A tax credit has worked before to correct a faltering housing market and it can do it again, according to a panel of builders on Monday who discussed the $7,500 tax credit for first-time home buyers that was signed into law last week.

“This program has been tested before,” said Sandy Dunn, president of the National Association of Home Builders http://www.nahb.org. “In 1975, in the midst of an economic recession, Congress enacted a $2,000 tax credit for people buying new homes. In nine months, the tax credits helped clear off then-record numbers of unsold homes on the market. In short, the tax credit worked before. We expect similar success in the year ahead.”

The new law will allow single or head-of-household taxpayers whose adjusted gross income is no more than $75,000 to take a $7,500 temporary tax credit. The same applies to married couples who earn $150,000 or less.  To qualify, buyers must close on the sale of a home on or after April 9, 2008, and before July 1, 2009.

There is one catch: the credit must be repaid over a 15-year period, starting two years after the credit is taken. So technically, it’s not a credit at all, but an interest-free loan.

NAHB research indicates that 40 percent--2 million or more buyers--are first-time home buyers who could qualify for the tax credit. “These buyers bring demand and they don’t have a home to sell, which is just what the market needs at this time,” says Rob Dietz, director of tax issues for NAHB. “That frees homeowners to make a purchase.”

One of the biggest benefits of the tax credit for builders will be in reducing the inventory backlog that is plaguing many markets.

“This will help whittle down the existing inventory of new and used homes, and it won’t put additional homes into the market,” says Ed Brady, president of Brady Homes in Bloomington, Ill., who has several product lines geared to first-time home buyers. “This is tailored to our business.”

It’s also a potential boon further up the home-buying chain. Richard Dugas, president of Bloomfield Hills, Mich.-based Pulte Homes, said that 50 percent of his company’s business in 2007 came from its Del Webb active adult communities. The single biggest challenge for those buyers, he says, is their inability to sell their current homes. “Breaking this logjam is something we’re very interested in,” he says. “If more people sell their homes, it frees them to buy at one of our communities.”

On Tuesday, Pulte will announce a marketing campaign tied to the tax credit, Dugas says. The builder will offer a $7,500 incentive to match the tax credit, and make it available for all its buyers, not just first-time home buyers.

Between now and Oct. 1, builders may be able to combine the tax credit with another popular program, seller-funded down-payment assistance. That widely used financing tool for FHA-insured loans was eliminated in the housing bill; some builders already are planning marketing efforts to encourage buyers who need help with a down payment to buy now before the program goes away.

“As far as I understand it, there doesn’t appear to be anything that prevents someone from using both programs at the same time,” Dietz says.

While the NAHB officials and builders agreed that the housing bill’s elimination of seller-funded down payment assistance was a negative for builders, they indicated that the benefit of the tax credit outweighed the damage of its loss. Dugas said that Pulte is investigating what percentage of its buyers planning to use seller-funded down payment assistance could use other programs to buy a home. “We don’t have enough information yet,” he says, “but we think a substantial portion of people using down payment assistance who could use other programs.”

To help answer questions about the tax credit, NAHB has launched www.federalhousingtaxcredit.com, a consumer Web site designed to explain the details of the program. As evidence of interest in the program, nearly 60,000 unique visitors have looked at the site in five days.

Pat Curry is senior editor, sales and marketing, at BUILDER magazine.

Learn more about markets featured in this article: Bloomington, IN.