A previous post of mine discussed the apparently positive effect the $8k tax credit has had on the Billings market. Now it's time to look at some not-so-positive market dynamics this has resulted in.

While it would seem that this credit cost taxpayers $8,000 per house, it's not so simple. Remember, many of those buyers would have purchased homes even without the credit. A better measure is to look at how many additional houses were purchased due to the credit, and divide the total cost of the program by that. Using the National Association of Realtors' numbers, we find that it cost about $43,000 per additional house sold. That seems like a steep price to pay for a temporary market bump.

And perhaps buyers haven't been getting as good a deal as they thought. Sure, it seems like a quick, free $8,000. But as a very perceptive real estate agent notes, funny things start happening when you subsidize a purchase. Buyers feel the thrill of getting a deal, and spend more than they would have otherwise. Here is how the aforementioned Realtor (Janet Guilbalt) puts it as she compares it with the Cash for Clunkers program:

Those handouts work every time, and succeed in making people lose their rational thinking. What is it about the word "FREE" that hooks us every time into short term thinking? Nothing is free..

Janet goes on to say that the "tax credit empowers the sellers more than the buyers." In reality, this credit was probably more of a giveaway to home sellers, Realtors, and homebuilders. Buyers were just used to facilitate it. And that $8,000? Well, any gain for the buyer was probably offset as buyers rushed in and houses were bid up.

The big question now is, what happens in the last half of this year? This tax credit ends in June, and it's quite possible that July and the rest of the year could see sales collapse after the incentive ends. And how will home prices react at that time? Once again, we'll have to wait and see.