$8,000 tax credit for first time home buyers

This is a good policy to help a lot of people to reach the American dream of homeownership. I welcome it. But is it enough to stabilize house price?

If a new buyer is qualified to get a FHA loan with 5% downpayment, he or she should be able to buy a house worthy of $160,000 using the tax credit offered by this policy. Of course you need to pay the downpayment somehow, and receive the tax credit later on. This is not bad as an investment.

There are a lot of REO listings in California that worth more than $500K. Eight thousand is just a little bit more than 1.6%, not enough cushion for the further decline as predicted by many economists. Many people are not willing to take the risk of more than 10% drop in the home price with just 1.6% benefit from the government. Apparently California law makers seems to agree with me and they passed their own state tax credit of $10,000 for new home buyers.

The tax credit should be based on the average home price in the corresponding state. A bold policy should offer at least 5 to 10% cushion for the possible decline of the home price.

Price changes with demand and supply. The administration has tried to reduce the supply with loan modification policy. To really stabilize the home price, the administration needs to offer a lot more incentives to fuel the demand as well.