Biden's New Policy: Could It Drive Home Prices Even Higher?

By Javier Sanchez | Monday, 03 June 2024 04:10 PM
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Image Credit : ABC News

The latest policy proposals from President Joe Biden could potentially exacerbate the already soaring home prices, according to economists who spoke to the Daily Caller News Foundation.

This comes in the wake of high inflation and substantial government spending.

Data from March reveals that home prices have surged to an unprecedented high, with a 6.5% increase across the nation and an 8.2% rise in the country's ten largest cities compared to the previous year. Economists suggest that Biden's recent policy proposals, which include housing subsidies, could further fuel this rapid escalation in home prices, a situation that has been aggravated by his administration's extensive government spending.

"Subsidies of every sort distort market prices, discourage private investment, and result in misallocated resources," Peter Earle, an economist at the American Institute for Economic Research, told the DCNF. He added, "On top of that, if the Biden housing assistance proposals go through without addressing the other sources of high prices — massive federal spending and crowding-out effects — it will result in little more than further price dislocations and misused resources — with a fresh layer of bureaucracy to boot."

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In an attempt to incentivize home buying amidst a housing shortage, Biden reiterated his call for Congress to provide a $5,000 annual tax credit for two years to first-time home buyers to offset mortgage costs. The White House asserts that this subsidy would reduce mortgage rates by "more than 1.5 percentage points" and increase the number of families purchasing homes by 3.5 million, as per a White House fact sheet.

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However, the average rate for a 30-year mortgage has skyrocketed under Biden, standing at just above 7% as of Thursday, a significant increase from the pandemic low of around 2.65% in January 2021. Mortgage rates peaked under Biden at 7.79% in October 2023.

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Biden's strategy to alleviate the housing shortage includes subsidizing the construction or renovation of 2 million new homes, such as through expanding the Low-Income Housing Tax Credit to build or preserve around 1.2 million subsidized rental units, according to the fact sheet.

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E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, criticized this plan, telling the DCNF, "His plan to add 2 million homes is equally misguided because it would simply crowd out an equal amount of private sector construction by consuming the materials, labor, and equipment needed by homebuilders to supply the same quantity to the market."

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The Biden administration has also set a goal to reduce emissions produced from everyday household items like appliances, which already cost the average American family more than $9,000 in compliance efforts. In February, the Department of Energy finalized regulations that will limit Americans’ access to residential washers and dryers that produce too high of emissions.

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Antoni criticized this move, telling the DCNF, “The latest nonsensical, so-called green energy regulation will add tens of thousands of dollars to the cost of a home and take about 90 years for the homeowner to recoup the additional cost. Biden’s proposed subsidies to home buyers will only drive costs up further — this is Econ 101, for goodness’ sake! If you increase demand, prices will rise.”

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Antoni further blamed Biden's large spending agenda for the rise in home prices, telling the DCNF, “He and his big-spender allies in Congress helped create 40-year-high inflation, which drove up home prices. The Fed’s accommodative monetary policy pushed interest rates so low that it further increased housing demand and home prices.”

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Inflation under Biden surged to 9% in June 2022 following heightened government spending during the COVID-19 pandemic, which has since decelerated to 3.4% as of April. The Federal Reserve began hiking its federal funds rates starting in March 2022 from near 0% to now over 5%, drastically increasing the cost of credit like mortgages.

Earle pointed out another factor contributing to the housing crisis, telling the DCNF, “Another factor is the crowding-out effect of massive fiscal spending, such as is being undertaken under the Chips and Science Act. Building semiconductor foundries and other such facilities bids up the price of construction labor and building material in certain regions, drawing them away from homebuilders who would otherwise be adding supply to the market.”

The national debt has reached over $34.6 trillion as of Wednesday, according to the Treasury Department. Under Biden, the debt has grown by around $6.87 trillion.

Biden has made large stimulus packages a key part of his broader agenda, passing the $280 billion Chips and Science Act in 2022 to subsidize research and construction in the semiconductor industry. The president also signed the American Rescue Plan in March 2021 and the Inflation Reduction Act in August 2022 which authorized $1.9 trillion and $750 billion in new spending, respectively.

Antoni explained the impact of these policies on the housing market, telling the DCNF, “Inflation then led to higher interest rates, and the shock of transitioning from near-zero rates completely froze over the housing market. Homeowners have to sell at a steep premium today to make up for the loss of a low-interest rate mortgage. Similarly, homebuilders also have to sell at a premium because their costs are at an all-time high. Thus, the price of existing and new homes remains stubbornly high, and the supply remains low.”

According to the National Association of Realtors, pending home sales declined 7.7% in April compared to last year, indicating a significant slowdown as the market continues to adjust to prohibitively high prices and elevated rates.

The U.S. currently faces an estimated shortage of around 4 million to 7 million housing units due to developers being unable to keep up with and predict demand amid high interest rates, rising construction costs, and restrictive building regulations. Additionally, a surge of illegal immigration under Biden, which has been exacerbated by his relaxed border policies, has also placed increased demand on shelter, further hampering the available supply of housing, particularly for rental units.

The price of shelter, which more closely tracks the price of rent, has increased 20.9% since January 2021, when Biden first took office, and is up 5.5% from just last year as of April.

The Biden administration has blamed the rising costs of housing on corporate greed, alleging that landlords are illegally colluding to fix prices higher, and the Department of Justice and the Federal Trade Commission filed a brief on the subject in November 2023. However, a report released by the Federal Reserve Bank of St. Louis in May contradicted this claim, showing that corporate markups were not the cause of the recent spike in inflation by comparing historical data from other economic recoveries.

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