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How will first-time homebuyer assistance affect housing markets?

"For Sale" sign in front of a house.
Shutterstock / Josh Namdar

Support for first-time homebuyers has reemerged as an important policy issue in the wake of rising housing prices and attention from presidential candidates. The most prominent proposal is a plan by Vice President Harris to provide $25,000 in downpayment support for first-time homebuyers. To some, these proposals are a welcome policy for increasing homeownership rates and addressing rising housing costs, while critics contend that they will simply boost the price of housing and that subsidized homeownership may not be justified in the first place.

Why provide support for first-time homebuyers?

The case for taxpayer support for first-time homebuyers reflects the widespread popularity of homeownership as an essential element of joining the middle class, as well as particular concern about the inability of younger first-time homebuyers to afford a home. Policymakers often assert that homeownership is a goal in and of itself and should consequently be encouraged through tax-based subsidies or other means. Indeed, proponents of homeownership argue that it better-commits residents to the well-being of their communities and the maintenance of the home itself, and it may also enable greater wealth accumulation.

An additional justification is that housing assistance is necessary to offset increasing housing costs, which have risen much faster than the rate of inflation since late 2022. From this perspective, first-time homebuyer assistance complements other approaches, such as expanding the supply of homes, which would simultaneously address the rising cost of housing. This assistance could also offset some of the reductions in tax-based support for homebuyers legislated through the Tax Cuts and Jobs Act (TCJA) of 2017—including a higher standard deduction, a cut in the maximum amount of mortgage debt on which incurred interest can be deducted, and a $10,000 cap on the deduction for state and local taxes such as property taxes, all of which contributed to a decline in itemized housing deductions. The TCJA also reduced the per-dollar value of housing deductions through lower income tax rates.

Another more targeted justification is that many potential homebuyers, especially younger households, do not have the liquid capital to afford a downpayment. Evidence suggests that young families often rely on help from others to buy a home, with one analysis from Freddie Mac noting that around one-quarter of young, first-time homebuyers depended on a cash gift to make a down payment. At the same time, the homeownership rate for younger households—those under 35 years old—has been falling throughout the pandemic and is now 3.2 percentage points lower than in the second quarter of 2020.

A final justification for downpayment assistance is that it is better suited to promote homeownership than other subsidies, such as the mortgage interest deduction. Existing subsidies primarily assist with the ongoing expenses of owning a home, favoring incumbent homeowners over potential homebuyers. In contrast, downpayment assistance can ease the high transaction costs of homebuying and selling, lowering barriers to homeownership while promoting the mobility of the labor force.

What are the drawbacks? Will this raise housing prices?

Support for first-time homebuyers suffers from several critiques, starting with concern over cost. For example, the Urban-Brookings Tax Policy Center scored a proposal from the 2020 Biden campaign—a $15,000 tax credit for first-time homebuyers—as costing $208 billion between 2021 and 2030. In addition, administration of such a benefit can be complex, especially if support is directed at first-generation homebuyers, where beneficiaries must document their family’s homeownership history.

These critiques aside, the most frequently cited concern is that the support will raise housing prices, potentially rendering the reform counterproductive. Indeed, economic theory suggests that by lowering the “user cost of housing capital”—essentially the ongoing price of homeownership—demand-side subsidies will boost equilibrium prices. This theoretical response depends not only on the magnitude of the subsidy but also the response by developers in each market. That is, in areas where developers will respond to rising prices by building more homes, demand-side housing subsidies will have a more muted impact on prices. From an empirical perspective, evidence has found that Great Recession-era homebuyer credits only raised prices by a few percent—around 2–5 percentage points in most housing markets—although these credits were implemented when the housing market was substantially weaker. This evidence (and other precedents) are explored in more detail below.

Any price impact owing to a downpayment reform will be experienced differently across households. To the extent that a credit or cash support will boost prices, downpayment assistance will increase the wealth of incumbent homebuyers by raising the value of their asset. First-time homebuyers will receive a net gain overall, as the value of assistance will exceed any increase in housing prices. Future homebuyers who do not currently own a home and who will not qualify for the first-time homebuyer support are the primary homeownership group that will experience a net loss.

What downpayment assistance proposals have the presidential campaigns proposed?

Both presidential campaigns have pledged to address rising costs of homeownership by boosting supply and directly subsidizing demand, although the Harris campaign’s plans are substantially more detailed.

In terms of support for new homeowners, the Vice President proposed providing up to $25,000 in downpayment assistance to first-time homebuyers. The sole eligibility requirement in the proposal, besides being a first-time homebuyer, is that families must have paid their rent on time for the last two years. The Harris campaign asserts that, if enacted, this single program could help more than four million first-time homebuyers over four years.

Harris’ plan to support first-time homebuyers appears to be similar to proposals from the Biden-Harris administration. Under one of President Biden’s proposals, homebuyers who have not owned a home within the last three tax years would be eligible for a tax credit worth 10% of their home’s purchase price, up to a $10,000 credit. The credit would typically begin to phase out for homebuyers with gross incomes above $100,000, phasing out entirely at $200,000.

The Trump campaign platform explicitly notes its support for first-time homebuyers but provides no details on plans for downpayment assistance—only citing that the former president would “promote homeownership through Tax Incentives and support for first-time buyers.”

Is there precedent for these types of proposals?

Similar programs have been tried in the past. Following the Global Financial Crisis (GFC), in 2008 Congress enacted a refundable First-Time Homebuyer Tax Credit (FTHTC) worth 10% of home purchase price to stimulate the floundering residential real estate market. This policy, which expired in mid-2009, initially offered a maximum FTHTC of $7,500, but required that buyers pay the credit back over the course of 15 years. The following year, the FTHTC was made more generous, upping the maximum credit to $8,000 and no longer requiring the credit to be paid back as long as homebuyers remained in their new homes for three years. A third iteration of the credit made it available to all homebuyers, offering repeat buyers up to $6,500. The last iteration of the credit was available to homebuyers who completed their purchases before September 2010.

Several states offer homebuyer assistance programs, particularly for first-time buyers. For example, Maryland offers first-time homebuyers mortgage loans with low fixed interest rates and permits borrowers to pair those loans with downpayment assistance in the form of secondary loans with zero percent interest rates. Similarly, Texas offers first-time homebuyers mortgage loans and downpayment assistance in the form of forgivable loans or grants. Other states, such as Alabama and Delaware, additionally offer first-time buyers special tax credits to reduce their federal tax obligation. City and local-level programs are also common, particularly in higher cost of living areas. New York City provides first-time homebuyers up to $100,000 in down payment assistance loans, while the District of Columbia offers first-time buyers up to $202,000 in interest-free loans plus $4,000 to assist with closing costs.

Has prior federal support for first-time homebuyers worked as intended?

Evaluations of the GFC-era FTHTC were mixed. During the Great Recession, some housing experts questioned the efficiency of the policy and suggested that homebuyers who entered the market were primarily motivated by falling home prices and low interest rates rather than the additional incentive offered by the credit. Importantly, too, those FTHTCs were implemented in a time of weak demand for housing and sharply falling home prices—exactly the opposite of the current housing market.

Concerns aside, academic research generally found that the various versions of the credit boosted home sales, and those studies that calculated a price change found only a modest impact. Dynan, Gayer, and Plotkin (2013) found that state-level downpayment assistance programs similar in design to federal programs boosted home sales by about 2 percentage points and raised prices by less than 1%—though the elevated prices persisted even after program expiration. Berger, Turner, and Zwick (2020) found that the credit increased home sales by about one-tenth (9.8%), while also raising prices—but typically by far less than the value of the credit. Biehl (2018) found that recent movers who qualified for the first and second FTHTCs were 8.2%and 9.3%(respectively) more likely to become homeowners than those who did not qualify for those credits. Hembre (2018) concluded that the FTHTC motivated approximately 400,000 additional first-time home purchases at a financial cost of $52,770 for each new homeowner but did not compute a price impact. However, these impacts should be considered in the context of the weak macroeconomic environment in which the benefits were offered.

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  • Footnotes
    1. Another Freddie Mac analysis indicates that the percentage of first-time homebuyers aged 25–34 that had a co-borrower aged 55 or older more than doubled between 1994 (1.6%) and 2022 (3.7%).
    2. Specifically, Vice President Harris has proposed to increase the supply of housing by offering tax incentivizes for the construction of starter homes, expanding the incentive for affordable rental housing construction, and incentivizing localities to update their zoning and permitting laws. She also called on Congress to prevent corporate investors and major landlords from buying homes in large quantities and colluding to raise prices. The Trump campaign has promised to make homeownership more affordable by bringing down mortgage rates through “slashing Inflation.” The Trump campaign also proposed opening certain tracts of federally owned lands to enable the construction of new homes, as well as repealing unnecessary regulations, which the former president claims “costs 30% of a new home.” Finally, the Trump campaign has attributed the high cost of housing to illegal immigration, asserting that border crackdowns and mass deportations will lower costs for American families.
    3. President Biden has also expressed support for legislation that would benefit first-generation homebuyers. Under one bill, first-generation homebuyers would receive 10% of the home’s price in direct downpayment and closing cost assistance, up to a limit of $20,000, or $25,000 for first-generation buyers from socially or economically disadvantaged groups. To qualify, buyers must generally make no more than 120% of the median income for either the area in which the purchased home is located or where they currently live.

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