What happens if the major polls are right and the upcoming election results in a change of administrations, if Trump is out and Biden is in? How might the housing sector change?
One place to look is the 2020 Democratic platform. It includes a suggestion that might significantly impact the real estate market is a proposed “tax credit of up to $15,000 to help first-time homebuyers, and will make the tax credit refundable and advanceable, so buyers can get assistance at the time of purchase, instead of having to wait until they file their taxes.”
The First-Time Tax Credit
In 2008, with the housing sector decimated by the mortgage meltdown, the Housing and Economic Recovery Act (HERA) gave a $7,500 tax credit to first-time buyers, an amount increased to $8,000 for those who bought in 2009.
However, it turned out that the 2008 version of the “tax credit” was not what people expected. It was really a tax advance that had to be paid back to the government over a 15-year period. Not a lot of people were interested. For 2009 the program became a true tax credit, offering a tax credit that did not have to be repaid. The program, of course, has long-since expired.
What a 2020 tax credit for first-time buyers would look like depends on the actual program passed by the Congress. The concept raises a number of concerns.
- While there was a massive buyer shortage in 2008 that’s not a problem today. Existing home sales in August were at their highest level since December 2006, according to the National Association of Realtors.
- Freddie Mac reports that interest rates averaged 6.03% in 2008 versus less than 3% as this is written. At 6.03% a $310,600 property — the price of a typical existing home sold in August according to the National Association of Realtors — will have a monthly payment for principal and interest of $1,868.20. At. 2.87% — the typical rate reported for the week of October 8th by Freddie Mac — the same loan will have a monthly cost of $1,287.83. In effect, rising home prices have been substantially offset by lower rates.
- A tax credit today might produce negative results. In the midst of an ongoing inventory shortage it will likely spur demand, raise prices, and thus reduce affordability.
Despite practical issues, a first-time tax credit could well pass in a Biden Administration, especially if there is also a Democratic House and Senate. Why? Great political optics and strong industry support. For investors, passage will mean more demand and higher prices in many markets.
“While the impact of Presidential elections on real estate is often less dramatic than anticipated, real estate investors still need to pay close attention to what the candidates are proposing,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real estate data. “New policies, or changes to existing programs can radically alter what investors are allowed to do, or significantly reduce tax benefits and profitability.”
Under the 2017 Tax Cuts And Jobs Act — the Trump tax reform legislation — the government created special investor tax incentives for opportunity zones. Investors can defer capital gains taxes and possibly avoid them altogether by shifting capital gains profits into opportunity zones.
An “opportunity zone” or OZ is defined as “a population census tract that is a low-income community.” As many as 25% of the census tracts in each state can have this special designation, meaning there can be more than 8,700 potential opportunity zones nationwide.
There is a real need for the opportunity zone program.
“The uneven recovery is leaving too many communities behind,” reported the Economic Innovation Group. It’s research showed that “50 million Americans live in economically distressed communities — places struggling to attract capital and sustain economic opportunity for their residents. The country’s distressed ZIP codes contained 1.4 million fewer jobs in 2016 than they did in 2007.”
Biden supports the Opportunity Zone concept but with changes.
- He wants to have Opportunity Funds — the special entities that invest in Opportunity Zones — partner with nonprofit or community-oriented organizations as they invest.
- Biden would require a community-benefit plan for each investment. He wants Opportunity Funds to specifically benefit OZ residents and not just those who commute to Opportunity Zones.
- He wants the Treasury Department to review OZ investment plans to assure that local residents benefit.
- Biden wants Opportunity Zone investors to provide “detailed reporting and public disclosure” showing how their money — and federal tax breaks — are helping local residents.
Opportunity Zones are located in all states. They spread federal money nationwide and as a result have strong bipartisan support. Lobbyists will oppose Biden’s Opportunity Fund changes because they create new program requirements without what they will see as sufficient investor benefits. Whether the Biden proposals are enacted or not, the OZ program is now entrenched in DC. There may be some nibbling around the edges but the program is here to stay because both parties want it.
Fannie Mae and Freddie Mac
One of the largest financial issues impacting the housing sector is the question of what happens to Fannie Mae and Freddie Mac, the two enormous government-sponsored enterprises (GSEs) taken over by the government through a 2008 conservatorship. Together, they dominate the secondary market where mortgages and mortgage-backed securities are bought and sold, a process which assures a steady flow of capital into the mortgage market as well as the lowest possible rates.
In September the Trump Administration, through a Financial Stability Oversight Council (FSOC) that included top government regulators including Treasury Secretary Mnuchin, determined that the GSE’s were insufficiently capitalized and as a result should be required to increase reserves. This would necessarily be done by charging higher fees such as the .5% “adverse market refinance fee” set for September 1st and then pushed back to December 1st. The fee was necessary, said the government, to increase GSE reserves by $6 billion.
“The proposed rule,” Politico reported, “would require the companies to retain capital equivalent to 4 percent of their assets under normal economic conditions, meaning they would have to hold about $240 billion to support their $6.1 trillion in combined assets — roughly five times what they hold today.”
Democrats see this differently.
In July, when the Administration began seeking comments on the new rule, leading House Democrats vehemently objected. Congresswoman Maxine Waters (D-CA), Chairwoman of the House Committee on Financial Services, Congressman Wm. Lacy Clay (D-MO), Chair of the Subcommittee on Housing, Community Development and Insurance, said that “given the significance of this complex proposal and due to the unprecedented nature of the COVID-19 pandemic, which is greatly challenging homeowners, renters, consumers, and the broader economy, we urge you to suspend this proposed rulemaking until after the crisis passes, and otherwise avoid increasing costs on homebuyers and homeowners looking to refinance in the short term.”
The Administration proposal will likely be opposed by a Biden Administration for several reasons.
- First, the reason Fannie Mae and Freddie Mac need additional capital is that under the conservatorship the government – according to ProPublica – has taken nearly $110 billion from the two companies in addition to the complete repayment of all federal advances.
- Second, the demand for a 4% capital buffer is far above banking standards. For instance, in the second quarter the FDIC insurance fund had a reserve ratio of just 1.3% while the mandatory minimum capital ratio for the FHA is 2%.
- Third, what the FSOC actually found is not public. The four-page statement issued by the Council is an outline of its overall findings and not the findings themselves.
- Fourth, one way to raise GSE reserves is to sell off the two companies to the public. This would raise billions of dollars for the federal government, money that would off-set the national deficit. It also result in higher mortgage rates, something the new Administration will not want.
“Under a Biden administration,” reports Fox News, “Fannie and Freddie would likely remain wards of the government and would be used to expand homeownership among lower-income people — a move that would allow more Americans to receive mortgages but could be disastrous for holders of Fannie and Freddie stock since the GSEs’ profits would likely be returned to the government as opposed to being retained by the companies.”
GSE profits, or course, are already being returned to the government, which is how the US Treasury collected almost $110 billion in mortgage borrower fees. As to the shareholders, government control has long been disastrous for them, the very reason they’re suing. Their case, Collins v. Mnuchin, will be heard by the Supreme Court in the coming session.