Kamala Harris has outlined her economic plan, featuring various incentives and disincentives for the real estate industry. While several aspects are intended to stimulate the industry, potentially benefiting investors, they could also lead to some unintended consequences. Conversely, certain proposals may pose challenges to the sector.
Let’s explore each aspect in detail, focusing on its impact on the economy, particularly the real estate market. We’ll skip proposals unrelated to real estate—such as a “price-gouging ban” or tax limits on tips—and concentrate solely on those affecting our industry.
Assisting First-Time Homebuyers
Harris proposes to offer first-time homebuyers $25,000 toward the down payment on a new home. This would represent the most substantial down payment assistance ever provided by the government, far exceeding the $8,000 First-Time Homebuyer Tax Credit available between 2008 and 2010 during the recession and credit crunch.
In 2020, there were 1,782,500 first-time homebuyers in the U.S. If all of them had utilized such an incentive, it would have cost taxpayers approximately $44.6 billion.
Not every first-time homebuyer would take advantage of this program, but the availability of such a generous incentive would likely lead to a significant increase in demand among first-time buyers.
Currently, FHA loans require only a 3.5% down payment, and Fannie Mae recently reduced its down payment requirement for owner-occupied multifamily properties to just 5%.
With a 3.5% down payment, a home priced at $714,286 could have the entire down payment covered by this program (excluding potential seller credits, which are often negotiated).
While many potential buyers struggle to save for a down payment, it’s not the primary barrier. A recent survey found that 40% of non-homeowners identified the down payment as their main obstacle, but a larger percentage (46%) cited insufficient income as the bigger challenge. Outside of expensive coastal cities with extremely high housing prices, the real problem for buyers isn’t the down payment—it’s the monthly mortgage payments, especially given current interest rates.
By increasing demand without addressing supply, this program could drive property prices higher as first-time buyers with $25,000 in government assistance compete, making mortgage payments even less affordable. While this could benefit house hackers, on a broader policy level, it risks being a case of good money thrown after bad.
Expanding Affordable Housing
To her credit, Harris acknowledges that the first-time homebuyer tax credit is only a temporary measure “while we address the housing shortage.” As I’ve emphasized before, the only real solution to the nation’s housing problems is to build more.
Harris’s plan focuses on increasing affordable housing. As The Hill explains:
“Harris’s proposal calls for the construction of 3 million new housing units over the next four years, along with what is described as the ‘first-ever’ tax incentive for building starter homes for first-time buyers.
“The plan includes expanding an existing tax credit for businesses building affordable rental housing and creating a $40 billion federal fund to support construction. It also suggests making certain federal lands available for repurposing to develop new and affordable housing.”
However, affordable housing often isn’t as affordable as intended. A study by Michael Eriksen found that the Low-Income Housing Tax Credit (LIHTC) program results in developers constructing units that are an estimated 20% more expensive per square foot than industry averages.
On the positive side, Harris’s tax credits for businesses developing affordable rental housing could offer significant opportunities for developers, particularly if these incentives help offset regulatory costs that make building low-income housing challenging. (A study found that regulatory costs added $93,870 per house built in 2021, nearly a quarter of the total cost.)
That said, single-family housing starts were already at an annualized rate of 1.46 million in December 2023, nearly doubling the 3 million new units Harris’s administration aims to build over the next four years, and this figure doesn’t even include multifamily units. Government spending tends to crowd out private investment unless there’s an economic downturn (which the housing market is not experiencing), so this initiative could end up costing taxpayers more while delivering less to consumers. (Government programs of this nature are also prone to corruption.)
Finally, the U.S. has seen near-record levels of immigration during the Biden-Harris administration. While politically contentious, it may be prudent to slow down immigration until the housing shortage is addressed, to help cool demand in the housing market—a step the Harris administration is unlikely to take.
Addressing “Predatory Investors”
Harris also seeks to curtail Wall Street’s acquisition of single-family homes with the “Stop Predatory Investing Act.” The bill is straightforward. Here’s the summary:
“This bill denies taxpayers owning 50 or more single-family properties any tax deduction for interest paid or accrued in connection with any single-family residential rental property. It also disallows depreciation of residential rental properties owned by such taxpayers.”
The mortgage interest deduction might not be as critical as many believe, but eliminating depreciation could significantly impact real estate investors. Depreciation allows investors to deduct the declining value of a building (the IRS considers a residential property to fully depreciate over 27.5 years) from net income, reducing income tax liability. This deduction is a major advantage in real estate investing, and removing it could be particularly harmful given the capital-intensive nature of real estate.
Investors often channel significant funds into lower-income neighborhoods with fewer homeowners, and such a tax change could drive capital away from these areas, where it’s most needed.
It’s also concerning that Harris labels “taxpayers owning 50 or more single-family properties” as “institutional investors.” Most investors who own that many properties (like us) are more akin to small businesses than institutional investors. We’re far from being BlackRock.
The notion that Wall Street is taking over Main Street is largely a myth. As I noted in a previous article:
“…What appears to be a skyrocketing number of homes being purchased by institutional investors only increased their share from about 0.5% to 2.5%—not exactly what I’d call a 'significant chunk…’ The proportion of homes bought by all investors had actually been declining from 2013 until late 2020, dropping from 29% of all purchases to 20.5%.”
If Harris is elected, one can hope that this proposal would either be amended or scrapped.
Who’s Funding All of This?
Despite the heated exchanges between Kamala Harris and Donald Trump, Americans should find common ground to bridge what seems like an unbridgeable divide. One area of apparent bipartisan consensus is excessive spending.
Indeed, even though the COVID-19 pandemic has ended and the U.S. is not (officially) at war, the country is running deficits exceeding $1.5 trillion a year. Trump can’t criticize this too much, as in 2019, the year before COVID struck, he oversaw a “peacetime” deficit of $0.98 trillion. Arguing, “I didn’t technically have a trillion-dollar deficit before COVID,” isn’t a compelling campaign slogan.
The Harris campaign is promising significant new spending (and to be fair, so is Trump). While new taxes are planned, these won’t generate enough revenue to cover the shortfall and will have economic costs.
Next year, for the first time ever, the U.S. will spend more on servicing its debt than on its military. And it’s set to get much worse in the coming years.
I, for one, support substantially cutting the military budget, but that’s somewhat beside the point here. As historian Niall Ferguson points out in Bloomberg:
“Any great power that spends more on debt service (interest payments on the national debt) than on defense won’t stay great for long. This was true of Hapsburg Spain, ancien régime France, the Ottoman Empire, the British Empire, and it will be true for the U.S. starting this year.”
Unfortunately, the financial reckoning may arrive sooner than we hoped. New spending programs (and tax cuts) will likely exacerbate this problem, with serious implications not just for the real estate industry but for the broader economy.
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