The Biden Tax Credit - A Terrible Idea
Note: In the current political climate, it seems anything mentioning "Biden" or "Trump" becomes an "Us VS Them" conversation. This blog is intended to be a non-partisan opinion based on facts, market conditions, and the reality that political leaders put what sounds good to voters ahead of what is in fact sound policy. End rant, read on.
The President of the United States has proposed a tax credit for first time homebuyers up to $15,000. This credit would go to the homebuyer at the time of settlement, with the idea being (from the campaign website) that the tax credit would "help families buy their first homes and build wealth by creating a new refundable...tax credit". On the surface this sounds great. For many renters, this is likely an incentive that would give people a needed push to enter the realm of homeownership, a historically proven path to accruing wealth for qualified buyers.
At face value, the idea sounds great (if you're one of the people who would receive the $15k), and a similar credit did help stimulate the housing market in 2008 when G.W Bush signed a housing bill in light of the great recession, but when you dive into the actual market of today, the metrics, and the end results of such a plan, it ends up being lackluster at best, and an absolutely reckless waste of taxpayer money at worst.
Let's start with market conditions today, versus conditions in 2008, the last time a round of home buying tax credits was implemented.
You can see here, in 2008, 'annual completions', or the number of homes being built, far exceeded 'household growth', or in other words, the demand for housing. For various reasons (another blog for another day) the demand for housing in the early-mid 2000s took a dip, due largely to the age demographic of first time home buyers being drastically lower than previous years, with builders not realizing a lapse in demand was on the way (or, with home values rising so much so fast, perhaps not caring). If you look at the market of today, we're in an alternate universe, with market metrics completely opposite the 2008 situation - today, we have an immense demand for housing, and not nearly the supply to keep up. So what would a $15k tax credit do? Incentivize more demand, in a market without supply. In other words, by the most basic laws of economics, it would increase purchase prices, minimizing the impact on financial benefit to families, and instead sink families further into debt as the typical first time buyer uses a 0-5% down payment loan product, thus financing and paying interest in the vast majority of a home purchase price.
According to the National Association of Realtors (NAR), housing supply is down roughly 25% year over year, due in large part to the COVID crisis and the stall it caused on construction, building permits, and supply chain issues. Supply is clearly the issue, and demand is already beyond what the market can bear without steep price increases, which would offset any value provided by a tax credit. The median home price in the US sits at roughly $300,000 with many markets experiencing annual appreciation around 10% (which can vary a lot on a local level). In this situation, home prices would rise $30k/year, so policy that would push home values higher by stimulating more demand would offset any benefit of a tax credit by strapping future home buyers with more debt.
Further, another complication from the COVID-19 pandemic has been supply chain issues and artificial market bubbles caused by supply and demand issues stemming from government shutdowns. One of these complications has resulted in lumber costs increasing by roughly 200%. The result has been an average increase on the cost of a new home of $24,000, according to the National Association of Home Builders (NAHB). With that in mind, a $15,000 tax credit would simply subsidize a temporarily-increased price tag that could easily be alleviated with some time and continuing to push for the economy to reopen and remain open. The reason this should be a temporary issue is that when COVID hit, many lumber mills and related industries shut down as the country sorted out the impact of the virus, implemented new safety measures, and figured out how to get back to work - this created a total collapse of supply, while demand increased - the industry is playing catch up, and in the coming months, so long as governments keep their economies open and allow people to work, these lumber prices should come down as the supply chain gets back some semblance of normalcy. In the interim, a $15,000 tax credit on new builds would do nothing but pay for the temporarily inflated cost of wood, and with NAHB's estimates, the credit wouldn't even cover that entire cost.
A $15,000 tax credit for first time buyers sounds great on paper, and is sure to appeal to voters as it sounds like "help", but understanding the market environment, it's clear to see this is a terrible idea, likely to result in more demand on a product (housing) that cannot easily increase supply quickly. Prices will continue to climb, more buyers will lead to more competition in already over-saturated markets, and the end result would be more debt on the backs of home owner the idea is intended to help. It's an idea that was great under the circumstances in 2008, and would be disastrous under the market of today.
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