Recent news from the housing market has been extremely concerning. Existing home sales appear to have stabilized somewhat, but at a low level and new home sales hit a record low. Credit conditions for new homes are also tightening, further hampering the process. There is an overhang of foreclosed properties depressing prices. And finally, homeowners equity is low, indicating that getting people out of homes they can't afford will be much harder. Simply put, there are myriad number of reasons to consider helping the housing market in some form or another.
As such, we need to revamp the home buying tax credit. Will this "distort the market?" Yes. However, the market is already distorted to the low end, so consider this an equilibrium move. While some will argue we shouldn't use the tax code for this, I'll respond as a tax lawyer -- the code is littered with special interest tax giveaways. One that helps an ailing economic sector makes just as much sense. However, I would condition the credits phase out to something tied to the overall inventory of homes or months of available inventory number -- and, phase it out gradually; don't make it a "here today, gone tomorrow" affair.
Just my thoughts on the topic.