Is Biden’s downpayment plan pouring gasoline on a fire?

The last time the federal government stepped in to help homeownership, we ended up with a housing crash. Is the Downpayment Toward Equity Act of 2021 the right legislation for today’s market?

Last week, details of the proposed Downpayment Toward Equity Act of 2021 were released, which essentially offers up to $25,000 to first-time homebuyers at closing. Well, not just any first-time homebuyers, only those whose parents never owned a home. According to an article on, “The newest draft of a down-payment assistance bill would provide $25,000 to first-time homebuyers, but only those who are also first-generation homebuyers and economically disadvantaged. Plus Biden’s proposal is not actually a homebuyer tax credit, but it is money that would be available at closing.” While many aspects of the plan are good – it’s always a good thing to help first-time and racially disadvantaged potential homebuyers – there are other parts that either don’t make sense or limit the help in a way that is counterproductive. “Have they actually done their homework to find out how many people this could help?, asks Steve Murray, industry expert and RealTrends senior advisor.

Demand is not the problem right now

“There’s a forest fire burning, so let’s pour gasoline on it,” says Murray, who’s studied the real estate market for more than 30 years. “Demand is not the problem right now. Access to capital is not the problem right now. There are numerous low-downpayment programs from the U.S. Federal Housing Administration (FHA), and other entities offered to anyone who qualifies based on income,” he notes.

The real problem? Affordable housing. A new report by Freddie Mac found that supply will meet demand only if the U.S. adds 3.8 million new homes. The housing need now is 52% greater than it was in 2018, just three years earlier – and it’s even worse for entry-level homes. According to Sam Khater, Freddie Mac vice president and chief economist“The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes. That decline has resulted in the decrease in supply of entry-level single-family homes.”

“The federal government is missing the most important thing, which is, instead of pouring billions of dollars into a first-time homebuyer program, what they ought to be doing is finding a way to focus that money on affordable first-time houses,” says Murray.

How do we enforce contingencies?

Some other problematic areas of the proposed legislation – enforcing some of the contingencies. Right now, to qualify for up to $25,000 in downpayment assistance, neither of the borrowers’ parents may have owned a home. Borrowers will be eligible for the $20,000 in assistance if they “have an income at or below
120% of area median income (AMI) for either the area where the home being purchased, is located or the area where the home buyer’s place of residence is located. For home buyers purchasing homes in high-cost areas, the income limit is increased to 180% of AMI for the area in which the home being purchased.”

Another $5,000 will be offered to those who are socially challenged, meaning part of a group that has historically been racially or socially prejudiced. That will certainly limit the number of people who can access the plan.

There is also talk of homebuyers being required to return the downpayment assistance if they move out of the house before two years is up. Downpayment assistance would have to be paid back in full if they “stop occupying the house after a year.” The penalty will be reduced by 20% for each year they live in the house, with no penalty after five years. “We had similar programs like that in Denver years ago,” says Murray. “The problem was that they had no way to enforce and track what people were doing once they bought the home. They ended up with hundreds of homes where people sold them and had incredible gains, but no one could track it.”

Who will get the help?

Experts question whether this proposed legislation will actually help the people who need it most. “What would help is to take whatever money you’re talking about and subsidize developers and builders to build affordable housing by underwriting some of their costs. Then, make sure the people you want to serve with [the Downpayment Toward Equity Act of 2021] get first crack at those homes,” says Murray.

It’s very possible this legislation will change as it moves through the process. Regardless, it will likely face challenges through both the House and Senate.