UPDATE 1-US homebuilder confidence ebbs on tax credit fears

(Adds details, calls for tax credit extension, byline)

By Lucia Mutikani

WASHINGTON Oct 19 (Reuters) - U.S. homebuilder sentiment edged down in October after three months of gains as builders fretted over the upcoming expiration of government incentives for first-time buyers, a private survey showed on Monday.

The National Association of Home Builders/Wells Fargo Housing Market Index dipped to 18 from 19 in September, falling below market expectations for a reading of 20.

The pullback in the gauge, which measures builders' confidence in the market for newly built single-family homes, comes ahead of the Nov. 30 expiration of the government's $8,000 tax credit for first-time buyers.

"The approaching expiration of the $8,000 home buyer tax credit, combined with the massive hurdles that builders face in obtaining construction financing ... could derail the fragile recovery in housing just as it is starting to take shape," said Joe Robson, chairman of the NAHB.

The tax incentive has been widely cited as one of the factors behind the nascent recovery in the housing market from a three-year slump.

The collapse of the domestic housing market and the accompanying global credit crisis helped to push the U.S. economy into its worst recession since the 1930s. The recession started at the end of 2007, and data indicates the economy resumed growth in the third quarter.

On Monday, real estate and banking industry trade groups urged the Obama administration to press Congress to extend and expand the tax credit, which they said would help to boost demand and significantly reduce the glut of unsold homes on the market.

"Achieving equilibrium between supply and demand for housing is critical to stabilizing housing prices, and therefore household wealth," said the group in a letter.

RECOVERY STILL ON TRACK

Some economists, however, do not believe that the modest drop in confidence in October is a sign that the housing market is slipping back, arguing that the recovery was not being solely driven by first-time buyers.

"Don't assume that this marks the beginning of another steep downturn in housing, especially with the first-time home buyer tax credit drawing to a close," said Jennifer Lee, an economist at BMO Capital Markets in Toronto.

"It is not only first-timers stepping back into the housing market. Signs that prices have bottomed have attracted other buyers as well."

The NAHB survey showed all three subindexes of the Housing Market Index fell this month, the first decline since November 2008.

The current sales conditions gauge slipped one point to 17 in October, while the sales expectations measure for the next six months fell two points to 27. The traffic of prospective buyers index dipped three points to 14.

"Clearly, builders are experiencing the effects of the expiring tax credit on their sales activity, since it would be virtually impossible at this point to complete a new home sale in time to take advantage of that buyer incentive before Nov. 30," said NAHB chief economist David Crowe.

Crowe reckons that an extension of the the tax credit and expanding the eligibility beyond first-time buyers could substantially boost home sales activity.

About 85 percent of respondents in the HMI survey believed expanding the tax credit would help their sales.

"That would amount to a very effective stimulus to housing demand and a needed boost to the overall economy," said Crowe. (Additional reporting by Al Yoon in New York; Editing by Leslie Adler)