The President of the United States seems to be on board with the recently proposed legislation that would facilitate access to homeownership. It’s called the Neighborhood Homes Investment Act (NHIA) and it was brought forth to Congress by Senators Ben Cardin and Todd Young.
Based on this proposed bill, President Biden wants to give money to 500,000 Americans to buy homes since the NHIA hopes to create 500,000 affordable homes for moderate- and middle-income families over 10 years.
The NHIA is a bipartisan bill that proposes the creation of a new federal tax credit to incentivize developers and investors to build or substantially rehabilitate affordable, owner-occupied housing in distressed urban, suburban, and rural neighborhoods.
The NHIA offers a tax credit that covers up to 35% of eligible development costs for new homes and rehabs in qualifying areas. This aims to bridge the "value gap" where building or rehabbing affordable housing can be expensive and unprofitable for developers without assistance.
There are many drawbacks to this proposed legislation. First, if implemented, it will lead to the displacement and gentrification of existing residents. Rapid redevelopment in distressed areas could lead to rent increases and displacement of existing low-income residents, particularly if proper tenant protections and community engagement measures aren't in place. the tax credit could unintentionally attract development to already-gentrifying neighborhoods, benefiting wealthier residents and pushing out existing low-income populations. This could exacerbate existing inequalities and undermine the NHIA's social goals.
Second, and more importantly, this legislation will create a housing bubble and a looming recession if implemented. If the NHIA successfully incentivizes construction in specific areas, it could lead to a surge in demand for affordable housing there. However, if the overall housing supply in those areas doesn't increase proportionally, a competition for the limited available homes could drive up prices beyond their sustainable levels. This could create a localized bubble in those areas, potentially pushing out the very same low-income residents the program aims to help. It would artificially increase demand without commensurate supply.
Third, the legislation would encourage speculative investment. Indeed, the tax credits offered by the NHIA could attract not just developers building affordable housing, but also investors seeking quick profits. They might purchase and renovate existing homes in targeted areas, hoping to flip them for a higher price driven by the increased demand from moderate-income buyers. This speculative activity could further inflate prices and contribute to a bubble, pushing housing affordability out of reach for many.
And lastly, this law presents a lack of long-term commitment and an over-reliance on tax credits. If the NHIA becomes the primary driver of affordable housing development, it could create dependence on the tax credits and lead to decreased investment in other affordable housing strategies. This could leave the market vulnerable if the program is scaled back or discontinued in the future, potentially causing a price correction and housing instability.
Moreover, the current 10-year timeframe for the NHIA raises concerns about its long-term sustainability. If the program isn't renewed or replaced with other measures, the temporary increase in affordable housing supply could be followed by a decline, exacerbating existing affordability issues and potentially bursting a bubble created by the initial surge.
What President Biden is trying to do will not improve affordability. On the contrary, it will worsen the housing market by creating an unnecessary bubble that would fuel competition between homebuyers. The worst is that the President wants to do it for political purposes at the expense of economic consequences.