Since January, I’ve been writing in this column that the home buyer’s tax credit program was successful—if you define success to mean that it helped to prop up demand in the near term, boosting immediate spending on housing and preserving jobs for Realtors and related real estate professionals. But I’ve also argued that it effectively sucked purchase money housing demand out of future quarters, was the result of short-sighted and reactionary economic policy—and a great example of how to misuse economic stimulus.

We’re already seeing evidence of the tax credit's demand pull, with the MBA’s purchase application survey last week falling off a cliff and hitting levels last seen way back in 1997. The MBA’s Michael Fratanoni admitted as much in explaining the application trends, saying that “the tax credit pulled sales into April at the expense of the remainder of the spring buying season.”

I’d suggest the demand pull here might go well beyond just the spring buying season, given the fact that homes generally are “sticky” assets to begin with and also represent a substantial investment for most households. It's likely that the program pulled purchase demand forward for much of this year, and perhaps even reaching into next.

As my colleague Linda Lowell has written about numerous times, the tax credit program wasn’t really all that different from the Cash for Clunkers program used to prop up automakers earlier in the recession. Both programs provide cash or equivalent incentives to spur spending NOW, versus later on.

Which actually can be a very good thing—so long as these sorts of incentive programs are able to bridge a market over to a period of relatively greater economic strength. The idea is that if you are going to face soft demand anyway, you’d much rather face it during a period of economic strength compared to a period of economic weakness. But here’s the rub: this only works if the “later” you bridge to is, in fact, a point in time where the market has had a chance to regain its footing.

Auto sales have kept some momentum post-Clunkers, even if unevenly, because consumer spending has proven to be back on the upswing (thanks largely to loosened auto credit standards, which should spur a separate debate over which sort of spending increases are economically desirable, and which are not).

But can we say anything remotely similar about housing, in this post-tax credit market? The short answer is no. And that’s been my fundamental problem with the tax credit program ever since it was first announced.

Challenges remain with housing demand

For one thing, unlike the auto market, credit standards in mortgages are clearly beyond tight enough to keep historic lows in mortgage rates (thanks, Greece!) from leading to a historic refinance boom, no matter how much MBA refi application volume shows consumers trying to get a piece of a 4.8% mortgage.

At any other time in our country’s history, a 4.8% mortgage would have driven a refi boom of epic--and I mean epic--proportions. Not now. J.P. Morgan analysts, in a research note last week, noted that “only the cleanest borrowers get through” refi channels and suggested primary market rates for mortgages would need to touch 4% before any refi wave might be coming. The same analysts noted that Treasury yields would need to rally 100bps from current levels, at least, to even have a shot at seeing primary mortgage rates get that low.

Fannie, Freddie and the FHA aren’t loosening credit standards any time soon. If anything, lending standards are set to get even more conservative with Congressional intervention (the Senate’s current version of financial reform mandates 10 percent down payments on GSE-sponsored loans, for example).

The safe money says that housing demand, then, remains especially constrained for much of the foreseeable future; and that says nothing of a consumer that may no longer see real estate as a safe investment.

Challenges in housing supply have only festered

Beyond the challenges on the demand side, we face supply-side challenges as well. We have yet to fully address a massive pipeline of distressed properties still lurking over our collective heads. More than 14% of existing mortgages are now in trouble, according to the most recent statistics from the Mortgage Bankers Association, and the backlog of properties stuck in the default and foreclosure process is at levels our country has never seen before.

Despite this, existing single-family home inventories have remained roughly flat year-over-year, at 3 million units in March 2010 according to the National Association of Realtors. (Keep in mind, too, that inventory has remained flat despite the fact that the tax credit was a massive success in driving immediate purchase demand.)

If we were going to run a temporary stimulus program for housing that worked both in the short and long run, such a program should have been implemented during the period of the greatest housing distress—during a time when policy makers wanted to force housing markets to “take their medicine."

Unfortunately, that's not what we've done. Instead, we applied stimulus at the exact same time we were holding the very source of housing market distress at bay.

For the better part of the past three quarters, we've seen borrower defaults and foreclosures put into interminable holding patterns as Federal programs like HAMP, HARP, and others have been put into place, while states have sought to put their own foreclosure mediation programs in place. (I've written about this before—and about how the median time in foreclosure for most Americans is now well north of a year).

Juice up housing demand while artificially suppressing historic levels of distressed inventory, and you'll likely get a bounce; it's not rocket science. Frankly, however, I'd expected a bit more of an upswing than what we have seen—and that's what has me so concerned. If we couldn't get a real strong bounce in housing while stimulating demand, holding millions of distressed properties at bay, and keeping mortgage rates ridiculously low, what does that say about the true state of housing in this country?

Now, we are finally starting to see distressed properties move through the pipeline. According to RealtyTrac, REO volume hit the highest quarterly total in the history of the company's data during the first quarter of 2010, rising 35 percent from Q1 2009. But as distressed supply is increasing, demand for housing is softening at the exact same time.

The result is that instead of using economic stimulus strategically, to help bridge housing markets over to a period of relative strength, we may have dug ourselves a larger hole than the one we were in before. We’re still faced with figuring out what to do with millions upon millions of distressed properties—the same problem we had before — but now at a level far worse than when the home buyer tax credit program first began. And thanks to the success of the tax credit, which drove plenty of home purchase demand forward in time, we don't have a whole heck of a lot of housing demand available to us now.

We can hope that the economy is strong enough to pull housing out of the drink, that jobs rebound enough to drive demand for housing. But to steal a line from Paul Krugman: hope is not a plan.

Paul Jackson is the publisher at HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson