First-time buyers represented 32 percent of all home purchasers in October, according to the National Association of Realtors. But they are not only facing the challenge of accumulating a sizable down payment but also finding it difficult to keep up with rising home prices — up 15.5 percent in October 2020 to $313,000, compared with $271,100 in October 2019, according to NAR.
Biden’s “First Down Payment Tax Credit,” if implemented, would create a permanent, refundable tax credit for first-time buyers. First-time buyers are defined by the federal government as people who have not owned a residence within the previous three years.
We asked David Howell, a real estate industry expert and executive vice president and chief information officer of McEnearney Associates in Washington, to discuss the implications of the possible first-time home buyer tax credit.
Q: Biden’s proposed tax credit of $15,000 for first-time home buyers includes a provision making it permanent rather than short-term and “advanceable” — meaning that they would receive the tax credit right away when they buy a home rather than waiting to file a tax return. He sees it as a form of down-payment assistance. How does the amount and the “advanceable” element compare to earlier first-time buyer tax credits?
A: I think it’s a matter of intention. Earlier first-time buyer tax credits were intended to stimulate a moribund housing market. And it worked — briefly — because it had an expiration date. This time, the intention is to help those who have had a hard time getting their foot in the homeownership door.
Q: What would be the impact on the housing market nationally? And would that be the same impact on the local housing market?
A: The tax credit will likely provide further demand stimulus to an already hot real estate market locally. The cost of entry for first-time buyers has always been a challenge and the tax credit will help. But at least in our local market, we don’t have a “demand” problem, we have a supply problem. For most property types, there is a critical shortage of inventory, so many of those newly empowered first-time buyers are likely going to be paying higher prices.
Q: Some industry experts (NAR and the National Association of Home Builders) are a little concerned that the tax credit could cause demand to rise higher, but without additional supply this could send prices higher. Is that a concern for you or does the benefit of the tax credit outweigh the risk of increasing prices? Do you have other concerns about the impact of a first-time buyer tax credit?
A: We anticipate that this will push prices higher. Pretty basic economics: If the demand side increases without a concurrent increase in supply, one would expect price to rise. So, while the tax credit will open the doors to homeownership to some who could not otherwise be able to purchase, it may not open it very wide.
Q: Do you anticipate that the proposed $15,000 first-time home buyer tax credit could be passed by Congress?
A: I think that may hinge on the outcome of the Senate runoff elections in Georgia. I have seen estimates that the tax credit could cost $25 billion annually. Pre-covid, I don’t think something like would have had a chance of passage. But good or bad, $25 billion doesn’t look like such a big sum given the amount of covid relief spending we have seen.
Q: What else do you think Congress and/or the new administration could do to help the housing market?
A: Something has to be done to address the really challenging landscape for developers and builders who face very high regulatory costs. But many of those hurdles exist on the local and state levels, so it’s much harder for the federal government to address. This will require community support at that level and there are so many competing interests for and against developing more housing units that it isn’t going to be solved, much less addressed, in the short term.
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