During the pandemic, rock-bottom interest rates and a desire for more space drove a rapid and stunning rise in housing prices. While prices have moderated from their peak, they have not done so nearly enough to make up for the more than doubling of borrowing costs. President Biden says he has a solution, but like most forms of government interference, it would only make the problem worse.
During the State of the Union address, Biden unveiled a plan to give homebuyers $400 per month for mortgage payments over the next two years “as mortgage rates come down.” It didn’t take long for most people with a basic understanding of economics or an ounce of common sense to recognize that government subsidies — especially during a time of falling interest rates — would lead to more demand and, thus, even higher housing prices.
No problem, Biden now says — he has an idea to increase housing supply. Right now, one of the reasons why inventory is relatively scarce is that a lot of homeowners who locked in low-interest-rate mortgages for decades are reluctant to sell and be forced to purchase a new home with higher rates. In response, Biden wants to offer up to $10,000 per year in tax credits to those who sell their starter homes and purchase new homes with higher-rate mortgages. This, the theory goes, would help unlock inventory.
But — on top of the cost to other taxpayers — it would be a rotten deal for any homeowner to take Biden up on such a proposal.
To start with, the closing costs associated with selling and then buying a home (broker commissions, inspection and appraisal fees, loan-origination fees, etc.) would easily take up most if not all of that $10,000. But more importantly, increased housing payments would quickly exceed $10,000, and after that credit expires after the first year, the new homeowner would be drastically worse off.
Just to provide an example, according to Rocket Mortgage, “first-time home buyers tend to stay in their homes for about 11 years.” Eleven years ago, according to the St. Louis Fed, the average 30-year fixed mortgage was 3.52 percent and the median house sold for $258,400. Now, the most recent data have the median sales price at $417,700 and interest rate at 6.87 percent.
Assuming the recommended 20 percent down payment, the mortgage payment on a median home purchased in March 2013 would be $931 per month, compared with $2,194 today. That’s a difference of $1,263 per month, or over $15,000 per year.
In scenario one (staying in their current house), the homeowner would have $212,268 in remaining mortgage payments over 19 years and then would be free of mortgage debt. In scenario two (selling), the homeowner would have to pay $500,232 over the next 19 years, and a total of $789,840 in remaining payments.
This isn’t to say that nobody should ever sell their current homes, as there are a number of reasons why somebody might want to change their current residence — change of job, desire for a new neighborhood, children leaving the house, etc. But from a purely financial standpoint, Biden’s proposal would make no sense as it could leave sellers worse off by hundreds of thousands of dollars over time.
Biden’s scheme sounds a lot like one of those credit-card promotions that offer zero-percent interest for a short period of time, only to slam consumers with sky-high interest rates once the promotional period ends. Ironically, those are the sorts of promotions that the Democrats’ beloved Consumer Financial Protection Bureau has been warning about for a decade. But Biden’s plan is an even worse deal. For consumers who are careful of the fine print and pay off their full balance before the higher rate kicks in, promotional rates could be a way to save money and pay off debt quicker. In every imaginable circumstance, selling a house with a historically low mortgage rate and buying a more expensive house at a much higher mortgage rate is going to be a bad deal.
Luckily, Biden’s cockamamie proposal would have to clear Congress, where it has no chance of passage. But as a window into the type of policies he would push in a second term were he reelected with Democratic control of the House and Senate, it is alarming.