President Joe Biden’s housing tax credit proposal intends to provide financial relief while mortgage rates sit at high levels. However, this strategy risks exacerbating the existing imbalance in the housing market.
Effective tax credit policies should promote the construction and finance of affordable homes, benefitting both buyers and builders. The Low-Income Housing Tax Credit program, for example, could be reformed to encourage homeownership and increase the availability of affordable housing.
Strategies that make homeownership more accessible should aim to increase the number of affordable homes. Directing housing demand towards affordable housing, rather than causing a housing price spike with mortgage credit stimulus, would help avoid an erasure of benefits due to market correction.
The LIHTC program could address the supply-side of the policy equation. This program offers tax incentives for the development of affordable housing. However, current per-state dollar limits on tax credits and restrictions on using private activity bonds for housing construction hinder its effectiveness.
The Affordable Housing Credit Improvement Act of 2023, devised to resolve these issues, had broad bipartisan support but unfortunately stalled without much hope of passing.
Progressive supply-side reforms, such as the introduction of more flexible tax-exempt schemas through private activity bonds, can be fundamental tools for resolving the affordability crisis. Proposals to extend tax credits to developers using only partially tax-exempt bonds have been put forward. This would allow developers to seek alternative funding for affordable housing and still benefit from preferential tax treatment.
As the proposed tax credit could potentially increase the demand for housing, it is crucial to simultaneously implement a strategy to address housing supply. Failing to address the core issues of affordable housing might inadvertently benefit those who could already afford homes, thus intensifying competition for those on the brink of homeownership.
The proposed tax credits would amount to $400 monthly for first-time homeowners and those selling their first homes, with a one-time credit of $10,000 for those who sell their homes to another owner-occupant, based on a White House statement. Nonetheless, the details of the applicability and refundability of the credit have yet to be clarified.
Ultimately, ensuring accessibility to housing requires nuanced and multifaceted policies that go beyond temporary financial aids. The current affordable housing crisis began long before recent mortgage rate increases and will persist despite rate reductions, thus necessitating interventions with long-term impacts on housing accessibility and market stability.