This week, the U.S. Senate agreed to a plan designed to help the housing industry and home builders, but given the scope of the industry’s troubles, many still have questions about the proposal and the potential impact.

As approved by senators this week, the plan includes $4 billion for block grants for communities to purchase and redevelop foreclosed houses, $100 million for housing counselors, $6 billion in tax breaks for builders and other businesses with net operating losses in 2008 and 2009; a boost in the FHA loan limit to $550,000; $10 billion in tax-free revenue bonds for refinancing, a $7,000 tax credit for buyers who purchase a home in foreclosure; and increased property tax deductions for homeowners.

It adds up to a $20-billion-plus grab bag, with many provisions for builders to love and hate. “I’m not sure how the part where giving $4 billion to local governments to buy foreclosed properties really works. The government would purchase them and then resell them? I’m not sure how that’s going to help,” observed Kenneth Malm, president and managing principal of Craftmark Homes in McLean, Va.

Builders who lose money in 2008 and 2009 will appreciate the proposed tax break, which will allow them to carry losses back as far as four years. This would reduce their tax liability and entitle them to amend their returns, possibly receiving tax refunds. “What it does for small builders is it allows them to recapitalize their business and stay in business,” NAHB Executive Director Jerry Howard says.

While Howard points out correctly that the tax breaks apply to any business, not just builders, that may not be a political advantage; this relatively recent addition to the housing rescue bill is already raising eyebrows. “It's a boon to every company that is losing money now but made huge profits in the preceding four years. And that could include any number of banks, investment banks, mortgage bankers, and hedge funds,” Washington Post Steven Pearlstein wrote in his April 4 column.

As large as the housing bill appears to be, though, at least one economist warns against irrational exuberance. “It’s difficult to say how $10 billion will do much given the magnitude of the problem,” says Brian Bethune, director of financial economics for Global Insight in Lexington, Mass. “The subprime market alone is $2 trillion. To some extent, this just dances around the problem.” 

Others question whether the housing package really addresses the very real problems in the industry or simply props up a weakened sector with the same artificially inflated demand that led to the current slump. As the U.S. House of Representatives begins work on their own version of a housing bill in the coming weeks, Howard and others expect all those issues and more to be on the table.

“The situation [on Capitol Hill] is still very fluid,” acknowledges Howard. “There’s discussion of applying the $7,000 tax break to any homeowner in foreclosure … There’s a lot of talk of limiting the tax breaks to houses being purchased as principal residences.”

Still, Howard considers the Senate bill a big step in the right direction. “What we can’t lose sight of is that they realized that what they did with the first economic stimulus package was not enough and that they need to do more,” he says.

Whether it will help, though, remains up for debate.

“Psychologically, maybe the fact that the government is going to do something will help, because psychology is one of the biggest problems in the market today,” says Malm, the Virginia builder. “But the reality is I don’t think it’s going to solve the problem or the worry of declining home prices, and that’s what needs to be fixed right now.”

Learn more about markets featured in this article: Washington, DC.