Key highlights from this report:
- A proposed bill would offer a refundable tax credit for buying a house in 2021
- President Biden first promoted the idea last year, while on the campaign trail.
- Two U.S. Representatives just introduced a bill that moves it one step forward.
- But it would have to gain approval from Senate Republicans, a potential hurdle.
Back in January, we wrote about President Biden’s proposal for a new tax credit for first-time home buyers. He first started floating the idea last year, while campaigning for the presidency. And now that he’s president, his proposed tax credit for buying a house has moved one step forward.
On April 26, U.S. House Representatives Earl Blumenauer (D-OR) and Jimmy Panetta (D-CA) introduced a bill that could potentially turn Biden’s proposal into a reality. But it faces several hurdles before being passed into law.
Introduced: A Tax Credit for Buying a House
Officially named the “First Time Homebuyer Act,” this legislation would create a refundable tax credit of up to $15,000 for qualifying home buyers.
According to a statement from Representative Panetta, one of the bill’s co-sponsors:
“Our First-Time Homebuyer Act, which I am proud to introduce with Congressman Earl Blumenauer, will provide a tax credit of up to $15,000 for the purchase of a first home, to help more families, and especially families of color, reduce the wealth gap.”
Proponents of the bill, including both Panetta and Blumenauer, said it would help “those who’ve been locked out of homeownership” in the past. It would do this by creating a refundable tax credit for eligible first-time buyers in 2021. Opponents of the idea claim it would add fuel to an already overheated housing market, pushing record-low inventory levels even lower.
The House is also considering a down payment assistance grant for select home buyers.
Minimum Requirements for ‘First-Time’ Home Buyers
While this bill has been described as a tax credit for first-time home buyers, those who have owned houses in the past could still be eligible. But bear in mind the current requirements written into this act could be modified as it passes through Congress (assuming it passes at all).
Here are the proposed minimum requirements for the First Time Homebuyer Act:
- Home buyers must not have owned a home within the past three years (prior to purchase).
- Buyers must have incomes at or below 160% of the median income for their area.
- They must buy a home that’s priced at or below 110% of their area’s median purchase price.
- The bill’s language specifies that buyers must be purchasing a “principal residence.”
In other words, this program is not intended for wealthy home buyers or high-priced properties. It is specifically designed for borrowers with a low to moderate income for their area, and for reasonably priced houses. There may be additional requirements as well, if and when the first-time buyer tax credit clears Congress.
The credit for buying a house would be limited to a maximum of 10% of the purchase price, or $15,000. Eligible buyers would be able to receive it sooner by treating the home purchase “as occurring in the prior taxable year.” But again, all of this could change.
While there do not appear to be any other restrictions, the bill’s proponents explain that it’s intended to help minorities in particular.
According to Blumenauer, the 2021 tax credit for first-time home buyers is “just one element of the big, bold housing agenda that we are promoting to combat the housing affordability crisis and address centuries of overtly racist and discriminatory housing policies that have left massive wealth, homeownership, and opportunity gaps between white communities and communities of color.”
Next Steps: Hearings, Votes, and President’s Signature
So, when might we see a new tax credit for buying a house in 2021? That’s a tough question to answer at this stage, because the bill has only been introduced in the House of Representatives. It would have to clear several more hurdles before getting signed into law.
It’s almost a given that President Biden would sign such a bill. After all, he’s the one who first proposed creating another tax credit for first-time home buyers. But before the First Time Homebuyer Act reaches his desk, it has to go through a series of steps.
First, the House of Representatives would have to debate the bill and vote favorably, in order for it to move forward. The bill would then proceed into the Senate, where the same thing must happen (hearings, debate and vote).
After clearing Congress, the bill would then proceed to the President for signing. That would make it official. It would likely be enacted soon after receiving his signature.
A Supercharged and Overheated Housing Market
A 2021 tax credit for buying a house would give first-time buyers a financial boost toward purchasing a home. But current real estate market conditions present substantial challenges to such buyers. Housing inventory has declined significantly over the past couple of years, reaching record-low levels in many cities.
In some respects, we’ve never seen a housing market quite like this one. Home purchases slowed to a crawl back in April of 2020, as the coronavirus pandemic took root in the United States. But they quickly rebounded.
In fact, the pandemic gave the housing market a boost by placing a newfound emphasis on homeownership. Suddenly, a lot of people wanted more space, less crowding, home offices, and other features that only a home purchase could provide. Record-low mortgage rates added fuel to the fire.
As a result of these trends, housing market competition continues to soar all across the U.S. Housing supply, on the other hand, has plummeted over the past 12 months. (And supply conditions were already tight going into the pandemic.)
Meanwhile, home prices in most U.S. cities continue to climb at a steady pace. And that probably won’t change anytime soon. In late April, the real estate data company Zillow stated: “United States home values have gone up 10.6% over the past year and Zillow predicts they will rise 10.4% in the next year.”
The bottom line: A 2021 tax credit for home buyers would create a compelling financial incentive toward making a purchase. But it wouldn’t eliminate some of the biggest challenges first-time buyers face right now, such as affordability and inventory shortages.