After President Biden signed executive orders addressing the pandemic itself and its financial fallout, the administration is reportedly looking at other ways to boost the economy and help Americans. One idea that was floated during the campaign may actually find bipartisan support — a $15,000 first-time homebuyer tax credit. Unfortunately, unlike so many other important proposals that are designed to help those most in need, a credit to help would-be homeowners seems unnecessary.
The Biden tax credit is modeled after similar ones created in the aftermath of the last recession — you know the one that started with a housing boom and bust. The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that was worth up to $7,500 and the American Recovery and Reinvestment Act of 2009 expanded it by increasing the credit amount to $8,000.
The 2008-10 credits were intended to help the beleaguered real estate market get back on its feet and to encourage would-be buyers to enter a decimated market. But today, the housing market is one of the bright spots in the economy. Existing home sales in 2020 came in at the highest level since 2006, according to the National Association of Realtors.
First-time buyers were responsible for just under a third of sales in 2020, which is basically unchanged from 2019, when the economy was doing just fine. While some may have a tough time coming up with the standard 20% down payment that would allow them to qualify for the cheapest mortgage interest rates, the bigger problem they face is that there simply are not enough homes for sale.
Low inventory was a problem before the pandemic and the biggest reason was that after the bust, big investors gobbled up distressed properties and then converted them to rentals, removing those properties from the for-sale market. Bill McBride of Calculated Risk notes that "Most of these rental conversions were at the lower end, and that limited the supply for first-time buyers." Adding to the dearth of housing stock was the fact that many baby boomers, who were previously expected to downsize, opted to spend money to improve their homes and stayed put.
The low inventory trend got worse amid COVID-19, as owners chose to remain where they were, just as the pandemic-induced exodus from cities led many apartment dwellers out to the suburbs, with their record-low mortgage commitments in hand. The result? There were 1.07 million homes for sale at the end of December, down 23% from December 2019, according to NAR. At the current sales pace, there was a 1.9-month supply of homes on the market at the end of December, a record low. (A "normal" level of inventory is six months, while in 2008, inventory reached nearly 12 months.)
With buyers flocking to a market with limited supply, prices have jumped. The median existing-home price for all housing types in December was $309,800, up 12.9% from the prior year, as prices increased in every region. December's national price increase marks 106 straight months of year-over-year gains.
Back to the Biden plan. Clearly, the real estate market does not need a boost, but do those wannabe homeowners need government assistance? Maybe, but who exactly are we trying to help? My fear is that those who are in a position to qualify for a mortgage are folks who have jobs and good credit scores. Sure, the $15,000 would allow some to nab their dream home, but the tax system already favors homeowners over renters by providing tax incentives. It would seem that we could find a better use for government money than this one.
Jill Schlesinger, CFP, is a CBS News business analyst. She welcomes comments and questions at email@example.com.