The first-time homebuyer tax credit included in the economic stimulus bill earlier this year is due to expire Nov. 30, but with home sales still sluggish, efforts are underway in Congress to extend the tax break into 2010 and perhaps even expand it to all home buyers.

The Home Buyer Tax Credit Act of 2009, introduced by Sen. Johnny Isakson (R-Ga.), would raise the tax break from $8,000 to $15,000, or 10 percent of the home's purchase price, whichever is lower; remove income restrictions - the current credit is available only to households making $75,000 or less - and extend it to all home purchasers, not just first-timers. The credit would expire one year from the date the bill is enacted.

Bankers say that turbocharging the first-time buyer program would go a long way toward stimulating home sales and, in turn, the economy. Jay Brinkmann, the chief economist at the Mortgage Bankers Association, estimates that just upping the tax credit to $15,000 would lead to an additional 400,000 home sales.

The sticking point, though, will be the bill's cost. According to the Joint Committee on Taxation's chief of staff Thomas Barthold, the proposed Senate bill would cost the Treasury $23.5 billion in the 2010 fiscal year and $13.3 billion in fiscal 2011.

Matthew Locke, president of the mortgage lending division at the $1.5 billion-asset Pulaski Bank in Creve Coeur, Mo., said he hopes lawmakers will look at the big picture. The existing tax break "has proven to be very motivating," he says. "You have to believe that...ultimately, the benefit is going to outweigh the cost of this."

David Kittle, president of the Mortgage Bankers Association, agrees. He said that after the down payment and closing costs, a new homeowner on average spends an additional $7,500 on furniture, appliances and other home products and services. He said the added incentives would also reduce housing inventories, boosting home values, and remove problem assets from banks' books, thus freeing up banks to make more business and consumer loans.

Still, the MBA would like to see lawmakers go even further by mandating that the tax credits be available at settlement, rather than at tax time, as to ease difficulties in coming up with a down payment.

Thirteen Republicans, along with Connecticut's two senators, Democrat Chris Dodd and Independent Joseph Lieberman, have signed on as the bill's sponsors. But industry observers note that even if the bill fails to pass the Senate, lawmakers seem almost certain to extend the first-time-buyer credit past the Nov. 30 expiration date in hopes of spurring more home sales.

According to the National Association of Realtors, the number of unsold homes fell to 3.8 million in May from April, a 3.5 percent drop. But, because about 33 percent of homes sold were either distressed or foreclosed, the median price fell to $173,000, 16.8 percent lower than May 2008. And while pending home sales had risen for four consecutive months through May (the latest date available at press time), many bankers say the pace of sales has slowed since interest rates started rising above 5 percent in late May.

"It's slowed down the refinancing and it's slowed down the little bit of momentum we gained in April and May on the home buying market," says Laney Briggs, president of the Arkansas Mortgage Bankers Association. "When they dipped under five, we got crazy busy."

Rob Katz, president of mortgage lending software company Del Mar DataTrac, concurs, saying that his bank and credit union clients are reporting a decline in origination volume. "It used to be that six [percent] was the magic number and if rates dropped below six, everyone got busy and there was a refi boom," he says. "If it was over six, everything got quiet. Now that's five. When interest rates dropped below five, our clients got unbelievably busy. Then when it went above five, it got quiet."

Some of that slowdown could also be attributed to potential homebuyers waiting on the sideline to see what the lawmakers will do, says Pulaski's Locke. If it seems likely that they will pass a bill that would be enacted in November, it will "stunt the market" for September and October, he says. But if Congress waits and potential homebuyers think the tax credit will expire, there will be a "frenzy" of activity in October and November to try and beat the deadline.

"You have some weird logistics taking place on how they time this," Locke says.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.