The housing market is receiving high-level attention that could make more Americans more likely to become homeowners, putting money in their pockets.
During his State of the Union address on Thursday, President Joe Biden acknowledged the challenges homebuyers face due to high mortgage rates and a lack of inventory. He also said that while rates are on a downward trend, he is not “waiting” for them to drop any lower before providing some relief from the high cost of housing.
To that end, Biden announced a plan to address housing affordability by providing $10,000 tax credits for first-time and repeat homebuyers.
Here’s what you need to know
Who would qualify for Biden’s home purchase tax credits?
While his plan also includes an initiative to increase the number of available homes, the main focus has been on Biden’s proposed tax credits, also known as mortgage relief credits. There are two: one for prospective homebuyers, intended to increase affordability, and one for homeowners, intended to help spur the number of new listings, which could ultimately drive home prices down .
The plan would provide a $10,000 tax credit, divided into two annual installments of $5,000, for first-time homebuyers in 2024 and 2025. The tax credits reduce income tax or, in in some cases, they increase the reimbursement.
According to data from Realtor.com, the $5,000 annual credit would be worth about $400 a month in mortgage payments. That’s a significant discount: The typical monthly mortgage payment is around $2,100.
The effect of the home equity loan would be similar to obtaining a lower mortgage rate: the White House estimates that the short-term savings would be equivalent to reducing current mortgage rates by about 1.5 percentage points. According to the Biden administration, it could help 3.5 million families buy their first home.
Biden is also proposing a one-year $10,000 tax credit for homeowners who may be interested in selling their homes but feel “stuck” by low mortgage rates. This credit would apply to middle-class homeowners selling their starter homes (defined as homes priced below the area’s median home price). According to White House estimates, this proposal could free up 3 million affordable homes.
Both tax credits are aimed at middle-class homebuyers and homeowners. Details on specific eligibility requirements have yet to be announced, although Money has reached out to the Biden administration for more information.
History of Tax Credits for Home Buyers
This isn’t the first time the federal government has used (or attempted to use) tax credits as an incentive to increase homeownership.
In 2008, then-President George W. Bush introduced a housing tax credit that offered a maximum of $7,500 to buyers who purchased their first home between 2008 and 2010. The goal of the credit was that of stimulating activity in the real estate market, which had entered into crisis. a free fall two years earlier as part of the Great Recession.
However, this “credit” worked more like an interest-free loan that had to be repaid over 15 years. In 2009, then-President Barack Obama expanded the incentive for first-time buyers, turning it into a tax credit that didn’t have to be repaid and increasing the credit to $8,000, even if the program expired again in 2010.
In 2021, Biden proposed a $15,000 tax credit for purchasing a first-time home, which formed the basis for his current proposal. That bill, however, never became law.
While most experts agree that the president’s latest proposal could help more Americans become first-time homeowners, some say they worry that more buyers entering the market could push up home prices above.
In the Realtor.com report, chief economist Danielle Hale noted that tax credits for homebuyers could lead to more competition in an already tight market. Without an increase in housing supply, she wrote, “this tax credit could attract more buyers, there will be no more homes for sale, and home prices will rise.”
Existing Tax Credits for Home Buyers
There are currently no tax credit programs similar to Biden’s proposal, but that doesn’t mean first-time buyers can’t get a tax break.
First-time homebuyers can apply for a mortgage credit certificate from their lender, which allows the homeowner to deduct a percentage of the interest paid on the home loan and receive a credit or refund of up to $2,000.
There are also home purchase costs that can be deducted from your taxes to reduce the amount you pay, as long as certain IRS requirements are met. These deductions include interest paid on mortgages up to $750,000; the cost of purchasing mortgage points; loan origination fees; and property taxes.
Homebuyers interested in learning about tax credits and deductions related to the purchase of a home should consult a tax professional or the IRS.
Will tax credits for home purchases pass?
After Biden’s announcement Thursday, industry experts applauded the proposals as a welcome spotlight on the importance of housing affordability. According to Marty Green, principal of mortgage law firm Polunsky Beitel Green, the housing market “is too critical to our economy and as a generator of wealth for Americans to ignore.”
Of course, Congress must debate and approve the plan (likely with several changes along the way) before it can become law, and there’s no guarantee it will pass.
However, Green says he believes Biden’s proposal “is a positive development [because] housing policy has returned to the foreground of the political debate.”
Will a builder tax credit improve housing inventory?
Another part of Biden’s plan addresses the supply problem facing homebuyers by proposing a new neighborhood home tax credit, designed to incentivize building or renovating affordable homes in at-level neighborhoods. national.
However, building enough homes in a short time to have a significant impact on today’s real estate market is a challenge. Orphe Divounguy, senior macroeconomist at Zillow Home Loans, says builders face several hurdles when building homes fast enough to impact housing supply.
These obstacles include a shortage of skilled labor in the construction industry, a shortage of developable land, rising land costs, and outdated zoning regulations that limit the number of units that can be built in specific areas. Together, these barriers prevent builders “from providing the homes needed in the current environment,” Divounguy tells Money.
He adds that without greater attention to addressing the issues facing builders – not just buyers – “it will be very difficult to see affordability improve.”
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