It’s not easy being a home buyer these days. U.S. home prices are high, housing inventory is low, and consumer sentiment is wobbling. A federal tax break for first-time home buyers will help.
Even with the recent interest rate cuts, there hasn’t been a material increase in the number of homes being purchased: new home sales dropped 12.8% in June, the largest decline since July 2013, and continue to be sluggish. Instead, these cuts have boosted the refinance market. The total volume of mortgage refinancings is on track to swell $678 billion in 2019 from $458 billion in 2018, the Mortgage Bankers Association reports. This refinancing boom should continue at least for the next several months, given that more than 8 million homeowners are eligible to save $266 per month on average by lowering their monthly payment.
As the purchase market remains soft, I’m concerned that this deceleration will continue, especially as the broader U.S. economy weakens. Having managed a large mortgage company during and after the financial crisis of 2008, I know that it’s vital for the U.S. housing market to remain robust and resilient.
That’s why a tax break for first-time owners is necessary so that they can more easily afford to purchase a home. Most of these first-time buyers are millennials. This generation of young Americans make up the largest group of home buyers, at 37% of the overall market.
Moreover, many more millennials are waiting to purchase a home because they are facing significant financial challenges such as high costs of student loans and credit card debt. In addition, wages have stagnated whereas living costs have increased, making it ever difficult to save for a down payment on a home. Even the many millennials who already have a mortgage are missing out on the opportunity to refinance at lower rates. In short, lots of millennials just can’t afford to buy a new home or refinance their existing mortgage.
Indeed, U.S. home prices are just too expensive. These prices are no doubt a function of supply and demand. The U.S. economy has been growing for almost a decade with low unemployment. Since 2012, the number of home buyers have increased faster than the number of homes for sale. Interest rates have also remained low, which helped home buyers obtain the financing to purchase their residences. Demand outpaced supply, which pushed home prices ever higher. While home prices have decelerated from an 6.5% increase in March 2018 to 3.1% in June 2019, home buying hasn’t picked up. This is arguably because home prices are still too high and mortgage finance companies are maintaining tight underwriting standards.
It’s time to re-adopt the tax break for first-time home buyers at the federal level. A similar measure was introduced in 2008 and provided a credit up to $7,500 for first-time home buyers. This initiative could be structured as a zero-interest loan that is paid back over several years or as a full credit. This eligibility for this credit could be targeted exclusively to first-time buyers over the next two years, which could be enough time for many young Americans to take advantage of this opportunity.
While many states have their own versions of first-time home buyer programs, it’s important to have a nationwide initiative so that home buyers are treated equally and fairly across the country. Pairing such a narrow-in-scope credit with the mortgage interest-rate tax deduction should serve as tailwinds for home buyers who are currently unable to purchase a home, even though they have the capability and intention to repay a loan. Such a tax break is indeed a counter-cyclical policy that should help to sure up confidence in the housing market before it deteriorates more fully.
Now is the time for policy makers and lenders to partner and find responsible solutions for those who want to embark upon buying a home and sharing in the American Dream.
Sanjiv Das is CEO of Caliber Home Loans , one of the largest housing specialty firms in the U.S. He was CEO of CitiMortgage from 2008 to 2013.