Biden has a plan to make homes more affordable for first-time buyers. Would it work?

What’s happening

Housing in the United States has never been less affordable. High interest rates, surging prices and a chronic shortage of available homes have combined to make the idea of owning a house increasingly out of reach for many Americans.

During his State of the Union address last week, President Biden unveiled two new proposals aimed at helping ease the housing affordability crunch. One plan would provide a tax credit worth $10,000 for first-time home buyers. The other would create up to $10,000 in incentives for homeowners to sell their “starter homes.” Both programs would be temporary and would need to be approved by Congress before they could go into effect.

“I know the cost of housing is so important to you,” he said. “If inflation keeps coming down, mortgage rates will come down as well. But I’m not waiting.”

At the most basic level, housing costs in the U.S. are so high because there simply aren’t enough homes to meet our housing demands. By one frequently cited estimate, the country would need nearly 4 million more housing units to overcome its housing shortage.

That problem has existed for decades, and the president has proposed a series of programs designed to close that gap. These new tax breaks, though, are intended to help solve unique short-term problems that have made housing so unaffordable today.

When the Federal Reserve slashed interest rates in response to the COVID-19 pandemic, demand for housing soared, driving prices to historically high levels. Now that interest rates have been cranked up to tame inflation, anyone looking to buy today now has to deal with increased borrowing costs on top of those elevated prices.

Why there’s debate

Reactions to Biden’s tax cut proposals were mixed. While no one is under the illusion they would solve the housing shortage, supporters say these narrow programs could be just the right recipe for making housing more accessible in the short-term for those who have been effectively priced out of the housing market.

“What they will do is open the door to homeownership to people who have been locked out of the American Dream for generations,” David M. Dworkin, CEO of the National Housing Conference, wrote in a statement.

Backers of the plans say two tax breaks could work in tandem to counterbalance the burden of high interest rates that have stifled movement in the housing market. In their view, an extra $10,000 could be the difference that allows people to own property for the first time. At the same time, giving current owners — many of whom are wary of giving up the low mortgage rates they secured during the pandemic — incentive to move on from their starter homes could increase the supply of affordable homes for those first-time buyers to purchase.

Some skeptics say that the president has the right idea with these plans, but the tax breaks just aren’t big enough to really move the needle. The biggest critics, though, say that the incentives will actually make housing less affordable for everyone. They argue that pumping extra money into the housing market will drive up prices even more while doing nothing to address the supply shortage at the root cause of the affordability crisis.

What’s next

Biden urged Congress to pass his tax break proposals as soon as possible, but the prospects of that happening while Republicans control the House of Representatives may be slim. The president has also expressed optimism that the Federal Reserve will lower interest rates in the near future, though that decision is entirely out of his control.

Perspectives

The difference would be small but still worthwhile

“America’s housing deep-freeze won’t last forever, but it’s good that the Biden administration is seeking solutions to help homebuyers in the meantime.” — Jonathan Levin, Bloomberg

Anything that allows new people to access homeownership is worth pursuing

“I'm very bullish on this first-time homebuyers credit because this will help partially offset the higher interest rates that we're facing. The more home ownership, the better. It ends up being a great investment for families.” — Bruce Sacerdote, an economics professor at Dartmouth University, to ABC News

These ideas won’t ever become reality, but it’s good that the president is making housing a key issue

“Of course, this is all a bit of a pipe dream. Congress, in its current state, won't be taking up big housing legislation. Still, ideas like these are important when it comes to setting an agenda.” — Emily Peck, Axios

All Biden’s plan would do is make housing even less affordable

“The president's proposals to subsidize home buying will, all else equal, increase demand while leaving supply constraints in place. That will only raise prices further. People who claim new federal subsidies will be no better off. Anyone who misses out on the subsidies will be worse off.” — Christian Britschgi, Reason

The battle against inflation will be even harder to win if these tax breaks go into effect

“To understand why this is such an aggressively moronic proposal, you have to understand that this — reducing the effective mortgage rate — is literally the opposite of what the Federal Reserve has done and wants to continue to do to reduce the worst inflationary crisis in 40 years.” — Tiana Lowe Doescher, Washington Examiner

The tax breaks are a good idea, but are too small to make any real difference

“The tax credit isn't very large relative to how much low mortgage rates are worth to borrowers. … The average borrower would need $50K to compensate them for giving up the rate that they've locked in. … The maximum tax credit of $10K is small relative to this amount, so it might not be enough to incentivize even one seller to sell, let alone two.” — Julia Fonseca, finance professor at the University of Illinois at Urbana-Champaign

Biden’s other plans to spur home production are what really matter

"The thing about starter homes and tax credits, I think in 10 years the economy won't be any different whether or not we do those initiatives. But the economy could be substantially different if we actually end up building 2 million more homes in the next 10 years.” — Daryl Fairweather, chief economist at Redfin, to Business Insider

Yahoo News; photo: Niall Carson-Pool/Getty Images