Left Out of the Free Money Offer

There would appear to be no limit on the national government's willingness to intervene in the housing market.

Just a few weeks ago, the expiration of the cash for clunkers $8,000 first-time homebuyer tax credit looked like it would happen on schedule at the end of this month. That conventional wisdom was supported by news that fraud and abuse had marred the first $10 billion in giveaways. (Our favorite anecdote: The 4-year-old who claimed the credit. Hey, no age limit!)

Then came a plan to extend it into 2010, but gradually ratchet down the amount of the credit. Like weaning, not a cold-turkey cutoff.

But no.

The new plan, now headed to the president, expands the credit. A credit worth up to $6,500 will now be offered to "move-up" buyers, i.e., current homeowners who are looking to sell and buy something else. (Typically a bigger home, but the credit is available to families who downsize or switch to less-pricey markets.) The credit applies to any deal made through April 30, 2010, provided it closes within 60 days thereafter.

The new limits: no greater than $225,000/yr. in family income (joint returns), live in the home you're selling 5/8 years, no investment properties qualify. (Click here for a WSJ Q&A on the credit.)

And the new ("move-up") home can be worth no more than $800,000.  

Uh-oh, that means MB – and other pricey California markets – are mostly left out of the action. There are currently just 2 SFRs in all of MB priced below $800k, none west of Sepulveda.

Here's an interesting example of how luxury markets will be treated differently, and perhaps continue to fare differently, even as unprecedented subsidies are thrown like lifelines to the housing market in general.

Are the credits working? It's a subject of debate, but Goldman Sachs estimates that the combined effect of these tax credits plus efforts to push mortgage interest rates lower plus programs to disincentivize or slow down foreclosures are keeping home prices 5% above where they'd be otherwise.

To see some of the data-crunchers' headlines on the housing market, you'd think things are getting rosy. But in D.C., they're still in a panic.

"Every economist will tell you we have to steady the housing market before the economy will turn around," said Sen. Christopher J. Dodd (D-Conn.). "We can't afford to let this tax credit expire now."

Moody's analyst Mark Zandi says of housing, "From a macro-economic perspective, nothing is more important than stabilizing housing values... The market is literally on life support—it's fragile. If we take it off, we risk taking a big step back."

Direct intervention to "stabilize home values." We "can't afford" to stop the interventions. So what's it costing?

Zandi offers a couple of interesting estimates of the real-world impact of these subsidies, and their cost. He thinks 400,000 sales happened this year purely because the $8,000 first-time buyer credit was available. That means about 1 million people took the credit after buying a house they would have purchased anyway. (And here we're excluding the young'ns and other credit abusers.)

Suddenly that's not $8,000 per home the taxpayers are subsidizing, it's more like $25,000 per transaction that was truly inspired by the subsidy. Of $10 billion spent so far, Zandi is effectively estimating we've wasted $7 billion.

So of course it's only fair to share the wealth by expanding the credit.

Zandi estimates we'll get a surge of 500,000 more "unexpected" sales from the credit extension. Congress estimates the tab at $10.8 billion. Of which perhaps $7.7 billion will be free money for people who don't really need the enticement.

But we're sure their thanks will be sincere just the same. And we're sure that very few will be in MB.