The great debate surrounding the fate of the first-time homebuyer tax credit appears to have ended on a good note; at least for the millions of households ready to purchase a home.

The Senate this week voted in favor of a package of measures that includes the homebuyer tax credit, making it highly likely that the legislation will be signed by President Obama within a week. The homebuyer tax credit was due to expire at the end of this month.

The $8,000 first-time homebuyer tax credit which began early this year has been enormously successful, generating an estimated 1.8 million households who claimed the tax credit as first-time homebuyers. The Senate bill extends the first-time homebuyer tax credit for another 7 months. The new legislation also provides a $6,500 tax credit for move up buyers who have lived in their current residence for five of the eight previous years. The legislation raises the income requirements for eligible households; individuals are now able to earn up to $125,000 in income, while couples are able to earn up to $225,000.

The homebuyer tax credit legislation is certainly generous to the nation’s housing sector. Although this year’s tax credit program generated 400,000 additional home sales (according to Economy.com estimates), another 1.4 million households took advantage of the tax credit even though they would have purchased a home in the absence of a tax credit. That is taxpayer money not well spent. The new legislation will place an even greater burden on the U.S. taxpayer because the government now subsidizes move up buyers with a $6,500 tax credit and household income requirements for eligibility have been raised.

Opponents of the tax credit extension are justified in identifying the allocation inefficiencies of the program. They also make a convincing case that extending this government program only postpones the inevitable. One of our readers (Sheila Barr) in a comment on our site sums up the inevitable argument well: “These tax credits only delay the inevitable (housing prices have not completed their market-driven correction) by propping up the housing market on shifting sands.”

As I stated in previous commentaries, the positives outweight the negatives for extending the tax credit. The housing sector continues to be in a fragile state; home values on a year over year basis continue to fall; home inventories remain in excess; and a meaningful number of households either lack the confidence, financial wherewithal and or credit/underwriting requirements to purchase homes. Not surprisingly, the tax credit program (combined with historic low mortgage rates) lessened some of these market problems, boosting home sales and placing the housing sector onto a definite, but wobbly, recovery path. Not extending the tax credit places a fragile housing industry at risk.

The tax credit does more good than harm. The costs of the tax credit and the resulting burden placed on taxpayers, pale in comparison to what the costs would be if the housing markets go into retreat once again, costing taxpayers a great deal more money than the cost of a seven month extension.

An extended tax credit program also buys time for market fundamentals to return to health. The dramatic fall in home prices over the past two years serves as a good example. Just as home prices were wildly out of control on the upside during the housing boom, it is possible that home prices are falling in a disorderly manner today. In some locations, like Las Vegas, Phoenix and Miami, home price drops have been fast and furious, resulting in first-time buyers and move up buyers delaying home purchase decisions indefinitely, impacting home sales and exerting downward pressure on home values. The median home price in Las Vegas fell by almost 40 percent in just the last 12 months, while home prices in Phoenix and Miami fell by 36 and 33 percent, respectively over the same period. These frenzied market conditions do not provide a stable backdrop for an orderly marketplace.

Extending the tax credit provides an opportunity for markets like Las Vegas to experience a more orderly drop in home values, leading to better (more rational) homebuyer and home seller decision-making. After the horrific lessons of the housing boom, it is in all of our best interests to promote orderly conditions whether the market is contracting or expanding.