The Biden Tax Credit - A Terrible Idea

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Mortgage and Lending with Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, NMLS #138061 MMCD #1141

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.

Biden Home Buying Tax Credit

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.

Comments (41)

Dorte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear John,

This is what happens, when politicians do not consult subject area specialists. There are so many policies over the years that could have been avoided by simply talking to some Realtors or Lenders or Farmers or Scientists or Medical Administrators, etc. The same is true for many computer programs. They are written with a notion about how things work, but asking someone, who actually knows, would have vastly improved the outcome. We need to rebuild the civil service sector, so we have people who do the important work, while the talking heads can be in front of the cameras.

Mar 19, 2021 08:19 AM
John Meussner

This is such a huge issue in so many fields - even internally as a lender, we run into this issue all the time when IT sets something up for the sales team without insight from the people in sales!  It makes us end up doing a lot of setup work twice!

Mar 19, 2021 12:02 PM
Alan May
Jameson Sotheby's International Realty - Evanston, IL
A moving experience!

I have to thank you for making this a non-political post.  I was fully expecting to disagree with you, on the surface... because I'm one of the "us", or is it "them"? However, I find myself agreeing with more of this post, than not.

I like the concept of a tax-credit for first time buyers who may need help to achieve their part of the American Dream, but I agree, at a time when we have intense competition for the limited inventory out there, this seems like the wrong moment in time.

Mar 19, 2021 08:23 AM
John Meussner

I know our politics differ quite a bit (thanks facebook!), but there's always room for respect when the conversation is on data and sound policy.  And you're spot on - nothing wrong with helping stimulate the market, but there's a time and place - 2008 was it, today is not.

Mar 19, 2021 02:14 PM
Adam Feinberg
Elegran - Manhattan, NY
NYC Condo, Co-op, and Townhouse specialist

On the surface, I love the idea of the $15k incentive...but as you said, once you dig down on the details - it doesn't address the underlying problems. 

 

I had a long career working in capital markets prior to becoming a real estate agent- and in NYC those 2 careers have a lot more in common than real estate would anywhere else. Everything about real estate in NYC is different than the rest of the nation. The low down payment amounts you mentioned are virtually non-existant in Manhattan. Most sales are co-op's- and the majority of co-op's require a minimum of 20% down PLUS 2 years of post closing liquidity and a debt to income ratio of (maximum) 25-28% (depending on the building). The $15k here is little more than a closing cost level issue...but still doesn't change the bigger picture issues. 

 

All of this ignores the politics of the issue. NY'ers might be liberal, but finance and economics is in our blood.  

Mar 19, 2021 08:33 AM
John Meussner

You mention many reasons I have no interest in doing loans in NY!  Very interesting market there (and a good one, but complicated)

Mar 19, 2021 02:08 PM
Chris Ann Cleland
Long and Foster REALTORS®, Gainesville, VA - Bristow, VA
Associate Broker, Bristow, VA

Anytime the government opens up their wallet to "help" it's something we all pay for.  We don't have unlimited funds in DC.  Everything budgeted for is already at a deficit.  Why add more? 

Yeah...the housing tax credit is a bad idea.  This market needs less demand.

Mar 19, 2021 08:46 AM
John Meussner

Exactly, when we can't service existing demand, there's no need for more!

Mar 19, 2021 01:30 PM
CANDACE (Candy) STEVENS, EA
Number Cruncher LLC - Overton, NV
Helping Taxpayers Resolve IRS problems

My thoughts on this, "Oh no another thing I have to try to keep track of."  All these tax changes are driving me crazy!

Mar 19, 2021 09:20 AM
John Meussner

Wouldn't it be nice if they all just went away : )

Mar 19, 2021 01:29 PM
April Swenson
Coldwell Banker Ocean Shores Brokers - Ocean Shores, WA
CRS and Managing Broker - Ocean Shores Real Estate
This is a great post! I really like the facts, but also the statistical analysis. I agree with it fully. We too have an issue with supply and the increased costs of construction.
Mar 19, 2021 11:59 AM
John Meussner

Hopefully we'll catch a break with lumber costs coming down in the months to come - that would give builder confidence a boost, and some much needed new inventory

Mar 19, 2021 02:09 PM
Sheri Sperry - MCNE®
Coldwell Banker Realty - Sedona, AZ
(928) 274-7355 ~ YOUR Solutions REALTOR®

In simple terms, a $15,000 tax credit is meant to stimulate demand for real estate when that demand is low and the supply is overabundant.  As you stated, this is exactly the opposite condition and if enacted could create a bubble burst that could throw us into recession or worse.

An excellent retort to Chad's comment.  I was a first-time homebuyer back in 1972 and needed a co-signer.  Back then, women of child-bearing age couldn't count income toward a loan. 

Here is my answer to that.  Builders need to create opportunities for first-time buyers through modular starter homes and builder incentives.  Buy cheaper land on the outskirts of communities.  Get help from the local government for incentives to build these types of homes and communities.  Homeownership can be had if it is done the right way.

Mar 19, 2021 12:31 PM
John Meussner

Great feedback, Sheri, thank you - what an amazing anecdote about your experience - in today's world where everyone is up in arms on "equality", it truly is amazing to think how different the world was not very long ago!  Our company has a female CEO and she's shared similar stories about how much more difficult things were for women in the not so distant past.  

Mar 19, 2021 02:11 PM
Anna Banana Kruchten CRS, CRB, Phoenix Broker
HomeSmart Real Estate BR030809000 - Phoenix, AZ
602-380-4886

John great article.  You make it very simple to understand.  A 15K tax  credit for 1st time buyers is a bad idea in our current economy and situation.  The market is not the market of 2008, far from it. Our market is very hot and inventory is very low. Mulitple bids on just about every home, ending up way over list.  1st timers get beat out time after time as they're competing with cash investor buyers. 30T in debt now, when will they stop this crazy wild spending.

Mar 19, 2021 01:09 PM
John Meussner

I'm not sure, but the sooner it would be, the better off we'd all be.  No one realizes the implications of this type of spending, nor how good things would been if we brought debt levels and spending down.

Mar 19, 2021 02:12 PM
Anna Banana Kruchten CRS, CRB, Phoenix Broker

It doesn't appear to be ending anytime soon. I think quite a number of people understand the implications of this out of control spending. Balance the budget no longer means anything.

Mar 19, 2021 04:12 PM
Winston Rowe & Associates CRE Investing Financing
Winston Rowe & Associates - Saint Clair Shores, MI
No Upfront Fee Commercial Loans

Well writtern post. If you combine the $15K credit with a no income no job "stated income" mortgage just to get someone into home ownership. This is out of touch of recent history.

Mar 19, 2021 05:46 PM
Ritu Desai
Samson Properties - Ashburn, VA
Virginia Realtor-Fairfax/Loudoun/PW-703-625-4949

I 100% agree with your statements! Fed keeping historic rates enough? With adding more incentive where this money will come from? Between all the stimulus packages I am worried about inflation and we don't have an unlimited supply of money. They need to support and add ADUs, student debt issues, give incentives to independent contractors like Realtors and encourage small businesses. 

Mar 20, 2021 03:31 AM
John Meussner

I agree Ritu - those inflation fears are what is currently pushing interest rates up!

Mar 22, 2021 11:38 AM
Debbie Gartner
The Flooring Girl - White Plains, NY
The Flooring Girl & Blog Stylist -Dynamo Marketers

Some great points here. it may be targeting the wrong people/wrong problem.

In my area, Metro NYC, new construction is not the driver for the majority as most land is already taken.  It seems to impact the higher end of the market - where they can afford to tear down and rebuild.  They are not the ones that need help now.

Mar 20, 2021 04:22 AM
Sharon Kowitz
CRS-SRES-ABR-GRI-E-Pro-CREN Fonville Morisey Cary, NC - Cary, NC
Cary, NC Relocation Specialist ~ Buying or Selling

All make excellent points! 

Most all are also, correct in that there is no inventory for first time home buyers in the Raleigh, Durham and Chapel Hill areas of NC ~ We are seeing up to 50k over list price so 15k would not even dent the bank. 

Thanks for sharing. 

Mar 20, 2021 07:03 AM
John Meussner

That first time buyer inventory is what's needed most!

Mar 22, 2021 11:39 AM
Anne Corbin
Long and Foster - Lake Anna - Spotsylvania, VA
Serving Lake Anna & Central Virginia

Prices are already too high because of low inventory. I have buyers who are frustrated and quit looking because the houses go before they can even schedule a showing!

Mar 20, 2021 07:50 AM
John Meussner

It's a jungle out there!  Those buyers need to jump back in though, it's only going to get more expensive and in most markets buying makes so much more sense financially than renting.

Mar 22, 2021 11:40 AM
AndreaBFerreira CRS - SRS - CLHMS
Keyes Co. - Davie, FL
Miami Dade, Broward and Palm Beach County in FL

I was not aware if that unit now. Thank you for sharin. Be saf

Mar 20, 2021 12:13 PM
Lisa Friedman
Great American Dream Realty - Essex, VT
30 Years of Real Estate Experience!

If the government would just leave everyone alone and stop causing problems then it wouldn't make those problems worse by attempting to fix them.

Mar 20, 2021 07:35 PM
John Meussner

If the government followed your advice I'd enjoy living in the US a lot more : )

Mar 22, 2021 11:40 AM
Ralph Gorgoglione
Maui Life Homes / Metro Life Homes - Kihei, HI
Hawaii and California Real Estate (310) 497-9407

How can a legitimate tax incentive to help homebuyers ever be a bad idea for whom it's ended - which is the home buyer?  Especially when it's a credit that is OPTIONAL to take?

Mar 20, 2021 07:38 PM
John Meussner

I outlined that in the blog - if a $15K tax credit forces home prices up beyond $15K, the buyer loses.

Mar 22, 2021 11:41 AM
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

If only politicians (all of them) would think things through and consider the possible consequences. That seems not to be in their DNA.

 

Mar 20, 2021 08:54 PM
John Meussner

Or better yet in my opinion, let the experts in given fields drive the policy in those fields!

Mar 22, 2021 11:41 AM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning John - thanks for this.  It is a very thoughtful analysis of the situation.  I am on a committee at our regional chamber where we spend time explaining the legislators at all levels of government the unintended consequences of seemly good things.

Mar 21, 2021 05:45 AM
John Meussner

Thanks Grant!  It's the old saying, 'the road to hell is paved with good intentions'

Mar 22, 2021 11:42 AM
Debra Leisek
Bay Realty,Inc Homer Alaska - Homer, AK

As usual you are spot on right!  We have such low inventory I agree with your statment here entirely 

 So what would a $15k tax credit do?  Incentivize more demand, in a market without supply. 

 Wrong time to go this route even if the intent is good 

thank you John!

Mar 23, 2021 10:57 PM
John Meussner

Thanks Debra!

Mar 24, 2021 09:58 AM
Erik Hiss
Keller Williams Capital Partners Realty - Worthington, OH
You can trust me for all your real estate needs!

I couldn't agree more, John. This is non-partisan and completely a real estate issue. The market cannot bear anymore incentive for buyers to continuously UP their offers higher than they already are. This wouldn't stimulate anything other than putting more devalued cash into pockets of the sellers and further aggravating those who have been searching and making offers again and again in hopes of snagging a deal. The government should offer a tax credit to the sellers to move! 

Mar 24, 2021 05:47 AM
John Meussner

Now we're talking, solutions!  Instead of a tax credit, perhaps a temporary waiver or reduction on capital gains would help some sellers put up a 'for sale' sign.

Mar 24, 2021 10:01 AM