Down Payment Assistance From the New Administration

The first few months of a new presidential administration, no matter who the winner is, tend to be times of guarded optimism. This year, first-time homebuyers are looking closely at President Joe Biden’s plan to put homeownership within their reach.

President Biden campaigned on his $640 billion plan to ensure “every American has access to housing that is affordable, stable, safe and healthy.” One plank in his housing proposal includes help for first-time homeowners, the First Down Payment Homebuyer Tax Credit up to $15,o00. 

Potential homebuyers are facing a tough seller’s market at the moment. Luxury broker Craig Studnicky told Forbes, “A decline in residential real estate prices in most areas of the country would be a shock right now, especially given the fact that we are enjoying the lowest mortgage interest rates in U.S. history.”

The Biden plan could boost new homebuyers’ chances, with the First Down Payment Homebuyer Tax Credit its core component.

What Happened to the Last Homebuyer Tax Credit?

This isn’t the first time a sitting President has attempted to boost the housing market with a tax credit. President George W. Bush signed the Housing and Economic Recovery Act (HERA) in the summer of 2008. The act contained a $7,500 tax credit for new homebuyers and President Obama amended the credit to $8,000.  

This previous tax credit was created to spur the housing market out of the worst U.S. recession since the Great Depression. This was largely the fault of the subprime mortgage crisis that gutted the global economy. New home purchases slowed to a crawl, causing prices to drop.

Under HERA, homeowners who bought homes in 2008 were required to repay the credit over 15 years. This requirement was largely waived for homes bought in 2009 and 2010. The benefits of HERA ended, quite simply, because the act expired. The terms of the original legislation only covered transactions from 2008 to 2010.

Near the end of the 2010s, the real estate market had the opposite of the problem it had in 2008. The inventory of homes for sale plunged and home prices went back up, pricing out potential new home buyers. That made then-candidate Biden look into restoring the tax credit incentive for first-time buyers.

Details of the Biden Plan

The First Down Payment Tax Credit is just one component of President Biden’s housing plan, but it’s arguably the part getting the most attention.

The plan is to give first-time homebuyers $15,000, as mentioned, to help make initial down payments, which is no small change. According to American Family Insurance, a house costing the US average of $250,000 usually commands a down payment of $12,500. That’s for a conventional 30-year fixed loan.

One key aspect of the plan is that buyers receive the funds when they close on the house. With most tax credits, buyers must file their tax returns the following year to get the money. Under the Biden plan, first-time homeowners won’t have to wait to get the cash and unlike the 2008 act, Biden’s plan makes the $15,000 credit permanent. In theory, it will never expire.

Who the Biden Plan May Help

More than one media source has called the Biden plan a “potential game-changer” because it can improve the prospects of those aching to convert from renting to owning their homes. It can especially benefit those living in the Southern and Midwest US where property is less expensive.

The President’s plan may also expand the reach of the buyer’s market and could help millennials who have given up on the notion of homeownership. It would increase homeownership for lower-income families and be beneficial for Blacks and Hispanics, who respectively have only one-eighth and one-fifth the average wealth of Whites.

Possible Side Effects of the Biden Plan

Every piece of federal financial legislation is inevitably laden with potential consequences and President Biden’s plan is no exception. Part of the problem is based on the financial reality of supply and demand. 

Increase already increased pricing

Implementing the plan would increase home buying and decrease an already-thin inventory of homes, which would likely result in home prices going up even more than they already are. 

The good news is another part of the Biden plan might address this problem. The proposed Affordable Housing Fund offers incentives for building new homes. It’s geared towards housing authorities in areas with a serious shortage of affordable homes.

Increased taxes

There’s also the chance that higher-income families might see their tax bills go up. Homes over certain income thresholds may experience hikes in their income, capital gains, estate, and gift taxes. While this generally won’t affect the majority of first-time homebuyers, it could make for some very verbal resistance from those in upper tax brackets.

Competition

When the pool of potential homebuyers expands, so does competition. This is especially the case when inventory is low, which it is at the moment. First-time homebuyers may get frustrated after being outbid by other parties.

When Would the Down Payment Tax Credit Go Into Effect?

President Biden’s housing plan is technically in limbo, as it’s unclear when Congress will take it under consideration. Other matters, especially COVID-related stimulus packages, still take precedence in the short term.

The Down Payment Tax Credit, along with the rest of the Biden housing plan, was one of the President’s proposed actions for his first 100 days in office. With the focus on health and economic fallout from COVID, will this plan come to fruition? We’ll just have to wait and see.

Those who have been waiting to buy their first home have cause to be excited about the Down Payment Tax Credit. It could create some great momentum in the real estate market that can spur growth in the broader U.S. economy.

One should still be practical and pragmatic in planning to purchase a house. The prospect of federal assistance shouldn’t encourage you to look for something beyond your means. Keep your sights set on what you can reasonably afford and plan your first home-buying strategy as if the tax credit won’t get passed. When it does, it will be a very welcome bonus.

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