Beware the $7,500 'tax credit'

“Washington policy makers and housing industry insiders hope a new tax credit for first-time home buyers will get the moribund housing market moving again.

But most analysts agree that the program is more of a band-aid than a cure-all for the battered real estate market. What's more, others are quick to point out that the credit must be repaid, which means it's actually an interest-free loan that could get some homeowners in trouble.

‘It's one of those things that are more complicated than it seems at first blush,’ said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. ‘Consumers have to make sure they understand the credit thoroughly.’

The $7,500 credit is for people buying their first homes, and was passed as part of the Housing and Economic Recovery Act of 2008 and signed into law in July. To qualify for the full $7,500, individuals must earn less than $75,000 annually, while couples may earn up to $150,000. Individual buyers with income of up to $95,000 and couples with income up to $170,000 are eligible for a partial credit.

The Senate Finance Committee estimates that about 1.6 million people will use the credit.

The housing industry pushed for the program. "Breaking the log jam of unsold homes is something we are very much behind," said Richard Dugas, president of builder Pulte Homes, at a news conference to discuss the program. First time homebuyers represented about 20% of the market for new homes in 2007.

Realtors are also behind the credit. ‘[It] will help chip away at inventory levels, stabilize prices and spur [sales] activity,’ said Richard A. Smith, CEO of Realogy, the parent company of both Coldwell Banker and Century 21.

The industry has had success with tax credits in the past. In 1975, Congress passed a $2,000 credit for homebuyers (about $8,200 in today's dollars).

‘Buyers flocked to market and cleared out a then-record inventory of homes,’ said NAHB president Sandy Dunn. But that credit did not have to be repaid.

And the impact should extend beyond first time homebuyers, according to Lawrence Yun, chief economist for the National Association of Realtors. A boost in demand for starter homes means that those sellers will be able to trade up to bigger, more expensive places, and so on up the chain.”

Continued at Money.CNN.com