Last spring, President Joe Biden proposed a $15,000 first-time homebuyer tax credit in 2021 that would be paid up front, rather than refunded at the time of tax collection, as other credits are. This was intended to help buyers meet the rising cost of the down payment. The bill is still making its way through Congress, but the industry is beginning to doubt how effective this credit will be.
With inventories already historically low, flooding the market with another group of buyers could be another problem. This could put prices out of reach for those who need the tax credit most. The better solution, according to NAR Chief Economist Lawrence Yun, is to maintain the 1031 exchange. This policy provides builders with a tax break to reinvest their profits in the housing market, incentivizing further development.
Our point of view
Getting a subsidy for a down payment on a property from the government is better than getting no subsidy at all. Will this significantly change the real estate market? We do not think so, based on over 45 years of experience in the real estate market. Will the government subsidy bring any buying momentum to the 2022 real estate market? If the law is actually passed, there is still a great incentive to receive the subsidy of $15,000, as it will increase the equity ratio for the real estate loan and thus make it easier for many people to be able to purchase a property.
The housing industry has been paying close attention to President Joe Biden's proposed $15,000 tax credit for first-time homebuyers. But how many people would actually benefit?
According to a report by Zillow, about 9.3 million renter households in the U.S. (27.4%) would spend less than one-third of their income on the monthly payment for the average home sold in their city in 2020 if they received the full tax credit. Of course, that's only true if the stars align: Think of a 3.5% down payment on a 30-year mortgage with a 3% interest rate.
Given these factors, in 40 of the 50 largest U.S. metropolitan areas, the tax credit would cover a borrower's entire down payment on a home. In metropolitan areas considered more affordable, the tax credit would help a large percentage of renter households: In Pittsburgh, 40.5% could afford a median mortgage; in Cincinnati, it would be 39.7%; in Cleveland, 39.0%; and in St. Louis, 38.5%. In areas like California, however, the percentage of renters who could benefit would be lower - running into the thousands rather than the millions.
Under former President Barack Obama, the federal government offered first-time homebuyers a $7,500 tax credit in 2008 and $8,000 in 2009 and 2010 under the Housing and Economic Recovery Act. Those who received the tax credit in 2008 had to repay it over time, while those who received it later had the tax credit forgiven.
The Biden administration has provided few details about the first-time homebuyer tax credit, but one key difference from previous tax credits is that the funds would be available to borrowers upfront at the time of closing. With previous tax credits, borrowers paid the money out of pocket to buy the home and were reimbursed at the time of taxation.
So far, the Administration has focused on the COVID-19 pandemic, and with the U.S. housing market at its hottest point in a generation and prices already at an all-time high, it is unlikely that the White House under Biden will prioritize this issue in the near future.
One consequence of instituting a $15,000 down payment assistance program is the demand it would create in a market already struggling with supply. The Census Bureau found that only 307,000 new homes were on the market in January, which equates to about four months of supply at the current sales rate. The median sales price borrowers paid that month was about $346,000, while the actual sales price averaged more like $409,000 - putting prices out of reach for those who would receive down payment assistance.
If the tax credit does pass, it would be a critical benefit for many renters, especially those struggling to make a down payment in expensive metropolitan areas.
According to Moody's Analytics, renter households are estimated to save only 2.4% of their income per year. At that rate, it would take a typical renter about 14 years to save $15,000. A $15,000 down payment could help millions of renters achieve homeownership within a few years, especially black and Latino renter households, which make up a disproportionately small share of potential buyers.
"Policies that target systemic inequities in our financial system-including reform of the credit reporting system-could help disadvantaged households get a foot in the door and close the homeownership gap across nationalities," said Alexandra Lee, economic analyst at Zillow.
Lawrence Yun, chief economist for the National Association of Realtors, said maintaining the 1031 Exchange to encourage land sales for builders is key to the future of the housing market. An additional $15,000, Yun said, would not help with the already low supply of homes.
"Only if supply is increased can the homebuyer tax credit effectively promote homeownership and grow the middle class," Yun said. "Without supply, home prices skyrocket without leading to a significant increase in homeownership.
Phil Schneider
