I just stumbled over a strong argument in the Washington Post against renewing the first-time home buyers' credit, put forth by the Baseline Scenario blog's Simon Johnson and James Kwak. I've argued in favor of the credit but believe it should remain isolated to first-time buyers. Johnson and Kwak have some valid criticisms, but I think there might still be ways to fix the credit and largely shield it from their worries.

Those Homes Would Have Sold Anyway

They begin with the often-heard complaint that many people claiming the credit would have bought homes anyway. That's true. But I think that the number of people who say they would have bought homes without the credit is highly exaggerated. Think about the current economic environment. Real estate is more unstable than it has been in decades; nearly 10% of Americans are unemployed with many others fearing for their jobs; and many people have lost wealth in real estate holdings and the stock market. Economic conditions aren't exactly conducive to buying a home right now. I think the number of home sales would be far, far lower without some incentive in place. Moreover, keeping the credit to first-time buyers increase the likelihood that it's a sale that might not have otherwise occurred and will reduce housing inventory.

This complaint is also a feature of virtually every kind of stimulus -- there's always overlap. For example, let's say you give states money to hire more teachers. Okay, but some of those teachers might have found jobs anyway and empty job openings will remain that way for longer if no qualified applicants apply. Moreover, you run the risk of hiring more teachers than you need, so once the stimulus money runs out, state governments might choose to cut those unnecessary costs and lay them off again. If you're going to play the stimulus game, then you have to accept some inefficiency.

It Overinflates Housing Prices

They also worry that the tax credit might overly stimulate the housing market, inflating housing prices above their natural level. Given how far home prices have fallen, I find this a little hard to swallow, but let's humor the idea. I think there's a solution that addresses this, and even speaks to the earlier criticism about not spurring only sales that wouldn't have happened anyway.

Neutralizing Negative Sentiment

The reason I think a tax credit like this can be helpful is because it can counteract the wrong kind of human psychology. People have a tendency to panic and overcorrect. That's what caused the financial market's collapse. The problems at most banks were not bad enough to cause them to fail, yet hundreds had to be bailed out by the government when their share prices plummeted and they couldn't secure financing. What happened? People freaked out.

What we don't want in the real estate market is an overcorrection. Housing prices were certainly vastly overvalued in 2006. But undervalued housing prices in 2010 are also bad. A tax credit like this could seek to help swing the pendulum back, without creating absurd irrational exuberance about the real estate market.

A Targeted Credit

So how do you strike the balance of stimulating without overheating? What if the credit were better targeted at the real estate markets that have been hit hardest? For example, the housing market in Northern Virginia has barely been touched by real estate's broader problems. Don't apply the credit there. But what about South Florida? Housing prices in some places there are down 30% -- or more. They're at 1989 levels. Allow the credits there.

Why not target them? Obviously people will complain that this isn't fair to those in good markets, because they can't benefit from the tax credit. But the government has never been in the business of assisting those who need no help. After all, it doesn't give food stamps out to millionaires -- why should it give first-time home buyer tax credits out in healthy real estate markets?

In the worst markets, people will be even less likely to take a risk on real estate. Meanwhile, foreclosures continue as home prices plummet. I think the tax credit specifically applied to such markets will largely dodge Johnson and Kwak's criticisms. Instead, it will work to alleviate the fear and panic that still grip many potential buyers in those regions.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.