A building contractor frames a home under construction in Lehi, Utah, United States on Wednesday, December 16, 2020. Private residential construction in the US rose 2.7% in November.
George Frey | Bloomberg | Getty Images
Anyone looking to buy a home today is likely to be frustrated by the sky-high prices and slim selection. President-elect Joe Biden, who takes office on Wednesday, will seek to resolve these issues as he prepares to execute on his plans for the real estate market.
From home financing to home construction, Biden’s plans focus on affordability. Here are some guidelines he might be pushing for:
- First time purchaser tax credit of $ 15,000
- Call on the big banks to get back into FHA lending
- Promotion of the construction of single and multi-family houses
- Strengthen the Community Reinvestment Act, which aims to help low and middle income areas
In December, the number of properties for sale fell by almost 40% compared to December 2019, according to realtor.com. The competition for what was on the market was fierce. The typical home sale took just 66 days, two weeks faster than last year.
“Looking to the future, we saw new ones [inventory] Lows in the next few months as buyers remain relatively active, but a surge in new COVID cases may slow the number of sellers entering the market, “said Danielle Hale, chief economist at realtor.com.
Property prices are also rising at the fastest pace in six years, up more than 8% year over year in November, according to CoreLogic. This is due to record-low interest rates and pandemic demand from buyers looking for larger suburban homes.
Several proposals from the Biden Housing Plan could ease both house prices and the supply of homes for sale, potentially changing both lending and the housing market.
Tax relief for first-time buyers
Biden is proposing a first-time buyer tax credit of $ 15,000 that the buyer can access immediately and that will serve as a deposit assistance aid. High property prices and tough lending standards have made it difficult for young buyers to raise the money they need to secure a mortgage.
According to the National Association of Realtors, first time home buyers, defined as those who haven’t bought a home in at least three years, made up 32% of all home buyers in November. Historically, this proportion is closer to 40%.
The tax credit could exacerbate the inventory shortage by juicing the demand even more. But the nation’s home builders, who have struggled to keep up with demand, could also get a boost from Biden. They have been hindered by the high cost of land, labor, materials and regulations.
The Trump administration’s restrictive immigration policy exacerbated the already serious labor shortage for builders, as many documented and undocumented construction workers had left the industry during the last real estate crisis. When the construction industry flourished again, some workers were still scared or unable to return to the US
In addition, Trump’s trade wars hit builders where they live. Prices for everything from wood to concrete to metal rose dramatically.
“The customs trade wars have increased the cost of goods and services. Timber from Canada has become ridiculously expensive compared to a year ago. Labor shortages due to immigration policies and more have made houses difficult to build,” said David Stevens, former appointee for the Federal Housing Administration below the Obama administration and former CEO of the Mortgage Bankers Association.
“I think that in a Biden regime some of that will loosen up and builders want to do whatever it takes to take advantage of the tax credit. They don’t want to lose potential buyers who may have a limited number of windows to run through. “
Given the huge economic impetus Biden is proposing, Stevens is not convinced the tax credit will survive Congress at such a high level. The loan was part of the original residential platform that Biden ran on.
FHA loans play a bigger role
The outlook for another type of relief for lower income buyers is likely better – an endeavor to increase lending through the FHA, which is a low down payment option that is highly preferred by first-time buyers. According to Stevens, who spoke to Biden administration insiders, the FHA could also lower its monthly insurance premiums under the new leadership.
“The FHA program is showing exceptional profitability, which is much better than expected, and is providing the Biden administration with an opportunity to bring prices down. This will benefit entry-level homeowners, particularly minority homeowners who are more likely to join the FHA. Turn program, really help, “said Jaret Seiberg, financial services and housing policy analyst at Cowen Washington Research Group. “This not only helps housing construction, but also the Biden government realizes some of their social justice priorities.”
The major banks abandoned FHA lending almost entirely after the Great Recession due to enforcement measures taken against them for managing the program. They were affected by these measures under the False Claims Act, which resulted in very expensive settlements. Independent mortgage lenders have stepped in and now not only dominate the FHA space, but also make up the bulk of mortgage lending.
“I think you will see that both the National Economic Council and the Biden team at the White House and the new HUD team are doing everything they can to put the banks back under pressure,” Stevens said . “I would have a Senate banking committee, led by Sherrod Brown and Elizabeth Warren, on that committee to hold hearings with bank executives trying to get them back on the program.”
Not only could big banks help increase the availability of more affordable mortgages thanks to their sufficient capital, but they are also bound by the Community Reinvestment Act, which non-banks are not. Banks are required by law to reinvest funds from communities from which they take deposits. Biden wants to strengthen the rating agency and also apply it to non-bank lenders.
“And that comes with a commitment, and I think you will learn more about it in the Senate Banking Committee,” added Stevens.
There are some inherent barriers to the Biden housing agenda, however. Opening up lending to low-income and first-time buyers and trying to create more affordable housing comes up against other important administrative goals, particularly protecting the environment.
To make housing more affordable, Biden said he will advocate more high-density apartment building. He might want to ease some of the regulatory burdens on single family homes. The problem is that a lot of these regulations are environmental.
“The Biden administration wants to encourage more development, they want to get rid of outdated zoning regulations, but they are not going to do it in a way that you know will make the environment worse, or if they are not they can be attacked.” Pro-environment, and that’s a sticking point, “observed Seiberg.
And then there’s the elephant in the room – mortgage rates that are rising now. Interest rates hovered near historic lows for most of the past year, fueling both the home buying boom and the property price boom. Low prices gave buyers more purchasing power and enabled them to bid higher in this highly competitive market.
The Federal Reserve bought mortgage-backed bonds, which in turn kept interest rates artificially low. Not only did this help buyers during the pandemic, but it was also a form of economic incentive in its own right for homeowners who could refinance their mortgages to see low interest rates. The savings in monthly payments were not insignificant in times of crisis. But that will come to an end.
“When the nation’s economy recovers … the need for the Fed to be there and buy up the mortgage-backed security will decrease, and you will take out the biggest buyer. That will put pressure on interest rates,” Stevens said.
Stevens doesn’t expect a big increase. He and others predict that the average interest rate on the popular 30-year fixed-rate mortgage will be closer to 3%. After a record low of 2.76% in December, it is now 2.9%, according to the Mortgage News Daily.
While Biden has no direct control over mortgage rates, its impact on the economy will certainly influence Fed decision-making. If Biden’s economic stimulus and aggressive vaccination plans result in sustained economic growth, the central bank will be less inclined to inject money into the mortgage market.
A stronger economy should even offset a small rise in interest rates, especially as they hit record lows.