It looks like the debate is heating up about whether to keep the $8,000 first-time home buyer's credit that expires at the end of November. I got press release e-mails today from Senate Banking Committee Chairman Christopher Dodd (D-CT) and Treasury Secretary Timothy Geithner both praising the credit's extension. I support the giving the credit a longer life, because I think that if the government is determined to continue to stimulate the economy, then shrinking the vast inventory of houses is a good way to help stabilize the real estate market. But oddly, a home buyer's credit extension might be opened up to far more than just first-time buyers.

Here's the bullet point from Dodd's e-mail that explains. His new agreement:

Extends the $8,000 first time Homebuyers Tax Credit and creates a new $6,500 tax credit for homeowners buying a new home from December 1, 2009 to April 30, 2010.



As you can see, the extension seeks to add a new credit for current homeowners. Dodd's press release explains that more than 70% of existing homeowners would be eligible for the new credit. I am trying to understand the motivation here.

There is a legitimate reason why it's a good thing for first-time home buyers to have an incentive to purchase a home: that will lower the inventory of empty homes. Since this population hadn't owned a home before, it will leave rentals. That necessarily decreases the inventory of houses for sale in the market.

Yet, this new $6,500 credit for current homeowners is inventory neutral. Current homeowners would have to sell their old houses to use this credit to buy new ones. What's the point?

Extend the old credit, yes. But let's not get carried away, throwing money at people to buy houses with no economic benefit.

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