House Democrats are proposing an $825 billion economic stimulus package that sweetens last summer's $7,500 tax credit for first-time home buyers, but doesn’t go nearly as far as many builders would have liked to boost buyer demand and stem foreclosures.

The Democrats have tailored their plan to match many of the priorities set forth by President-elect Obama, whose stated agenda will be focused on creating or saving at least 3 million jobs during the next two years. The plan includes a $500 per worker tax cut, a $2,500 college tuition tax cut, and a $1,000-per-child tax reduction for poor families. Obama has stated his belief that infrastructure investment is the surest way to create jobs, and the Democrats’ plan allocates more than $100 billion for infrastructure retrofit and construction and another $58 billion for energy-related projects.

Most importantly for builders, the plan also gives first-time buyers a permanent $7,500 tax credit for homes purchased through June 30. In the economic recovery bill passed last year, that $7,500 was in the form of a 15-year loan and failed to muster much interest among buyers. This new credit would not have to be paid back.

The Democrats’ proposal, though, does fall short of the housing industry's hopes. Builders, through the industry’s “Fix Housing First” lobbying effort, had been urging Congress to include in any stimulus package a much larger tax credit, between $10,000 and $22,000 depending on the market, for all buyers. Builders also wanted the plan to provide guarantees that would allow buyers to purchase mortgages at 2.99 percent borrowing rates through June 30, and 3.99 percent rates through Dec. 31.

On a tax front, the Democrats’ plan does provide relief to builders and other companies by extending the two-year carryback on new operating losses to five years. Several public builders speaking at this week’s Credit Suisse home builder conference in New York estimated that this extension, if passed, could provide their companies with refunds that, for some, would be in the hundreds of millions of dollars.

At the Credit Suisse event, Michael Williams, the investment firm’s director of public policy/Americas, told builders that the House proposal has “no chance” of getting through the U.S. Senate, so the final version of this bill will involve more negotiating between the two houses of Congress. That conceivably could give builders another shot to help shape a final bill in ways that might stimulate broader buyer demand.

Still up in the air is how the Obama administration intends to use the next $350 million that Congress just released from the $700 billion Troubled Asset Relief Program (TARP). Builders are hoping that some of this money will go towards reducing foreclosures through loan guarantees that would make modifications easier to achieve and keep people in their homes. RealtyTrac’s estimate yesterday that foreclosures jumped 81 percent in 2008 only confirmed builders’ lament that foreclosures pose the greatest competition to the sale of their new homes. The builders also want TARP money to be used to loosen credit, as many builders are struggling to secure new construction financing or lines of credit from lenders.

“Up to this point, the TARP program has failed to expand the flow of credit to business and consumers on competitive terms,” said Joe Robson, NAHB’s incoming chairman, in testimony he gave before the House Financial Services committee on Tuesday. “In addition, the TARP program has not adequately responded to the nation’s foreclosure crisis, which must be addressed to keep people in their homes, help stabilize home prices, and promote recovery of the housing market and economy.”

Robson warned legislators that foreclosure relief absent a plan to address demand for housing will not succeed in fixing the nation’s housing and economic woes. It remains to be seen whether the Democrats' plan is the first step in that direction, and whether this latest tax credit will finally push new buyers back into the market.

John Caulfield is senior editor at BUILDER magazine.

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