And it’s a big mistake.

The National Association of Realtors, The National Association of Home-Builders and The National Association of Mortgage Brokers have poured everything they’ve got into the extension of this credit, sometimes arguing that it’s good for consumers, at other times cravenly acknowledging that it’s also a sop to a beleaguered industry. As a broker ourselves, and a consumer advocate, Redfin has every reason to agree with the NAR’s position.

But the truth is that the credit won’t make much difference for consumers. It solves the wrong problem. It spends  money we don’t have. And even if the credit is extended, enough home-buyers rallied for the original November 30 deadline that there will still be a December lull in demand.

It Won’t Make Much Difference
So first things first. The first-time home-buyer tax credit hasn’t been a major factor in the recovery. The Brookings Institute estimates that the credit increased demand among first-timers by only 15%, so that each incremental home sale has actually cost the government $43,000 or more. Our own experience suggest that this number is, if anything, low, as demand among first-timers has increased at Redfin only 11%. At least some of that increase is because, in the current market, 2^nd-time home-buyers can’t afford to sell their first home.

The National Association of Realtors’ arguments in favor of the credit don’t make sense. When August sales volume slipped ever so slightly, the NAR was quick to blame the dip not on the seasonal tendency for many would-be home-buyers to hit the beach, but on the expiration of a credit that was still four months off. Even as the NAR warned that first-time home-buyers had begun to abandon the market, the same press release noted the percentage of first-time home-buyers had remained unchanged from July to August. A month later, when it was at least remotely conceivable that a September deal might not close before the November 30 deadline, the NAR reported that sales volume increased; that press release argued all the same for the extension of the credit.

It Solves the Wrong Problem
And the problem isn’t that there aren’t enough buyers. Between 1994 and 2005, the percentage of Americans who owned homes rose by almost 10%. Even after two years of record rates of foreclosure, the U.S. home-ownership rate is at 67.4%, whereas it was at 64% before the bubble. The government can stave off a further decline by extending this one-time credit, but with unemployment above 10%, it may just encourage people to buy homes they later can’t afford.

This isn’t to say that Redfin begrudges the folks who have been able to take advantage of the credit so far; far from it. And we’re certainly not against home-ownership. Helping people get a home is, for us, very fulfilling; it is more fulfilling for me than anything I’ve ever done professionally.

But that doesn’t mean we tell every Tom, Dick and Harry to buy a home. We have a fiduciary obligation to advocate fiscal responsibility, even — as we emphasize to every new hire — to dissuade home-buyers from a rash purchase. In this era of responsibility that was supposed to have been inaugurated after the credit crunch, it seems inarguable that people shouldn’t buy a home unless they can afford it on their own.

The Problem is Inventory, Not Demand
And we worry that these one-time government incentives have already lost sight of that principle. The major destabilizing force in real estate today isn’t a dearth of buyers. Credit or no credit, buyers would still be out in force, primarily because prices and interest rates are relatively low. The problem is foreclosures, which don’t just affect the temporary gyrations of home prices but fundamentally lower the value of the underlying asset, American real  estate.

Trust us on this one. Redfin tours a hundred foreclosed homes a day and most are absolute dumps. Ask any home-buyer what she worries about, and it isn’t that nobody will want to buy a house. It’s that delinquent loans are still piling up three times faster than banks can handle them. Nobody wants to buy a house only to find that foreclosures at fire-sale prices have ripped the bottom out of the local market again. The #1 way to stabilize the housing market is to limit the number of foreclosures being sold, not to increase the number of people who buy them.

A First-Time Home-Buyer Credit and The Time Machine
To that end, we have an alternate proposal. We still want to help first-timers, particularly those who don’t have a lot of money. But why not offer a first-time home-buyer tax credit to the real victims of the bubble, first-time buyers from 2006? The credit could be limited to help re-finance the predatory loans which overwhelmingly occurred in a one-year span between 2005 and 2006.

“What about moral hazard?” the suddenly Scroogey capitalists will argue. We say that these home-buyers have been through enough hazard. We treat the buyers of 2006 as if they  deserve whatever misery the bank can inflict on them, yet we eagerly court a new generation with a fresh set of one-time incentives that will yield a new set of fees.

It seems particularly heartless that we in the real estate industry would focus all of our attention on new home-buyers, when the folks now facing foreclosure were our customers only a few years ago. Instead of making the system more efficient or compassionate, we just try to feed the bloated beast by keeping the number of transactions in the U.S. too high.

We Can’t Afford It
And we can’t afford to do this. The primary factor driving affordability is not an $8,000 one-time credit, but low interest rates. At some point, government spending drives interest rates up. If rates increase from 5.3% to 6.3%, the real cost of a typical home will be almost $100,000  higher, credit or no credit. More important, we will have closed the one exit that folks facing foreclosure have been able to avail themselves of, re-financing.

It’s scary to think what the world will look like if that happens: foreclosures will get much worse, and inventory will climb even as demand drops. In such a scenario, the market could suffer a second steep drop, and the government, having exhausted its credit, will have fewer levers to pull it back.

But for now it’s easier simply to feed the beast. Just this once, let’s not do it.

Since the price drop-data is for November while mortgage rates declined in December, it may be that the market just needs time to respond. But one analyst called the price drop “breath-taking” and “god-awful.” The WSJ quoted an economist as saying that “the housing industry is in the process of reducing capacity to dangerously low levels.” A second economist said that, “outside of distressed properties, the [California] market is nonexistent almost.”

This made us wonder whether it’s really true, in California or elsewhere, that most of the homes for sale are foreclosures being liquidated by banks.

Since Redfin’s database includes virtually all the homes for sale (basically everything except what’s on Craigslist), including bank-owned listings as well as for-sale-by-owner (FSBO) listings, we can measure what percentage of homes for sale are bank-owned. And we can do this with unusual precision because we map all the data down to the level of a city, neighborhood or postal code.

Here’s what we found for nine of the largest cities we cover, sorted from the highest concentration of listings in foreclosure to the lowest, as of December 22, 2008. We measure the ratio of for-sale-by-owner listings as a percentage of the total homes for sale in each city, and then do the same for foreclosures.

And it’s true that in major California cities south of the Silicon Valley peninsula, about 1 in 4 homes for sale have been foreclosed, and others are being sold by sellers trying to avoid foreclosure (short sales). But the number of short sales may soon be decreasing, as banks are now soliciting short sellers to modify their loans at the new low rates so folks can keep their home.

I used to worry that the low rate of foreclosure in Seattle and San Francisco was a disaster waiting to happen. Prices will fall through the floor in those markets if the percentage of listings being sold by banks increases in either place to 20% or 25%.

But because the downturn in Seattle and San Francisco prices started a little late, and mortgage rates fell soon thereafter — unemployment, not increasing mortgage payments, will be the main driver for foreclosures here — maybe Seattle and San Francisco can avoid the huge pile-up of distressed inventory that is dragging down the market in Southern California.

What do you think? Why do Seattle and San Francisco have such low foreclosure rates? And will this continue?

(Photocredit: Ironside on Flickr)

Clarence Nathan: I wouldn’t have loaned me the money. And nobody that I know would have loaned me the money. I know guys who are criminals who wouldn’t loan me that and they break your knee-caps. I don’t know why the bank did it. I’m serious … 540 thousand dollars to a person with bad credit. 

Glen Pizzolorusso (a mortgage broker in upstate New York): We rolled up to Marquee at midnight with a line, 500 people deep out front. Walk right up to the door: Give me my table. Sitting next to Tara Reid and a couple of her friends. Christina Aguilera was doing some, I’m-Christina-Aguilera-and-I’m-gonna-get-up-and-sing kind of thing. Who else was there? Cuba Gooding and that kid from Filthy Rich: Cattle Drive. What was that kid’s name? Fabian Barabia? We ordered 3, 4 bottles of Cristal at $1,000 per bottle. They bring it out, you know they’re walking through the crowd, they’re holding the bottles over their heads. There’s fire crackers , sparklers. You know, the little cocktail waitresses. You know so you order 3 or 4 bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who’s the cool guys? We were the cool guys. They gave me the black card with my name on it. There’s probably 10 in existence. 

Thanks to Peter Cochran and my twin brother Wes for reminding me about this episode, nearly simultaneously.

I searched for a picture of Glen Pizzolorusso but he’s nowhere to be found…