New plan for government to offer 25k to homebuyers

A new plan unveiled by candidate Harris aims to provide up to 25k to every first time homebuyer for a downpayment. Like many of you when I heard the news, I did a double take. What is in the plan? Will the proposed plan increase or decrease house prices? Who pays for the downpayment assistance? What does this mean for real estate? What can we learn from Denver on how this plan will turn out?

What is in the plan to provide down payment assistance?

“Harris-Walz ,during their first term, will provide working families who have paid their rent on time for two years and are buying their first home up to $25,000 in down-payment assistance, with more generous support for first-generation homeowners.”

Essentially this will be “gift” from one taxpayer to another for 25k

Each one of us, the taxpayers will pay. Based on my back of the napkin calculations, the plan will cost around $ 50 billion plus per year. This will substantially increase the federal debt which is already at historic levels.

Interest rates will increase and/or not fall as much as they should

There is this misnomer that the federal reserve “controls/sets” interest rates. Unfortunately this could not be further from the truth. The federal reserve does not control rates by any stretch of the imagination. The federal reserve sets overnight lending rates and the market sets the rest of the rates which is why the huge deficit spurred by giveaways like downpayment assistance will impact mortgage rates.

As the deficit increases, more bonds must be sold by the government to finance its debt. As the number of bonds increases, over time the price of those bonds will decrease, which will in turn raise interest rates. Long and short the huge deficit spending will actually make housing more expensive due to higher interest rates.

Will 25k downpayment assistance increase or decrease real estate prices?

The irony is that there is already a ton of government assistance in housing. You can put as little as 5% down and get approved for a HUD or VA loan. With that said. 25k of free money would enable basically any home owner to buy a house up to 500k with zero money down as long as they have a job and can afford the monthly payments. With a huge influx of new buyers at lower price points, prices of entry level houses will only increase substantially due to the increased demand. The free downpayment will further distort the housing market with higher starter prices.

Defaults will be higher on the gifted downpayment loans

We have seen in every single cycle that the more equity/skin in the game that borrowers have the lower the probability of default. This proposal to gift equity on this large of a scale will no doubt lead to an increase in defaults down the road. We can look no further than Denver for a recent real life example.

A cautionary tale in Denver, Colorado

Denver was one of the most liberal cities providing rental assistance over the last 4 years. This is on top of all the covid money that the government disbursed and yet the outcome is essentially the same as it was pre covid. Essentially this “gift money” did very little to fundamentally change the outcome of evictions.

Here is a headline from the Denver Post: Denver will shatter last year’s record number of evictions as crisis outstrips available rental assistance money. More than 9,000 eviction filings in city so far this year — 32% more than at same point in 2023

Here is a more in depth article on the Colorado evictions. Even with all the assistance, free rent, etc… the outcome of evictions was merely delayed as the money did nothing to address the underlying issues of why tenants weren’t able/willing to pay rent. The same outcome will occur with the “gift” of a down payment.

The idea of fairness with downpayment assistance

The 25k in downpayment assistance comes back to the idea of fairness. If I bought a house a year ago and put down 25k towards the purchase, why shouldn’t I get assistance as well? Why should the government assist buyers of houses up to 500k? Is this really “affordable housing”? How about the single mom who previously owned a house and got divorced, why would they not be eligible for assistance? Long and short when the government decides to enter the free market, there will always be unintended consequences.

Summary

The idea to “gift” 25k to each homeowner is an election year gimmick to buy votes. Unfortunately basic economics proves time and time again that this is a terrible idea. Gifting money distorts the real estate market and will ultimately lead to higher defaults and higher prices. Furthermore, every taxpayer will pay for this plan in the form of higher taxes and higher interest rates due to deficit spending.

The crazy part is that we already know how this experiment will end up as Denver evictions have soared since pandemic assistance has run out which solidifies that all the money spent for rental assistance merely delayed the same outcome. The same fate will occur with the gift of downpayments, and taxpayers will be on the hook for billions with very little to show for it. Hopefully congress and the Senate stop these crazy plans before they get implemented.

Additional Reading/Resources

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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.

My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).

Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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