After the dramatic drop-off in home sales after the expiration of the federal home buyer tax credit programs in the spring, it's probably no surprise that Congress is considering a new or extended tax credit. When the foreclosure crisis first began, Congress initiated a first-time homebuyer tax credit to encourage new buyers to enter the market. It later added the "move-up homebuyer tax credit" to encourage existing homeowners to trade up.

The tax credits being considered now are targeted to encourage people to purchase homes that are in foreclosure or being sold as part of a short sale agreement, where the bank allows an underwater homeowner to sell the home for less than what is owed and (typically) forgive the remaining debt.

On a recent appearance on CNN's "State of the Union," HUD Secretary Shaun Donovan said it was too early to say whether a new tax credit for short sales and foreclosures was in the works. He added that "we're going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers."

Florida Politicians Support a Foreclosed Property and Short Sale Tax Credit

Appearing on the same episode of "State of the Union," Governor Crist said that a new or extended homebuyer tax credit program "would stimulate the economy. It would increase home sales in Florida."

"I would absolutely encourage the president to support that because it would certainly help my fellow Floridians," he added. Several other congressional candidates have also announced their support, according to Diana Olick, a real estate reporter for CNBC.

Opponents of a new tax credit directed at foreclosures and short sales argue that the excesses caused by the real estate bubble require a market correction. To put it simply, too many homes were built and sold during the boom, and it will take time to reabsorb that excess inventory. A new tax credit will artificially prop up the housing market for a while, but ultimately it will only prolong the agony.

Supporters say that a new tax credit program would at least move some of the existing inventory quickly. The inventory of homes on the market right now is dangerously high, and many economists predict that a new wave of foreclosures --caused by record unemployment levels -- is only going to push it higher.

If Congress stands aside and lets the market correct on its own, they argue, the market could languish indefinitely -- which would be devastating to desperate homeowners overtaken by the crisis.

Source:

"Another Home Buyer Tax Credit?" (Realty Check with Diana Olick, CNBC, August 30, 2010)