Last week a bi-partisan deal was announced in the Senate that will likely pave the way for the new homebuyer’s tax credit to be extended through April 2010.  The deal also includes plans for a significant expansion of the tax credit, raising the income requirements to $125,000 per individual and $225,000 per couple from $75,000 per individual and $150,000 per couple. This expansion means that many more individuals will be eligible for the tax credit than were previously. Finally, the deal added a $6,500 tax credit will be available to homeowners wishing to move out of their current home into a more expensive one.

I have been thinking about the deal all weekend, and I worry about its effects. While the goal of the credit is to strengthen the market and help bring home prices back up, increasing income requirements and adding a tax credit to incentivize trading up seems like it risks exacerbating the current problems in the housing market.  Many of the current problems in the housing market have been created by homeowners (many first-time homeowners) taking out mortgages that were more than they could afford to pay in order to buy homes. Even when they could afford the mortgage, the recent economic problems have led many to be out of work or find their401(k)s and pensions to be less than they had expected. Consequently, the number of foreclosures and mortgage delinquencies reached all time highs in recent months.

In light of these developments, some proposed that maybe homeownership should no longer be an essential part of the American Dream.  It was argued that it is a disservice to put people into homes they cannot afford. While the tax credit is not a very large sum of money, it is enough money to push individuals to act in uncertain times.  A realtor in Portland, ME commented that nearly 70% of their clients were motivated by the tax credit. Yes, the housing market could use a boost, but when individuals are making a significant long-term financial decision for a short-term financial incentive, it seems like many poor choices can occur.

Reverse mortgages and refinances are available to help homeowners who find themselves over-extended, but reverse mortgages are only available to those over 62, and refinances and short pays have been extremely hard to get.  To avoid another housing crisis, the government does need to stimulate the market, but putting more borrowers into homes they cannot afford does not seem to be a safe way to do so.