What a $15k first-time homebuyer tax credit could mean for borrowers, builders

As the Biden administration starts legislating its policy platform plank by plank, the housing market is anxiously watching for news of a promised $15,000 first time homebuyer tax credit. The credit is being treated as a potential lifeline for struggling first-time homebuyers, frustrated by a competitive market and distinct lack of housing supply. However, this tax break would be injected into a market struggling with the aforementioned lack of supply as new housing starts are stymied by high lumber prices and other supply chain issues.

While the tax credit may help, it’s not a panacea for the market, and its true efficacy will come down to complementary supply-side policies, explained Rob Dietz (pictured), chief economist at the National Association of Home Builders (NAHB). He noted that if taken in isolation, the tax credit could serve to partially inflate house prices through the first-time buyers driving much of our current appreciation, thereby negating some of its own effectiveness in helping buyers achieve homeownership. He explained some of the potential knock-on effects of this credit for borrowers and builders and laid out some of the policies he would like to see accompanying the tax credit.

“It’s certainly a positive step, particularly for frustrated first-time homebuyers that are looking for that additional financial boost to try to attain homeownership,” Dietz said. “Right now, however, the challenge in the market is on the supply side. Even if you boost demand, you still have to solve some of the supply side challenges that are limiting inventory, because the risk would be that you would increase demand, further boost home prices as demand increases and, without a corresponding supply response, you would just then offset some of the benefit that would come from tax credit.”

Dietz noted, too, that any demand-side policy would need to be felt in the area where first-time buyers are struggling the most: down payments. He wants to see a tax credit that can come to bear directly at the closing table.

On the supply-side, Dietz would like to see policies that address the pressure builders are under. The primary source of which, he noted, is in lumber prices. Whether through a new softwood lumber agreement with Canada, or finding ways to improve domestic supply, something must be done to lower the price of a 2×4. In addition, Dietz noted that there’s a skilled labor shortage in homebuilding. While national policies may help, he said that local policies around zoning and minimum lot sizes can make a considerable difference when it comes to addressing supply issues.

As lumber prices have added an average of $24,000 to the cost of every new build home, Dietz believes that the extra buying power that would come with a tax credit will help to offset that additional cost. However, that would again come down to the unique structure of the tax credit.

He suggests that financing could play a crucial role in supply-side solutions, too, noting that roughly 70% of home construction is undertaken by smaller firms, usually financed by community banks and other lending institutions. If a secondary market can be created for those development loans, akin to what exists for purchase mortgages, that could lower interest rates and increase the availability of capital for developers.

Addressing the supply of new homes, Dietz explained, would directly impact first-time homebuyers who are currently demanding new construction homes at a rate 10% higher than the historic average. Millennial homebuyers have gone from renting straight into seeking a new construction home faster than expected. As they run headfirst into a supply wall, however, these homebuyers are getting increasingly frustrated.

As first-time buyers deal with these frustrations and develop questions about this looming tax credit, Dietz believes mortgage professionals can play a crucial role in navigating these market conditions.

“Mortgage professionals are one of the key first contact points for these prospective homebuyers,” Dietz said. “They need to be urging prospective buyers to be patient and to be strategic. Patience is going to be required in order for that additional supply to come about because, while the industry is growing, we certainly are not going to be able to add the supply of what’s needed overnight. From a strategic perspective, we know that the marketplace is changing, whether it’s the ability to telecommute on a partial basis or the fact that traffic is likely to be lower than it was in late 2019. It does expand the scope of communities that a buyer could search for a home in. They might take a second look at some markets that may be a little further out.”