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Will the real Biden first-time buyer program please stand up

Two Democrat congressmen introduced the First-Time Homebuyer Act, which offers a $15,000 tax credit for certain first-time homebuyers and is touted as a way to combat the affordable housing crisis.

Last week, I reported on the Downpayment Toward Equity Act of 2021 (DTEA), crazily thinking (and calling it), Biden’s plan. I was wrong. The real plan, called the First-Time Homebuyer Act, is already a bill that would offer a tax credit for first-time homebuyers of either 10% of the purchase price, or $15,000.

It appears that the Biden-Harris administration has distanced itself from the DTEA in favor of this plan. A key difference is that the DTEA is for first-generation homebuyers, not just first-time homebuyers, so this new plan is much farther reaching. It also offers a tax credit, not a grant. And, it’s capped at $!5,000 rather than the $25,000 of the DTEA. Although there is reason to believe both might be considered down the road.

According to Congressman Jimmy Panetta (D-CA), who introduced the First-Time Homebuyer Act with Earl Blumenauer (D-OR), “This legislation is just one element of the big, bold housing agenda that we are promoting to combat the housing affordability crisis and address centuries of overtly racist and discriminatory housing policies that have left massive wealth, homeownership, and opportunity gaps between white communities and communities of color.”

Details about the new bill

Here’s what we know about the First-Time Homebuyer Act.

  • The bill was introduced on April 26 by Rep. Earl Blumenauer (D-OR) and Rep. Jimmy Panetta (D-CA).
  • Homebuyers must not have owned a home in the past three years before purchase.
  • The grant is only available on homes that are priced at or below $110% of the area’s median purchase price.
  • Buyers must have incomes at or below 160% of the median income for their area.
  • It must be the buyer’s principal residence.

Creating opportunities

This bill, according to its sponsors, is all about creating affordable housing and opportunity. “As housing prices and demand continue to rise to historic levels, we need to do more to create opportunities for those who’ve been locked out of homeownership by creating incentives for first-time homebuyers,” said Blumenauer.

Yes, I totally agree with this statement. But there also needs to be an incentive for builders to develop affordable housing, or some other program that boosts the number of homes on the market that this underserved community can buy. How can buyers use this incentive if there isn’t anything to buy?

“Affordability and supply are the issues,” said Doug Palin, Realtor Emeritus of RE/MAX Equity Group in Vancouver, Washington. “The first-time homeowner does not have a chance in our market with the multiple offers and accelerating prices. [Affordable housing] seems like a myth at this time. I don’t have the answer, but maybe more new affordable homes? Or, maybe fewer regulations tied to affordable homes? In our area, prices are going through the roof.”

We’ve said it before and we’ll say it again: Throwing first-time buyers into an overheated market is probably not the best tactic to take right now.

“The last thing to do in this market is stimulate demand on the buyer side. I’ve been in the real estate business for almost 50 years, and I’ve never seen real estate inflate as quickly as it is today. The market will react only one way to more buyers being introduced into [it], and that is to further inflate prices,” said Ron Russell, president of Russell Real Estate Services in Ohio.

Institutional buyers swamping the market

Not to mention there are large numbers of institutional buyers who are able to outbid and out-buy first-time homebuyers, thus crushing available inventory and reducing affordable housing options.

“The problem that needs to be addressed are the millions of homes being taken out of the ‘traditional’ market by massive institutional investors or the small, mom-and-pop investors, like myself, who own several different properties,” says Steven Barks, CEO of Worth Clark Realty in St. Louis. “Most of the time, these types of investors harvest their investment after five or six years. However, some are not doing so because rents have increased dramatically over the last decade. Why sell your portfolio if the returns are 30 to 40% higher than you originally predicted?”

Barks says that he’s done some research and big investors are selling, but they’re simply “swapping to another institutional investor. Investor A wants to sell a 60-property package, so they call investors B, C, D, and E to submit bids. These properties are now being perpetually kept out of the typical inventory.” He continues, “The worst part is that these investors are still buying today. They’ve raised their purchase limits and decreased their gross margins. We know the stats that one in five home sales, the new homeowner never moves in. That means 20% of home sales are investors in some fashion, and every day buyers cannot compete with all-cash, no-contingency offers.”

One solution? Temporarily get rid of or reduce the capital gains tax on real estate sales. “Where some creative thinking is needed is how to get investors to sell properties to primary residence buyers,” says Barks. “That’s the difficult part. I would be more likely to sell a few of my properties if I didn’t have such a big tax burden between capital gains and depreciation recapture. With rents continuing to climb every year, I have no incentive to sell.”

Another reason to hold on to investment properties? The proposed removal of the 1031 exchange option in certain cases. According to HousingWire.com, “Part of the American Families Plan is the elimination of 1031 exchanges in cases where the gains are more than $500,000. A 1031 exchange allows real estate investors to defer capital gains taxes by funneling the proceeds from a sold property into a new one. The elimination of this program for high-income investors could cause them to hold on to properties for longer that they ever have before — and may have the effect of decreasing supply and demand.”

Creative solutions

In my last article, Steve Murray mentioned subsidizing developers and builders to build affordable housing by underwriting some of their costs, then making sure underserved potential buyers get first crack a those homes. Leonard Kleiman, regional comptroller of Jackson Hole Sotheby’s International Realty in Jackson Hole, Wyoming, thinks it should go beyond that.

“I would suggest a different approach,” says Kleiman.”I believe that providing tax incentives for the entire supply chain would be more productive and ultimately reduce the cost of the final product, keep product production in the U.S. and reduce unemployment.”

Whatever the solution, the problem still remains. We need affordable housing and more inventory, and this bill doesn’t seem to offer either.

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