The question that everyone is asking is - what will happen once the government repeals the $8,000 tax credit for home buyers buying their home first time and the $6,500 tax credit for the second home purchasers. In terms of economics there is nothing to cheer about.

It is necessary to observe from a macroeconomic point of view what the government is going to do with this tax credit. With this there are two actions that it will be committing and not one.

Before the tax credit the demand for housing was neutral which turned positive to the tune of +$8,000 after the government artificially drove the demand high with its past tax benefits. For rational people this is a lucrative option while purchasing a house but this also drives up the demand within the housing market.

Another is placing a specific time limit on ending the housing tax credit which is similar to labor supply being driven up in the short term by decreasing income taxes temporarily and driving it down in the long term. Initially the credit was planned to end in November but now the time has been further extended to April. This is a further disincentive to people who are considering purchase their first home right now rather than in future. Because it generally costs $8,000 for a person if they intend to purchase a home May 1st in place of if they buy it before that. This has forced the housing demand to be in a compact time limit than it naturally would have been. In turn this has resulted in the demand that would have been within the remaining 2010 and 2011 to be drawn back into the 2009 and first quarter of 2010. Additionally it has further pushed up the demand curve up in the housing sector.

The future scenario after the end of tax credits:

The first scenario mentioned above is going will be corrected as it was artificially created. The demand will shift back the way it shifted upward in the first place. However it is difficult to predict how its impact will affect housing – will housing revert back to the initial position, proceed further down or go down a little less. All that is clear is that the demand will be going down in the housing sector.

Over time this is going to have a more lasting effect than the earlier scenario because the demand has been unnaturally manipulated within the time limit in the next few years. In case it happened in the goods sector there would not be much of an effect on the demand, but that is not the case with the housing sector. It will be several years before the demand picks up again. This is going to result in lower demand compared to what it would have been earlier in the next years. Even though this would depend on how in the long term people had planned to buy a home if no tax credit for a home was provided.

There is also hope that the unnatural demand generated with the tax credit will come down to a level that the cost will stabilize over time.

In reality is that it did not.

It is the unnecessary exuberance and the idea that the government might extend the tax credit for housing again that is holding up housing stocks. It is assumed that similar information is already known that has been just presented here. At the end of April the delay will last with all the red thumbs on the oversubscribed housing stocks.