The first-time homebuyer tax credit is set to expire on November 30, 2009. There are ruminations happening in Washington D.C. about extending the deadline into the next year and expanding the amount of the credit.

Politics. Everyone sees every proposal through the red or blue colored lens of the two big parties. The idea of extending the first-time homebuyer tax credit throws a wrench in the political process. Why? Well, it is actually a Republican that is proposing the program. Whether this means Democrats will automatically oppose it is simply unclear at this point. So, what exactly is the proposal?

The proposal comes to us from Senator Johnny Isakson, a Georgia Republican. He wants to extend the tax credit for an additional year, to wit, November 30, 2010. He also wants to add a bit of oomph to it by expanding it from the current $8,000 figure to a full $15,000. The idea is to entice more renters into the home ownership market and create demand at the lower end of the market. This will then fuel sales at higher levels as people look to trade up.

The effect of the first-time homebuyer tax credit is hotly debated. Some studies show it has had a minimal impact when it comes to getting buyers into the market, but most real estate professional have professed to a noticeable change in demand. The real question is what happens if it is not extended. Will the current market stability turn out to be a mirage? Will there suddenly be a lack of demand that sends the market twirling back down into the abyss?

Nobody knows the answers to these questions. One can expect some fall off in demand as was exhibited with the termination of the Cash for Clunkers program. That being said the overall economic environment is less panicky now than it was in 2008. Whereas people previously horded every dollar they could, they now seem to realize there are some real bargains out there.

What about the cost of the additional year and expanded credit? It is a red herring argument for two reasons. First, the tax credit has to be paid back over 15 years. As a result, it is more akin to a zero interest loan from the government than a tax credit. Further, the government has long subsidized the real estate market. Don’t believe me? Then explain the mortgage interest tax deduction!

Will the tax credit be extended and expanded? It seems unlikely. At best, one might expect to see an expansion to the middle of spring when the real estate market naturally picks up with the weather. An expansion on the amount of the tax credit is very unlikely.