Obama administration skeptical on renewing home buy tax credit

A listing for a new price on a home for sale is seen on a sign in Manhasset, New York August 18, 2009.

WASHINGTON (Reuters) - The Obama administration is still considering whether to back a popular tax credit for first-time homebuyers but is skeptical the United States can pay for it, Housing and Urban Development Secretary Shaun Donovan said on Tuesday.

He told the Senate Banking Committee he was aware the program was popular with lawmakers, but added that, "at the same time, I am mindful that these proposals can be very expensive, especially at a time of significant budget deficits."

The new homebuyer $8,000 tax credit, which will expire at the end of November, has boosted home sales in recent months, helping to revive a flagging housing market that had been a key factor driving the United States into a recession.

Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Georgia Republican Senator Johnny Isakson want Congress to extend the credit through next June.

Isakson told the panel that failure to extend the popular tax credit would lead to "a dramatic and awful situation in the United States of America."

Under questioning, Donovan said the administration would make a decision the coming weeks after it sees more government data on just how much the tax credit would cost.

But he was much less dire in his predictions for the housing market if the tax credit is not extended.

"I do not believe that a catastrophic decline (in the housing market) would be the result of the end of the credit," Donovan said.

Isakson is seeking to attach a bill to extend the credit, and expand it to cover repeat homebuyers, to separate legislation pending in the Senate to extend unemployment benefits. The Senate could vote on that as early as this week.

Donovan also told the panel that the Federal Housing Administration would not need to ask Congress for additional funds to increase its capital levels.

"There is no need for any 'bailout'," Donovan said, adding that he expects the FHA capital reserve ratio to rise above two percent in the next two years.

(Additional reporting by Andy Sullivan, Editing by W Simon )