Millions of homebuyers could soon qualify for a $10,000 tax break under the sweeping housing reforms proposed by President Biden during his State of the Union address.
The move is intended to improve housing affordability after mortgage rates effectively doubled over the past two years, while property prices remain artificially high.
According to the White House, Biden’s plan — which will require congressional action before taking effect — will help 6.5 million Americans. The credit would be spread over two years.
In addition, the President reaffirmed his commitment to other housing initiatives, such as reducing closing costs, offering down payment assistance and encouraging the construction of new homes.
Here, DailyMail.com explains what the announcement did (and didn’t) say…
Central to the housing initiatives were two tax credits. The first would help limit the current costs of a mortgage, the other would aim to increase the housing supply
Biden arrives in the House Chamber of the U.S. Capitol on Thursday for his third State of the Union address, announcing initiatives to address the housing affordability crisis
Support for starters
So-called “middle class” first-time homebuyers are eligible for a tax break of $5,000 per year, spread over two years.
The White House claims the payments – which amount to $416 per month – effectively reduce a buyer’s mortgage by 1.5 percentage points for two years on the average home.
The statement claims the assistance will be offered to “middle class first-time homebuyers,” but does not specify what requirements must be met or how “middle class” is defined.
Officials estimate that 3 million buyers will take advantage of the credit.
DailyMail.com asked the White House for clarification on what a middle-class buyer would be, but received no response.
Support for homeowners
Biden is also calling on Congress to provide a one-year tax break of up to $10,000 to families who sell their so-called “starter homes.”
This is defined as a property that is valued below the median home price of their area in the province.
The White House also declined to elaborate on what was meant by “up to $10,000.”
For example, in Fulton County, Georgia, the median home price is $469,670, according to the National Association of Realtors. In Fresno County, California, the average price is $387,710.
The proposal will help 3 million families, according to the White House.
It aims to overcome the so-called “lock-in effect,” which keeps many Americans from moving home.
According to government-backed lender Freddie Mac, the average interest rate on a 30-year fixed-rate home loan is now 6.88 percent. That’s almost double what it was two years ago.
It means a homeowner today will have to pay about $1,000 more per month for a typical U.S. property than they would have purchased in 2021.
A buyer of a $400,000 home who makes a 5 percent down payment now pays about $2,800 in monthly mortgage payments.
In March 2021, when interest rates were around 3.05 percent, buying a home at the same price and with the same down payment would have cost just $1,940 per month.
In a normal market, this would be sufficient to dampen demand for housing and thus keep prices down. However, several experts have noted that a widespread housing shortage in the US has kept home values artificially high.
Biden also discussed lowering the cost of refinancing a mortgage by eliminating lender title insurance on some refinances
Many Americans who bought their homes when mortgage rates were low are now reluctant to sell because a mortgage on a new home would be so much more expensive. The second tax credit would encourage them to leave their homes and still upgrade
Housing Policy Council Chairman Ed DeMarco said the proposed tax credits could have the effect of increasing demand without significantly improving supply.
“Simply put, demand continues to exceed supply and subsidizing more demand increases home prices,” he said.
“The proposed supply-side tax credits appropriately address this objective, but they do not address the regulatory environment that constrains builders.”
Redfin data shows that the average American homeowner now spends twice as long in his or her property as he did in 2005.
Today, an owner can expect to spend 11.9 years in the same property, compared to 6.5 years 20 years ago.
What else has Biden announced? Other housing initiatives reintroduced?
In addition to the two tax credits, Biden has outlined a host of other initiatives that would help supply housing and lower costs for new homebuyers.
Most notably, the White House said the president would call on Congress to provide up to $25,000 in down payment assistance to first-generation homebuyers.
This proposal was included in the Down Payment Toward Equity Act of 2021 and is currently before Congress awaiting approval.
Another issue Biden discussed again this week involves lowering the cost of refinancing a mortgage.
According to the White House, waiving the title insurance requirement on some refinancings could save homeowners an average of $750 to as much as $1,500.
Government-backed mortgage lender Fannie Mae confirmed in January that buyers can now replace expensive title insurance with a cheaper alternative.
The insurance is a one-time benefit that protects lenders and buyers against losses if an error is made with the title of a property.
In the future, they can use an Attorney Opinion Letter (AOL), which allows a real estate attorney to confirm that there are no issues with the title of a property. According to Fannie Mae, AOL is on average $1,000 cheaper than title insurance.
The president also called on Congress this week to pass legislation that he said could result in the construction and renovation of more than 2 million homes. That would, in theory, narrow the gap between supply and demand and ultimately lower housing costs.
