Kiss the Housing Credit Goodbye

It's looking more likely that the $8,000 first-time homebuyer credit set to expire next month will really, truly expire.

Plenty have begged and pleaded for the credit to be renewed, saying it's ushering the housing market into greatness. Others have argued it's merely a prop -- and a badly conceived one at that -- doing more harm than good.

The latter group appears to be winning. On Monday, Housing and Urban Development Secretary Shaun Donovan said he "[doesn't] believe that a catastrophic decline would be the result of the end of the credit." That was one of the first anti-credit confirmations so far from a government official whose opinion holds some weight.

And he's right, most likely. One of the most shocking examples of how ineffective the credit is comes from a simple illustration from the superb blog Calculated Risk (emphasis mine):

NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

With 1.9 million first-time buyers, the total cost of the tax credit will be $15.2 billion. Divide $15.2 billion by 350 thousand, and the program cost $43.4 thousand per additional buyer. The actual number could be much higher if there were fewer additional first-time buyers than the NAR's estimate-or if the overall cost is higher (more buyers claiming tax credit).

In short, most of those who received the credit would have purchased a home anyway. Now, 350,000 is a lot of new buying activity, but the cost to subsidize those sales -- roughly $43,000 per buyer -- is so atrociously unfair to taxpayers that keeping the program in existence is insane. For comparison, the average household earned about $50,000 in 2007.

Plus, as my colleague Matt Koppenheffer noted regarding the comparable cash-for-clunkers program, these subsidies reduce future demand. It's just front-loading sales, which was awesome for auto companies like Ford (NYSE:F) for about four weeks, but not a day longer.

The same can be said for the 2008 stimulus package that gave checks to millions of Americans. The spending effects juiced retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) for one quarter, max, before they fell back to ordinary levels. The lasting impact these subsidies provide is quite limited, and their continuation just highlights the desire to fire short-term actions at long-term problems.

Who knows. Maybe the credit will get an extension, pleasing Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) with subsidized fiction a little longer. But some day, the credit has to end. And then we'll ask: What then? Will we have to face -- gasp! -- reality? Mmm-hmm. Subsidies work ... until they don't. That's what makes these programs so frustrating.