What's in the Biden Housing Plan?
And how will it impact you?
President Biden released a set of plans this week with the goal of closing the country’s housing supply gap within five years, calling it, “The more comprehensive all-of-government effort to close the housing supply shortfall in history.” What’s in the plan? And how will it impact you? Let’s dig in.
Ideas and Proposals
The plan is full of both specific, actionable items and things that are a little bit more vague and could take some time to develop, but overall it’s a pretty comprehensive list with things that should help both the supply and demand sides of the housing equation. Among the highlights:
Provide tax credits to those who rehabilitate the millions of homes nationwide that are too old, dilapidated, or costly to renovate without some sort of financial incentive.
$25 billion in grants to municipalities and housing organizations and their partners to develop 500,000 new units, noting:
This includes intergenerational housing, investments that place vacant or underutilized properties back into productive use, ADUs, and novel and non-traditional development techniques, including modular, panelized, or manufactured housing. States and localities would have flexibility to design their programs to meet local needs, and the resources would be used to support renters and homebuyers with up to 150 percent of area median income in high-cost areas.
Improve Fannie Mae and Freddie Mac financing for multiunit rental properties (generally these entities are currently focused on single-family homes).
Provide grants to municipalities and other jurisdictions that invest in local housing. On a related note, find ways to leverage previously allocated American Rescue Plan dollars to facilitate the construction of housing. Many cities, towns, counties, and state have not spent their Rescue Plan dollars yet - the White House now wants some of those dollars spent in ways to improve local housing markets especially for low and moderate income homeowners and renters. A particular focus on tribal lands and other underserved communities is noted.
Better streamline programs like the Low-Income Housing Tax Credit (LIHTC) and HUD funds so that developers can apply to one source of funding rather than having to piece together multiple sources. Concurrently, expand the LIHTC, which the President believes will lead to the development of 800,000 new housing units.
Reduce fees for banks partnering with USDA to finance the development of rural multi-unit housing
Dispose of underutilized Federal properties and convert them to housing the homeless
Encourage use of Community Development Block Grants (CDBG) for the acquisition and rehabilitation of dilapidated homes and to lessen transaction costs for low and moderate income homebuyers
Promote modular and manufactured housing and provide funding to retrofit units to be more energy efficient. Develop new financing mechanisms for these types of homes, which are not always as easy to finance through traditional bank loans.
Leverage federal funds including DOT grants to allocate more to communities that have taken steps to loosen up housing restrictions through zoning and land-use changes. A jurisdiction’s ordinances and land-use policies will be noted in actual grant formulas even for grants that are not housing related.
Recruit more workers into construction jobs, noting:
The President’s Budget includes a 50% increase in funding for Youth Build, invests $303 million to expand Registered Apprenticeships and $100 million for a new Sectoral Employment through Career Training for Occupational Readiness program, which will support training programs focused on growing industries, like construction. Additionally, the $1.2 trillion for training in the Bipartisan Infrastructure Law is creating good paying union jobs, many of them in construction. In addition, the Administration continues to call on Congress to pass comprehensive immigration reform, while the Administration acts administratively to accelerate visa processing and other improvements to our immigration system.
There are also a number of other proposals related to easing supply chain issues and promoting the importation and production of common housing materials including lumber.
What it All Means
These ideas are not fluff - they are actually things that would fundamentally change the housing market. If even a portion of them pan out they will represent significant changes.
I can say from my nine-year experience on the Bangor City Council in my hometown of Bangor, Maine including two years as mayor that cities and towns are highly dependent on federal funds for all manner of items: infrastructure, social services, economic development, public safety, and more. If federal grant processes start to include questions about a municipality's policies towards multifamily zoning, Accessory Dwelling Units (ADU’s), and the like and then either reward or penalize jurisdictions based on their answers, it will be immediately impactful as cities and towns simply cannot afford to forgo their ability to receive federal funds; they will have to adapt their policies to meet what the Federal Government is looking for. Whether this amounts to a heavy-handed Federal Government exerting itself over local control or whether it represents meaningful policy advancement is probably up to one’s own perspective, but this change alone would have a significant impact on housing markets at the local level.
Other ideas like improving the ease of financing modular construction, incentivizing new construction, and expanding financing options all have merit. As I’ve written about in the past, there is no real equivalent these days to the Sears Catalogue Home that would retail for about $90,000 in today’s dollars other than mobile home units and tiny homes. Improving financing options for these types of things and other modular units would really loosen up the housing market for those looking to buy between $80,000-$180,000 as there is really just not much inventory in this price range today.
How The Biden Housing Plan Will Impact You
The question of how these reforms, proposals, and ideas will impact you depends on where you sit. If you are a prospective homebuyer or renter, these proposals should help as they will lead to increases in the supply of homes and also some more financing options. Whether they make a difference over, say, the next six months is not likely as a lot of these things will take some time to unroll. Plus some of the proposals are vague and would still need to wind through hornets nests of local and state approvals, a process that can take years.
For real estate investors including rental property owners, the question is more muddled. On the one hand, the proposals contain some ideas for new financing options of both the construction of new units and the financing of multiunit properties, which could help developers and investors. Furthermore, if these proposals loosen up some of the red tape at the local level it could help ease construction challenges and make new development easier.
But on the other hand, the White House is setting its sights squarely on rental property owners (especially large investors) when they say:
In recent years, the share of single family home purchases by investors has grown – comprising more than 25% of all purchases nationally in some months of 2021, with an even higher share in certain markets, like Atlanta, San Jose, and Phoenix. Well over half of these purchases were made by investors with more than ten properties, and almost a quarter of these purchases were made by investors with over 100 properties. Large investor purchases of single-family homes drive up home prices for lower-cost starter homes, making it harder for aspiring first-time and first-generation home buyers, among others, to access wealth-building opportunities from homeownership.
In other words, the President is saying that large rental property investors are part of the problem, not the solution, and he wants more homes to go to people who are going to own them and live in them as opposed to investors. To counter the rise of investor-owned housing, the President has two specific proposals:
Direct the re-sale of foreclosed homes to owner-occupants and non-profit housing organizations rather than investors. What this means is that when an FHA mortgage goes into default and the home is foreclosed upon, it would be re-sold to an owner-occupant or local housing organization rather than an investor.
Incentivize the use of Community Development Block Grants (CDBG) to encourage the acquisition of vacant and dilapidated housing by local jurisdictions and then re-sell those properties to owner-occupants (i.e. not to investors).
Real estate investors should be mindful of these specific reforms, but also about the growing political push to swing power in the housing market away from investors and towards owner-occupants and tenants. Moreover, investors should be mindful that a marked increase in the production of new units, a meaningful nationwide rehabilitation effort of currently vacant or dilapidated units, and the addition of hundreds of thousands or even millions of new units nationwide through relaxed zoning and land-use changes to permit multiunit construction or the addition of ADU’s, will swell the supply of available housing units.
For the past decade (especially the last few years), rental vacancies have been very low, rents have been rising steadily, and properties have appreciated in value. My word of caution for rental property owners is that markets tend to correct themselves: new participants enter the field, which narrows profit margins, and supply typically reacts to meet demand. Over the past few years, demand for rental units has been roaringly high. It will not always be that way, especially if even a portion of these housing reforms and incentives to construct new units nationwide pan out. Real estate investors need to be mindful of the perfect storm that is possibly brewing of rising interest rates, significantly increased supply, and public reforms amid political pressure. The market (plus the government) is reacting. The rental market for both tenants and property owners will not be the same five years from now as it is today.
One Final Note
I just want to say welcome to all of the new readers and thank you to new and long-time readers alike. I write these articles on a weekly basis from my perspective as a Senior Vice President and Commercial Lender at First National Bank here in Maine, although, full disclosure, my thoughts and opinions in these articles do not represent the Bank. If you enjoy what you read here, please consider sharing with your colleagues and networks and make sure you are subscribed below. This week I wrote about the political sector responding to the housing crisis, and either next week or the following I am planning to write more about the private sector’s response to the current housing crisis. So stay tuned for that.
For some additional discussion along the lines of today’s topic, you can read these past articles I’ve written on similar topics:
The Simple Reason Home Prices Are Rising
Rental Vacancies Have Been Dropping for a Decade. Why?
Thanks for being here and have a great week.
Ben Sprague lives and works in Bangor, Maine as a V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Follow Ben on Twitter, Facebook, or Instagram and subscribe to this weekly newsletter by clicking below.