Over the past two years, the price of property around the US has been rising at an incredible rate. In a country already struggling with an affordable housing crisis, homes became extremely overvalued.
While the growth seems to have slowed recently, it would take a major crash to get homes anywhere close to their value even a year ago.
Of course, no one wants the housing market to crash as that could be catastrophic for every American.
However, there is no doubt that something needs to be done if housing is to become affordable for the average person once more.
Many Americans are currently choosing to rent out of necessity. Renting requires no big down payment or expensive homeowners insurance.
Standard renters insurance policies cover named perils that destroy a renter’s possessions. But it is much cheaper than homeowners insurance and most renters can afford it without too much trouble.
Renting is a great temporary option, but for people who want to start building a life in a house of their own, it will always feel second best.
President Biden has made promises to combat the affordable housing crisis but is he actually doing anything that will cause house prices to drop?
To understand his actions, we need to provide some context on how we got to this point.
Who is Buying Property?
When prices started increasing at rapid rates, experts pinpointed the low mortgage rates as part of the explanation. Supply was limited, but demand was high.
After all, the national interest rate was at record lows and people could get houses with much lower monthly payments.
Low interest kept housing affordable for many, even as the actual price of houses shot up.
However, in 2022, interest rates have increased at record rates. The Federal Reserve implemented interest rate hikes to counter inflation.
This led to extremely high mortgage rates. It was feared that this could cause something of a crash in the housing market. House values were higher than ever. So were mortgage rates.
But the crash has not happened and we may only see a small correction. This points to a new understanding of the property buyers keeping prices high.
They’re not your average American looking to start a family life on a regular income.
The Power of Investment Firms
It is becoming clear that many properties have been bought over the past two years by big investment firms, shell companies, or individual investors with a lot of capital.
While these buyers benefited from low mortgage rates, they could still afford to buy property when rates and prices went up.
The question of whether there is anything wrong with this practice cannot be answered by any one person. The legality behind it is complex but probably sound.
However, many people will debate the ethics based on their own value systems. Some see it as immoral. Others see it as ethically neutral. And still others see this kind of practice as virtuous.
What is clear though is that this practice is making it tough for regular people to afford homes.
This creates a societal problem which needs to be addressed one way or another. It is in this context that Biden is acting.
Rather than challenge the legality of big investments in real estate, Biden has proposed changes to how property is taxed.
His proposal includes hiking property taxes significantly, but that is not what will have the biggest impact. It is by restricting certain tax breaks that his proposal will discourage these investments.
Currently, there is a way to defer capital gains taxes on the sale of real estate that can, effectively, give investors the chance to avoid these taxes indefinitely.
The details require a broader understanding of the real estate market as well as the ins and outs of taxes. However, the basic point is that investors avoid huge taxes using this method.
Biden plans to limit the amount that can be deferred significantly. It is expected that this will lead investors to think twice before snatching property off the market.
This could lead to the correction in prices many Americans have been waiting for.
Whether this will work remains to be seen. In the context of the economic and political chaos of 2022, a myriad of other things may cause the housing market to rise or fall regardless.
If Biden’s plan does work, we’ll still be left asking whether it is good enough.
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