Ronald Reagan once said that the scariest words anyone could hear were, “I’m from the government, and I’m here to help.” The Biden administration’s latest housing proposal seems to have taken this literally, as it stands to punish homeowners, forcing the market to stabilize. Let’s examine what this proposal is and why it’s a bad deal.
The Pandemic Ruined Housing Availability
At the height of the pandemic, housing prices skyrocketed as people looked for extra space, and some moved out to gain independence, prompting mass home buying.
On the one hand, it was great for the housing market as it got a massive influx of cash. On the other hand, it also drove up the cost of taking out a loan, which was much more expensive than pre-pandemic.
The Biden Plan Is Unhelpful
In his recent State of the Union address, President Biden stated that to support the current market, he would offer homeowners $400 monthly for mortgage payments as rates come down.
Unfortunately, this didn’t seem well thought through. It violates a basic economic tenet and could lead to even higher housing prices. Government subsidies don’t benefit anyone in the long run.
Subsidies Drive Up Demand
Once a government introduces subsidies into the market, the commodity they’re subsidizing becomes more accessible for buyers to acquire because they have to commit less of their own money.
In this case, subsidizing the cost of housing will make it more attractive for people to buy a house. This would mean demand for housing would go up, and so would prices to match.
Not Enough Available Housing As It Is
Once there were enough houses for everyone, that wouldn’t be so much of a problem. Unfortunately, there isn’t enough housing for everyone. In fact, there’s a housing shortage.
During the pandemic, the lack of new construction and homeowners’ unwillingness to sell their homes led to a market with far more demand than supply, further driving the cost up.
The Biden Administration Wants to Build More Houses
In another attempt to manage the housing market, the government wants to start constructing low-cost housing in certain areas to add homes to the market.
This is a much-needed approach to fixing the problem, but it still won’t help the issue of the current mortgage rates making it unaffordable to many people.
Why Won’t Homeowners Sell?
Many homeowners who have had their starter home for a few years might have been inclined to sell it and trade up for something bigger. Except it’s not in their best economic interest to do so.
Most of these homeowners locked in mortgage rates that were low when they bought their homes. It makes no sense to sell and take out a new mortgage at a higher rate.
The Government Needs That Inventory
This reasoning was behind another measure the government introduced to ensure more houses entered the market. To sweeten the deal for homeowners, they’ll get a $10,000 tax credit annually.
This might be a sweet deal if the numbers weren’t so bad. Closing costs on a new home would swallow up most of the $10,000 credit, and the mortgage payments would eat the rest.
What Happens When the Credit Dries Up?
One of the biggest problems with government stimuli and subsidies is that they never last. Eventually, the government will need that money for something else and will have to cut the program.
Without the $ 400-a-month mortgage coverage and the $10,000 tax credit, homeowners will now have a mortgage payment they can’t afford for a home that no one will buy from them.
Both House and Mortgage Prices Have Skyrocketed
On average, first-time homeowners stay in their first home for 11 years. At that time, an average 30-year fixed mortgage was 3.52% interest, and the average cost of a home was $258,400.
Today, the interest on a mortgage is 6.87%, and the average cost of a home is $417,700. The difference between what homeowners have to pay comes up to around $15,000 a year.
A Home Is a Financial Asset
Most people who buy a home see it as a financial asset that they can count on. Yet, in this housing market, it’s a bad idea to consider selling because it’s just not financially viable.
However, people sell their homes for many other reasons. Between jobs, relationships, or a smaller household, someone might consider selling their starter home for many reasons.
The Hallmarks of a Credit Card Scam
Some commentators liken the Biden administration’s approach to supporting the housing market to a credit card scam. Many people have fallen prey to such a scam before.
The card comes in the mail, stating a 0% interest rate for six months, and that sounds like a good deal. When the six months run out, you’ll be on the hook for a massive interest rate.
Don’t Sell Your Home If You Have a Low Mortgage Rate
A tenet of personal finance is that you should never get into something that will cost you more in the long run. If you have a low mortgage rate already, you should not consider selling.
Mortgage rates will eventually come down, but not because of the Biden administration’s attempt at corralling the market. If anything, it would exacerbate an already bad problem.
Young People Priced Out Of the Market
Far fewer younger homeowners have been looking for housing because the market is too hostile for them to enter and find something they can afford.
Many of them are just avoiding buying a house because they can’t compete with other buyers who can offer competitive cash to sellers.
Is This The Solution For The Housing Market?
This “solution” will likely cause more problems than it’s worth. With the high cost of owning a house and mortgage rates remaining where they are, it’s a bad idea to invest in a house now.
Homeowners who already have homes won’t be duped into selling just because of the tax credits and the subsidies. The few that do will quickly realize why doing so is a terrible idea.
