The silver lining of the COVID-19 pandemic is that it provides a rare opportunity for sweeping economic reform in the new administration, and the Biden campaign ran on a promise to make quality affordable housing accessible to Americans in all ZIP codes. As part of a larger investment in American housing, Biden has proposed a first-time home buyer (FTHB) tax credit.
An FTHB tax credit marks a definite departure from current homeownership subsidies, of which the mortgage interest deduction (MID) is most important. The MID allows homeowners to reduce their taxable income by the amount of interest they paid on their mortgage. It therefore incentivizes an individual to hold mortgage debt and encourages the purchase of a larger home. The FTHB tax credit more directly subsidizes the purchase of a new home.
Proponents of the new tax credit argue that it would better help lower-income Americans, for whom home ownership offers a path to the middle class. By lowering the initial down payment, the FTHB tax credit reduces the primary barrier to homeownership for those Americans who need it most. Opponents of the credit say that it will further drive housing demand while not addressing the lack of supply, which many consider to be the root of America’s current housing problems. Regardless of which side prevails, the introduction of this tax credit is a significant change to the way the federal government subsidizes home ownership in the United States.
Though policy information is limited, Biden’s official campaign website notes that his “First Down Payment Tax Credit” is capped at $15,000 for potential buyers. The credit is permanent and advanceable, meaning that homeowners can claim funds upon purchase without waiting for their annual tax return. Additionally, the credit will build off the framework of the first-time home buyer tax credit included in the American Recovery and Reinvestment Act of 2009 (ARRA), which was introduced to combat the financial crisis. ARRA instituted a tax credit of 10% of a home’s purchase price (up to $8,000) for first-time home buyers with an adjusted gross income below $75,000 ($150,000 for joint filers).
It is probable that the forthcoming Biden proposal will be an augmented version of the credit in ARRA. Biden’s version will likely raise the maximum credit to $15,000 and adjust the income limit for eligibility upward to reflect inflation. Otherwise, the only fundamental differences between the two policies are the permanence and advanceable quality of the new FTHB tax credit. Because this credit is advanceable, it functions as a true markdown in the purchase price of the house.
In our next post, we’ll dig into regional housing price data and perform an analysis to find the average home price reduction due to the anticipated FTHB tax credit in each county. Stay tuned!