Harris' $25,000 subsidy for first-time home buyers will fuel housing price inflation

Vice President Kamala Harris' campaign team has unveiled a new program that will make it easier to build and buy homes through hundreds of billions of dollars in subsidies. Among other things, it will provide first-time buyers with a $25,000 grant. The program will cost $100 billion, according to the campaign team, and will facilitate one million first-time home purchases annually over the next four years.

In addition, Harris wants to expand tax breaks for homebuilders to facilitate the construction of another three million new housing units. Similar incentives are already being used by Congress through the Department of Housing and Urban Development and the Treasury Department to facilitate the construction and renovation of homes and apartments, including $3.3 billion in block grants for community development, but Harris proposes much more.

In the 2000s, lending standards were lowered to allow for an expansion of mortgage lending to homebuyers. According to data from the New York Federal Reserve, mortgage debt nearly doubled from $4.9 trillion in 2003 to $9.29 trillion at the end of 2008, while home prices rose a massive 40 percent. The number of mortgage holders had jumped from 80 million in 2003 to 98 million in 2008. From 2003 to 2007, more than nine million new privately owned housing units were brought to market.

Then came the financial crisis – triggered by an overproduction of homes, which eventually led to a collapse in prices (by more than 26 percent by 2011) and left the last homebuyers of the bubble with negative equity, which many would rather foreclose on than pay because they could not afford to sell. The number of mortgages fell again by 2013 to about 80 million mortgages with about $8 trillion in mortgage debt. Home construction also slowed, with only 4.3 million new homes built.

There, the number remained relatively stable at about 80 million mortgages, but home prices rose again by about 38.8 percent from their low point in 2011 to the end of 2016, with 80 million mortgages still outstanding and mortgage debt reaching $8.5 trillion. And the pace of home construction picked up again, totaling 3.3 million from 2014 to 2016.

In addition, from 2017 to January 2021, home prices rose another 32 percent, the number of mortgages reached 81 million, and mortgage debt rose to $10 trillion. Another 5.1 million new homes were built.

Finally, home prices have continued to rise since January 2021, up another 32.3 percent as the number of mortgages has risen to 85 million and mortgage debt is now a whopping $12.5 trillion as another 6.4 million new homes have been built, even as the number of newly built privately owned homes has declined over the past three years from its peak of 1.6 million in 2021 to 1.4 million in 2023 and an average of 1.35 million so far in 2024. Typically, home construction slows, leading to recessions that Harris desperately hopes to avoid at least until after the November election.

Prices have become so high – thanks in no small part to the $7 trillion printed, borrowed and spent during and after COVID – that home sales are falling, just as they did in the 2000s. In January 2021, existing home sales were a seasonally adjusted 6.69 million units sold per year; in June 2024, that figure will be just 3.89 million units sold per year, a decline of 41.8 percent.

So, while housing construction is increasing, home purchases are declining, but there are still many more mortgages. That means there is no shortage of supply.

The reason for this is not a lack of subsidies, but rather that personal incomes have failed to keep pace with rising housing costs – they have only increased by 18.2 percent, while home prices have increased by 32.3 percent. In addition, 30-year mortgage rates have more than doubled since 2020, and with them monthly mortgage payments for a housing unit, which have more than doubled.

Harris wants to provide hundreds of billions of dollars in additional housing subsidies and down payment subsidies for first-time buyers. Essentially, the goal is to increase the number of mortgage loans to around 90 million or more, the highest level since the housing bubble burst – and at a time when incomes are not keeping pace with inflation.

Here's a hint. A home that was worth $250,000 in January 2021 is worth $337,000 today. Harris wants to give the buyer of that home a $25,000 grant, bringing the principal owed down to $312,000. And they would pay about 6.8 percent interest. In 2021, with an interest rate of just 2.65 percent, that same unit cost just $1,007 a month when it was worth $250,000.

Instead of the current $2,192 per month mortgage payment, the monthly payment will drop to $2,096 per month despite hundreds of billions in subsidies under the Harris program, even if housing prices magically remain frozen—which they won't. Wow.

All to keep housing construction going while housing prices continue to rise and interest rates remain high, delaying a recession that is almost certain to happen anyway, but with the risk of a housing price collapse similar to that of the 2000s. This would spell doom for Harris' Democratic Party in the 2026 midterm elections if she wins, and likely in 2028 if she hopes to seek re-election.

Or we could just accept the recession now. While unemployment will rise (it's already risen by 1.47 million since December 2022), interest rates will also fall on their own, lowering monthly mortgage payments, making refinancing easier, and making first-time homebuyers more attractive, creating a more virtuous cycle.

Choose your poison.

— Robert Romano is vice president for public policy at the Americans for Limited Government Foundation.