The Kamala Harris Plan for More Housing Shortages

Her plan would stimulate demand, not supply, and redistribute wealth to the sellers of existing homes

By Edward Pinto. 

"A signature feature of Kamala Harris’s housing plan is providing first-time home buyers with $25,000 in down-payment support, at a total cost of $100 billion over four years. Absent a severe recession, this policy is all but certain to lead to higher home prices. That’s because the four million program recipients would become price setters for all buyers in their neighborhoods.

According to the American Enterprise Institute’s Housing Center, 77% of all home purchases would be subject to this home buyer “tax,” causing the price of these homes to increase by 3.6%. Over four years the increase in home prices would total $175 billion, more than the $100 billion cost of the program. The price increase would show up in higher revenue for sellers, thus acting as a wealth transfer to them. 

The law of supply and demand dictates that an increase in demand without a commensurate increase in supply will result in higher prices. This effect on prices is because we’re currently in a strong sellers’ market, which exists when the number of months it would take to sell all the homes currently on the market is less than six. As of August, the overall supply of homes for sale was 3.7 months’ worth. For houses in lower price tiers, that number drops to 2.4 months. Sellers’ markets create upward price pressure on home prices, which grows more powerful when demand is further stimulated. Ms. Harris’s policy would do just that, boosting demand by giving buyers more spending money.

The plan’s defects don’t stop there. Ms. Harris’s proposed tax incentive for building starter homes is intended to increase housing supply substantially. This approach has led to significant market distortions on at least two occasions.

The Housing and Urban Development Act of 1968, with its easy credit terms and substantial subsidies, resulted in a surge of housing permits in 1971 and 1972. By 1975 the housing boom had reversed, leaving lasting scars on cities including Detroit, Chicago and Cleveland. Similarly, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which set affordable-housing goals, combined with Bill Clinton’s National Homeownership Strategy, led to credit liberalization in the runup to the 2008-09 financial crisis. Housing permits doubled, from 1.1 million in 1992 to 2.2 million in 2005, but then collapsed by 73% in 2009. In the aftermath, millions faced foreclosure, and the resulting housing-supply deficit still afflicts us today.

Without such dangerous credit easing, it is likely that Ms. Harris’s proposal would provide incentives largely for new homes that would have been built anyway, with any incremental construction being unevenly distributed across the nation. This would cause further imbalances between supply and demand.

Ms. Harris also proposes a $40 billion fund for local governments to explore “innovative” housing solutions. The Housing and Urban Development Department would likely channel this money into programs laden with self-defeating government-mandated affordability requirements, which markets abhor.

History offers a cautionary tale against such federal interference in the housing market: From the 1930s to 2008, at least 43 housing, urban-renewal and community-development programs were signed into law. Despite these laws’ lofty goals, these initiatives consistently failed to make housing more affordable.

There is indeed a housing affordability crisis. The root cause of this is a housing supply shortage of between three million and eight million housing units. Rather than pursuing Ms. Harris’s misguided plan, the federal government has several options to increase the housing supply at market rate:

• Implement a 10-year plan to auction surplus federal lands for home construction. Doing so could add 200,000 homes per year. By my estimate, these sales could generate $10 billion in annual receipts.

• Eliminate the tax deduction for interest on mortgages. This would increase supply and reduce demand by freeing up over the next decade 700,000 existing homes currently being used as secondary residences.

• Adopt a credible plan to reduce deficit spending. This could lower the 10-year Treasury rate (and mortgage rates along with it) by 0.75 to 1 percentage point.

• Subsidized housing projects often involve a cycle of subsidizing, rehabilitating, tearing down and rebuilding, all on the same parcel. Congress should require HUD to document, project by project, this revolving door of waste.

These measures, in combination with state and local efforts to deregulate land use and zoning, would mitigate the housing affordability crisis—all at no taxpayer cost and without unintended consequences.

Mr. Pinto is co-director of the American Enterprise Institute’s Housing Center."