A more important housing subsidy has already snuck into law without many people noticing. Last Thursday, President Obama signed legislation, H.R.2996, that was billed as providing funding for the Forest Service and the Indian Health Service and temporary cash for the rest of the government. It also extended, substantially, the federal government's support for higher housing prices for another year.
You won't see any mention of housing policy in the Congress' official summary or the White House's announcement that Obama had signed the measure. But if you look carefully, you'll find it buried in the middle of the 31,332-word bill (which can claim the dubious virtue of topping out at over 1,000 words longer than George Orwell's novel Animal Farm).
If Congress had done nothing, the maximum government-backed loan for a house or condo in the continental United States would have dropped from $729,750 to $625,500 on January 1, 2010. Other loans -- known as "non-conforming" loans -- would still be available, but they'd be more expensive. TotalMortgage.com, for instance, puts the difference at around 1.1 percentage points as of this week.
It's true that the extension applies mostly to coastal areas (and it's even higher in Alaska, Guam, Hawaii, and the Virgin Islands), deemed sufficiently "high cost" to exceed the normal $417,000 limit. Home-buyers in the wastelands of Detroit, where you can buy houses for a few thousand dollars, won't be affected. Not so ones in Washington, D.C., New York, Boston, and San Francisco.
Nevertheless, letting the maximum loan amount fall back to normal levels would have been wise. First, it would reduce the cost of any possible future taxpayer-funded bailout if housing prices continue to fall.
Or have we forgotten how taxpayers bailed out Fannie Mae and Freddie Mac in over $400 billion of stock and debt guarantees? That's despite the federal law creating them in the first place, which clearly says: "This chapter may not be construed as obligating the federal government, either directly or indirectly, to provide any funds... or to honor, reimburse, or otherwise guarantee any obligation or liability..."
Second, it would rescind a sliver of one of the government distortions of the market that gave us the housing bubble and bust, coupled with all the economic pain of the past year or two. Without cheap loans, it's more difficult to have excessive speculation and a housing frenzy.
You can blame, in part, special interest groups who profited during the housing bubble. Realtors pushed for the higher conforming loan limits. The California Association of Mortgage Brokers urged members to lobby Congress to keep the higher limits. The National Association of Home Builders darkly warned in 2005 that "25 basis points tacked on to the mortgage rate will price about 1.2 million households out of the market." (Four years later, we now know that many of those folks might have been better off to continue to rent.)
Third, letting the maximum amount fall would have been a modest step toward what President Obama says he really wants: affordable housing.
The president's statement accompanying his administration's official budget says "access to affordable housing" is an important goal. Limiting what amounts to government-subsidized loans will, at the margin, increase interest rates and reduce the amount that sellers can charge for homes.
How much home prices would fall is an open question, but fall they would. A Chicago Fed letter from 2005 written by economist Richard Rosen suggested that if mortgage rates rise from 5.8 percent to 6.5 percent, housing prices would fall by 6.5 percent. An interest rate jump to 7.5 percent implies that "housing prices could fall by 15.5 percent."
Of course, this would run up against the current political dogma in Washington, where economic know-nothingness is more common than political courage, where existing homeowners are favored over would-be homeowners, and where our elected representatives who tout the need for "affordable housing" in theory vote the other way in practice.
Declan McCullagh is a correspondent for CBSNews.com. He can be reached at email@example.com and is on Twitter as declanm. You can bookmark the Taking Liberties site here, or subscribe to the RSS feed.