned houses directed into the pockets of home sellers and first-time buyers.

But the emergency is over. That doesn't mean the country has recovered - far from it. There are nearly 15 million unemployed Americans, each with his or her own story of hardship and frustration. But the fear that preceded the creation of the stimulus - the concern that 15 million unemployed would become 30 million - has abated.

The Dow has risen 2,000 points since then. Monthly job losses have been cut by two-thirds. Production, savings and consumer confidence are up. Unemployment is still rising, but that's what normally happens at the beginning of recoveries.

A separate report - this one from the Realtors - showed that home sales dipped for August. When the August Case-Shiller dispatch shows up a month from now, it may indicate that the price recovery faltered. But if you're worried that an expiration of the first-time buyer credit would make the housing business stimulus-free, don't.

Mortgage rates continue to benefit from the Federal Reserve's bond buying and are near all-time lows. The Federal Housing Administration is guaranteeing billions in new mortgages that it probably shouldn't.

The Realtors' Housing Affordability Index - which accounts for rates, family income and prices - is near all-time highs. After all, home prices in many markets are down 40 percent or more from their peaks a few years ago. The homebuyer tax credit - which basically amounts to 5 percent or 10 percent discount on a starter house - looks puny by comparison.

The inventory of unsold homes has plunged to a level that would take buyers 8.5 months to exhaust - down from nearly 12 months when gloom prevailed. In normal times there is a 6-month supply of homes for sale. As the supply gets smaller, prices should stabilize no matter what Congress does.

Thousands of people would be buying houses even without the credit. Why don't we find out how many there are by letting it expire?

Then, if prices and sales deteriorate again next year, Congress can revive it. But let's test reality first before adding billions more to the federal deficit.