Why the Home Buyer Tax Credit should be allowed to expire

It appears Uncle Sam will keep propping up the still shaky real estate market for months to come. The Senate last night voted to extend the $8,000 first-time home buyers tax credit, and the House followed suit today. The president is expected to soon sign it into law.

But is the bill good for real estate? Not at all. What better way to fix a bubble caused by way too much home ownership than to encourage more home ownership?

Extending the home buyer tax credit is a bad idea because the real estate market doesn't need it. The panic phase of the housing crisis is essentially over. Americans know full well that house prices are no longer in free fall, but still have a ways to go before resembling anything close to a recovery.

Real estate experts have long argued that slumping prices and dwindling sales are a natural and necessary part of the real estate cycle. Extending the tax credit will only help lower and middle class Americans buy homes they can't afford, which will likely exacerbate the housing problem and may even trigger another mini-bubble in some markets.

In fact, a handful of local and state housing agencies are already providing second mortgages to buyers who don't have enough money for down payments so that they might turn the tax credit into cash. Down-payment assistance helped fuel the housing crisis in the first place because it helped people buy homes they couldn't afford.

I've already written in this column about the bidding wars now underway in some places for low and mid-priced homes as the tax deadline loomed. Extending a tax break to first-time buyers will only inflate these already somewhat inflated numbers.

The new bill goes beyond giving a leg up to first-timers who place homes under contract by the end of next April. Americans who have lived in their current house for five years and want to buy a new house will be also be able to get in on the action by being eligible for a $6,500 tax credit.

This isn't needed. In many markets prices have fallen so far that houses are actually affordable again in a way they haven't been in years. That's a reason enough to buy a home even without a government handout.

Let's face it, fear and a healthy dose of pandering is why this home buyer tax credit persists. Months of dire warnings from the National Association of Realtors and other formidable real estate lobby groups have spooked not only skittish lawmakers who don't want to appear tone deaf on housing woes.

It's also startled home buyers (aka voters), who now think the government should come to the rescue every time housing numbers tick downward. (For the record, home sales figures have been on an upward trend in many markets for months.)

The housing crisis was triggered, in part, by bloated sale prices, greedy speculators, and overzealous Americans wanting to "get in on the real estate action." Extending the tax credit or any other economic benefit will only serve to put us right back where we started by helping Americans rush to buy when they should be waiting, saving, and renting.

Finally, it's also important to remember another crucial point; Uncle Sam is broke. America is currently carrying record deficits and the bailout-happy Congress will only worsen the problem.

By December 1, the original end to the tax credit deadline, the government will have spent some $8.6 billion on house-buyer payments. Estimates for the proposed extension start at close to $12 billion. The lesson? Tax perks for house buyers don't come from the government. They ultimately come from taxpayers.

Troy McMullen writes the weekly INside Real Estate column for WalletPop. He's a former real estate reporter for the Wall Street Journal and Financial Times.