Should We Help Homebuyers?

After President Biden signed executive orders addressing the pandemic itself and its financial fallout, it hopes to turn to other ways to boost the economy and help Americans. One idea floated during the campaign that may actually find bipartisan support is a $15,000 first-time homebuyer tax credit. Unfortunately, unlike so many other important proposals which are designed to help those most in need, a credit to help would-be homeowners, seems unnecessary.

The Biden tax credit is modeled after a similar one created in the aftermath of the last recession, you know the one that started with a housing boom and bust. The 2008-2010 credit was intended to help the beleaguered real estate market get back on its feet. 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 would-be buyers have a tough time coming up with the standard 20 percent 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 the pandemic, as some sellers were spooked and wanted to remain where they were, just as a pandemic-induced exodus from cities led many apartment dwellers into 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 percent 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 6 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 percent 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 wanna-be 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 to own. It would seem that we could find a better use for government money than to perpetuate the American Dream of homeownership.

As I wrote in my book, “THE DUMB THINGS SMART PEOPLE DO WITH THEIR MONEY: Thirteen Ways to Right Your Financial Wrongs” in the chapter “Dumb Thing #5: You Buy When You Should Rent,” buying a home may not be in every person’s best interest. Before you write in about the fear of missing out on owning a home, remember that “you’re not ‘throwing money out the window’ by renting. Rather, you’re buying flexibility. Every rent check you write purchases you the freedom to grasp opportunities as they arise, or the ability to adjust to unforeseen setbacks that smack you in the face.”