Analysts explain how the proposed subsidy could further complicate the current housing crisis

A recent study from the American Enterprise Institute (AEI) has revealed that Democratic presidential candidate Kamala Harris’s proposed $25,000 down payment subsidy for first-time homebuyers could unintentionally raise home prices by 4%, undermining its purpose of easing housing affordability.

The plan, introduced in August, aims to assist four million first-time homebuyers with taxpayer-funded down payment assistance. However, the AEI’s findings suggest that the initiative might have the opposite effect, further inflating housing costs in an already strained market.

The logic behind Harris’s proposal is straightforward: offering financial help to buyers would theoretically make it easier to afford a home. Yet, experts warn that economic realities complicate the situation.

According to the AEI, housing supply across many parts of the US remains limited due to restrictive land-use regulations and slow permitting processes, creating a bottleneck in home construction. These constraints prevent supply from expanding in response to increased demand, meaning the subsidy could drive prices up instead of alleviating the housing crisis.

Housing supply shortages drive up costs

AEI scholars Edward Pinto, Tobias Peter, and Sissi Li explored these dynamics in their study. Their analysis, building on research from the Journal of Housing Economics, estimated that Harris’s down payment assistance would drive up home prices by an average of 4.1%. This would lead to a $177 billion increase in the total cost of homes purchased by subsidized buyers—far exceeding the $100 billion allocated for the subsidies.

Even more concerning, the study has predicted that the impact of Harris’s plan would extend beyond those directly receiving assistance. As first-time buyers bid on homes with the extra funds, they would drive up competition and prices for other buyers across the market. The scholars estimated that this ripple effect could push national home prices up by $1 trillion overall.

The study also noted significant variation in how different housing markets would respond. In high-cost areas like coastal California, where $25,000 is a small fraction of the average home price, the price impact would be relatively modest, around 1% to 2%. In more affordable regions, such as parts of the Midwest, prices could increase by as much as 6%.

The AEI’s findings echo long-standing economic principles: when supply is limited, subsidies that stimulate demand can lead to higher prices. The authors argue that the most effective way to control housing prices is by increasing housing supply. They recommended reforming land-use regulations and streamlining the permitting process to allow more homes to be built.

The scholars suggested that instead of pursuing down payment subsidies, policymakers should focus on enabling more construction to meet demand and stabilize prices.

By Jonalyn Cueto 09 Oct 2024