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Buying a home has become increasingly out of reach for Americans, who face a double whammy: high interest rates and the increase in home values. In his State of the Union address on Thursday, President Joe Biden proposed a new tax credit that would provide $10,000 to first-time home buyers.
Biden is also proposing a separate $10,000 tax credit for current homeowners who sell their “starter home” so they can move to a larger home. That could help melt a housing market in which homeowners who locked in low mortgage rates during the pandemic are hesitant to move because they now face significantly higher mortgage rates.
Biden’s proposals, which must be enacted by Congress, were applauded by affordable housing advocates, with National Housing Council CEO David M. Dworkin calling it “the State of the Union address.” regarding housing in more than 50 years. On a practical level, tax credits would reduce the cost of buying a home, a problem that affects Americans of all ages and backgrounds.
“Housing affordability has become a key issue for Americans spanning all demographic and political divides, and housing policy has remained largely stable in recent congressional budgets,” said Moody’s Associate Economist, Nick Luettke, reporting on Biden’s efforts.
Here’s what you should know about the proposals.
What are Biden’s home purchase tax credits?
Biden is proposing two tax credits aimed at helping Americans buy homes at a time when housing affordability is near a limit. all-time low.
Currently, Americans must obtain a six figure salary comfortably buy a typical home, compared to $59,000 just four years ago. House prices have increased about 27% since the start of the pandemic, while mortgage rates have skyrocketed, making buying more expensive.
To help offset the cost of buying a home, Biden proposes the following tax credits:
- A $10,000 first-time homebuyer tax credit
- A one-year tax credit of up to $10,000 for current homeowners who sell their starter homes.
Tax credits are seen as a bridge to help people purchase a home while mortgage rates are high. As a result, they would not be permanent but would be offered to homebuyers purchasing properties in 2024 or 2025, a senior Biden administration official told CBS MoneyWatch.
The Federal Reserve is expected to cut its key interest rate later this year, which would ease the cost of borrowing for all types of loans, from mortgages to credit cards.
Who would qualify for tax credits?
First-time homebuyers would qualify for an annual tax credit of $5,000 per year for two years, for a total of $10,000.
The one-year tax credit for current homeowners would be available to people who own starter homes, defined as homes below the median home price in their county. According to the White House, the owners would have to sell the property to another owner-occupant, rather than an investor.
Both tax credits are targeted at “middle-class families,” and the Biden administration official told CBS MoneyWatch that the credits would be limited to households earning less than $200,000.
How would tax credits affect the real estate market?
The Biden administration said the tax credits would help unfreeze the housing market and make home buying more affordable for millions of people.
The first-time buyer tax credit could help 3.5 million middle-class families buy their first home, and the tax credit would provide an equivalent reduction of about 1.5 percentage points over two years in the home price medium, according to the White House. saying in a sentence. The homeowners tax credit would help about 3 million families buy a larger home, she added.
“Many homeowners have lower interest rates on their mortgages than current rates,” the White House said. “This ‘lock-in’ effect makes homeowners more reluctant to sell and give up that low rate, even in circumstances where their current homes no longer fit their household needs.”
When would these tax credits take effect?
That’s unclear, because Congress would need to pass legislation to change the tax code, an uphill climb as Democrats and Republicans face off ahead of the November elections.
Passing tax credits could be “a particularly arduous task in an election year, although their inclusion in the speech underscores the importance of the rising cost of housing for Americans across the country,” Moody’s Luettke said.
The White House wants Congress to pass legislation to enact the tax credits this year, which would allow homebuyers and homeowners to receive the tax credits beginning in fiscal year 2024. Homebuyers would receive the credit for a period of two years they could claim on their tax returns starting in the 2024 or 2025 tax year, the Biden official said.