What Is Biden’s Proposed First Time Homebuyer Tax Credit?
As a candidate, Mr. Biden proposed an “up to $15,000” tax credit for first-time homebuyers. Unlike previous tax credits offered under the Bush and Obama administrations, Biden’s plan wouldn’t require waiting until tax filing time to get your credit. His plan would give the credit at a closing.
Why Is This Important?
For many, the biggest hurdle to homeownership is coming up with the money needed for the down payment. According to the National Association of Realtors, the median price of a single-family home in January of 2021 was $308,300. While there are loan programs that require as little as 3.5% down payment, saving the $10,790 down payment plus another 3% for closing costs ($9,249) would require a first-time homebuyer to have about $20,000 on hand to close on the median house, not to mention the cash cushion that a lender might require when estimating the homebuyer’s ability to pay. And that’s if you qualify for one of the low-down payment programs. If not, the down payment will be more.
Moody’s estimates that over the last 20 years renters have only been able to save 2.4% of their income, approximately $440 per year in today’s dollars. At that rate it would take 45 years to save the down payment and closing costs.
With the previous tax credit programs, buyers still had to come up with this upfront money and could recoup it when they filed their tax returns. Under these programs, if you couldn’t save enough for the down payment and closing costs, then the tax credit was a moot point. With Biden’s plan, up to $15,000 could be credited right at the closing table, which would help many families get over the down payment hurdle.
When Will This Proposed Homebuyer Tax Credit Be Implemented?
Nothing has been heard about this program since the campaign trail. With the housing market red hot and a shortage of housing inventory, this proposal probably won’t get a lot of attention from the administration, at least for now. With demand outpacing supply, housing prices have increased 14.1% between January 2020 and January 2021. This appreciation level far outpaces the 3.4% increase in real average hourly earnings, thus making housing less affordable. It isn’t likely that the Biden administration would want to initiate a program to further increase housing demand and risk decreasing housing affordability even further.
Creating an Environment For Adoption
The supply/demand imbalance would have to normalize before a program designed to increase demand could be initiated. Interest rates have started to rise. This makes borrowing more expensive which might lessen the demand for housing.
There are steps the Biden administration can take to increase housing supply. Standardizing and liberalizing the zoning laws, which are often restrictive and drive up the cost of housing development, would be a good first step.
Expanding the workforce so that increased competition for jobs drives down labor costs for builders would make homes more affordable and increase capacity. According to the National Association of Home Builders (NAHB), the price of lumber has increased by more than 170% since mid-April, causing the average price of a single-family home to increase by $16,000. Additionally, many builders have reported shortages of things like lumber, tile, hardwoods, lighting and appliances. Going forward, the NAHB anticipates such supply chain constraints will slow single family construction. The administration should review tariffs that drive up materials costs and limit availability.
Taking steps to increase the housing supply so that it can meet demand would put President Biden in position to enact his first-time homeowner tax credit and again increase demand. A program like this could help those who might not otherwise be able to afford a home and thus drive overall home ownership to higher levels. It’s a good idea, but getting spending programs through congress is sometimes a matter of timing as much as anything else. The $15,000 homebuyer tax credit will have to wait for the right time.
Contact EMM Loans for a Mortgage Loan
To learn more about other programs for first-time buyers, contact the experts at EMM Loans.