Biden Housing Tax Credit Targets Demand, but Supply Is the Issue

President Joe Biden’s housing tax credit proposal, mentioned in his state of the union address but not yet detailed in a formal policy draft, aims to provide financial relief while mortgage rates remain high. But it risks worsening rather than fixing existing imbalances.

Such a tax credit policy should provide clear incentives to build and finance affordable homes for both builders and buyers. To help encourage homeownership, Congress should reform the Low-Income Housing Tax Credit program, and affordable housing should be increased.

Supply-Side Strategy

A comprehensive and effective strategy for making homeownership accessible must include more affordable housing. This would mitigate the risk of inflating housing prices through a mortgage credit stimulus for the demand side alone, ensuring that a market correction doesn’t negate any benefits of that strategy.

Reinvigorating the LIHTC program would address the supply side of the policy equation. The program provides tax incentives for development of affordable housing, but its effects are hemmed in by per-state dollar limits on allocatable tax credits and limits on use of private activity bonds for affordable housing construction.

A bill designed to solve those problems—the Affordable Housing Credit Improvement Act of 2023—garnered bipartisan support but stalled with little chance of passage.

Radical supply-side reforms, such as opening markets to more permissive tax-exempt schema via private activity bonds, are also crucial to solving the affordability crisis. For instance, proposals have been advanced to expand tax credits to developers for projects that are only partially financed through tax-exempt bonds—allowing developers to seek alternative funding for affordable housing and still receive preferential tax treatment.

Opening the market would create a more permissive financing mechanism for developers. Just as housing needs to be made affordable for buyers, it should be profitable for investors and developers absent direct government intervention.

These kinds of solutions can run the gamut from tax-exempt financing to preferential tax treatment for proceeds from the sale of a new affordable housing unit. Long-term solutions will come in the form of balanced solutions—maintaining an equipoise between affordable housing supply and demand, or more accurately, consumer capacity to purchase.

Bigger Imbalances

It appears the proposed tax credit will force recipients to foot the bill for a higher mortgage payment in the hopes of receiving the credit at year’s end. From a broader perspective, the proposal may boost demand for housing without a corresponding strategy to increase housing supply.

If the proposed credit, as it is currently understood, is applied annually at filing time, it may make purchasing more difficult for those who need immediate assistance. This is because it would put them at a competitive disadvantage against buyers who can afford to foot the higher mortgage bill while waiting for the credit. The credit has potential to favor a demographic that can withstand the financial burden upfront and be reimbursed at year’s end.

Further, while the initiative represents a meaningful effort to make the American dream more accessible, its effectiveness is mired in market complexities that could limit or reverse its impact on the intended beneficiaries.

Introducing such an incentive without addressing the core issues of affordable housing supply would put more money in the pockets of those who are more likely to afford housing—allowing them to more effectively outbid people on the cusp of homeownership. Effectively, it could make homes even less accessible to first-time and lower-income buyers.

Target Demographic

While the particulars of the mortgage credit proposal haven’t been released, Biden has indicated an interest in providing $400 per month for first-time homeowners and those who want to sell their first home—which would amount to $4,800 per year.

Separately, in a statement before the state of the union, the White House referred to another $10,000 one-time credit for those who sell their first homes to another owner-occupant (rather than to an investor).

In both cases, it appears this credit is applied at filing time—and isn’t something payable immediately upon the assumption of a mortgage on a qualifying property. That alone is misaligned with the immediate financial needs of taxpayers on the lower end of the economic spectrum.

The recent proposal hasn’t yet released any details on refundability. If the credit proves to be nonrefundable, it will further alienate taxpayers that don’t owe enough in income tax to make full use of the credit.

Those who can most afford to foot the higher mortgage bill today and make use of the full credit at the end of the year will benefit—to the detriment of taxpayers for which a $400 monthly difference would affect their chances of purchasing a new home.

Moving Forward

Ensuring equitable and accessible housing requires nuanced and multifaceted policies that don’t always make for a simple turn of phrase to include in a speech. The proposed mortgage tax credit is only one step in the right direction in the context of broader reform.

Policymakers must recognize that solutions must extend beyond temporary financial aids. The affordable housing crisis didn’t begin when mortgage rates skyrocketed, and it won’t end when they fall. Initiatives must be assessed on both their short-term benefits and their long-term impact on housing accessibility and market stability.

While the Biden proposal’s intentions are admirable, its potential effectiveness isn’t clear from a policy perspective. The end goal should be an environment where homeownership isn’t the purview of the privileged few but instead a feasible ambition for all.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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