Are the Democrats’ Proposals to Reinvigorate the US Housing Market Worth It?

During last week’s state of the union speech, President Biden announced several plans which he and the administration believe would come to the aid of a struggling U.S. housing market. Although no one can deny that housing costs have become far too high, and there is an egregious shortage of affordable housing, are any of these proposed actions really likely to succeed?

Let’s take a look at some of his headline proposals and see how they stack up.

Lowering the cost of homeownership

·?????? Mortgage Relief Credit

The mortgage relief credit “would provide middle-class first-time homebuyers with an annual tax credit of $5,000 a year for two years. This is the equivalent of reducing the mortgage rate by more than 1.5 percentage points for two years on the median home and will help more than 3.5 million middle-class families purchase their first home over the next two years.”

Although I applaud any program that attempts to assist first-time buyers get their feet on the first rung of the housing ladder, my primary concern here is that it would likely exacerbate an already supply starved market.

Fundamentally, the issue we are faced with today is that the US market is suffering from a lack of supply, not a lack of demand.

Any plan that looks to increase demand will do nothing more than push prices even higher by bringing more would be buyers to the table who will have – albeit temporarily – greater purchasing power. I fail to see how this offers any palpable assistance to the market.

·?????? Down Payment Assistance for First-Generation Homeowners

The President’s plan also calls for “a new credit to unlock inventory of affordable starter homes, while helping middle-class families move up the housing ladder and empty nesters right size. Many homeowners have lower rates on their mortgages than current rates. This “lock-in” effect makes homeowners more reluctant to sell and give up that low rate, even in circumstances where their current homes no longer fit their household needs. The President is calling on Congress to provide a one-year tax credit of up to $10,000 to middle-class families who sell their starter home, defined as homes below the area median home price in the county, to another owner-occupant. This proposal is estimated to help nearly 3 million families.”

Again, I am pleased the administration understands that the artificially low mortgage rates that were seen during the pandemic placed “golden handcuffs” on millions of homeowners who either purchased a new home or refinanced their existing mortgage during that period.

According to the FHFA National Mortgage Database, almost 79% of single-family homeowners with a mortgage in the US have a rate that is at 5% or lower, and a remarkable 22.6% have rates at 3% or lower.

My concern is whether a $10,000 tax credit will be significant enough of an incentive for these owners who are locked into ultra low mortgage rates – and this concern is amplified in the country’s more expensive markets which – paradoxically – are frequently the ones where first-time buyers want to live given the higher incomes that these areas offer.

As far as tempting retirees to downsize, I will refer you to the article I wrote a while ago which, amongst other things, suggests that most retirees plan to age in place and not move regardless of home size.

Lowering housing costs by adding to/maintaining supply and narrowing the supply gap

·?????? Tax Credits to Build More Housing

The President “is calling for an expansion of the Low-Income Housing Tax Credit to build or preserve 1.2 million more affordable rental units.” He is also “calling for a new Neighborhood Homes Tax Credit, the first tax provision to build or renovate affordable homes for homeownership…”?

The LIHTC is not a new program – in fact, it is a program that has been around since 1986 (although it has been altered numerous times over the years).

My concern here is that it is expensive, and the number of units delivered have been underwhelming – at last count the annual average number of units created was around 87,000 and cost the government an average of $8 billion in foregone revenue.[1]

But my bigger concern is that the cost to develop these units is 20% more than it would cost a market rate developer [2] and is notoriously corrupt .

I find the same issues appearing when considering proposed Neighborhood Tax Credits.

·?????? Innovation Fund for Housing Expansion

“This fund would support the construction of affordable multifamily rental units; incentivize local actions to remove unnecessary barriers to housing development; pilot innovative models to increase the production of affordable and workforce rental housing; and spur the construction of new starter homes for middle-class families.”

Although I am delighted to see the administration look at ways to spur construction of new units, the hurdles remain high. In as much as it is remarkably important that the plethora of obstacles confronting builders today be lowered – or, indeed, removed – I can’t help but wonder how much impact these proposals will have when it comes to the provision of much needed “workforce housing.” I say this as this proposal does not address the land shortages which push lot prices higher, nor does it address ever escalating labor and material costs.

Conclusions

These are just a few of the more prominent of the housing-related proposals put forward by the President for consideration by Congress. He is also suggesting increasing banks’ contribution toward building affordable housing as well as several proposals that expand tenants’ rights and expanding housing vouchers.

The bottom line as I see it is that the headline proposals are unlikely to achieve their stated goals – even if all of them are approved by Congress – which is certainly not a given.

I would have liked to see greater consideration made to expand Tax Increment Financing. This program – put in place back in 1952 - allows local governments to finance development projects using the revenue generated by the development itself and has become [one of] the most widely used local government program[s] for financial economic development in the US.

Albeit a far more complex and contentious option, the administration should also consider revising immigration policies in order to attract skilled workers and investors who can make immediate – and tangible – contributions to the housing supply issue.

Expansion of Housing Trust Funds could also assist in jump-starting new construction and, as a program that is already in place, should be relatively straightforward.

Of course, there is no “silver bullet” when it comes to solving the nation’s massive housing shortage – I wish it were that easy. As I stated earlier, I was pleased that the Administration appears to be taking this problem seriously, but the question now becomes whether words can be turned into actions.

[1] Department of Housing and Urban Development, Office of Policy Development and Research, “Low-Income Housing Tax Credits,” June 5, 2020

[2] Michael Eriksen, “The Market Price of Low-Income Housing Tax Credits,”?Journal of Urban Economics?66:2 (September 2009)