Skyrocketing Home Costs Spur Fed, State Aid to First-Time Buyers

Federal officials and state lawmakers are looking at new ways to help prospective home buyers compete with investors for scarce housing in hot real estate markets.

President Joe Biden last week announced new efforts to increase available housing and reduce financial barriers for prospective buyers as the American dream of building generational wealth through homeownership becomes increasingly out of reach for many.

According to the Federal Reserve Bank of St. Louis, the median U.S. home sale price in the first quarter this year is about $429,000, up from $370,000 last year and $329,00 in 2020.

“Today’s rising housing costs are years in the making,” the White House said in a May 16 statement. “Fewer new homes were built in the decade following the Great Recession than in any decade since the 1960s—constraining housing supply and failing to keep pace with demand and household formation.”

Federal and state regulators are eyeing steps to make prospective first-time buyers better able to compete for homes. Lawmakers in California and New Jersey, among others, have proposed boosting down-payment assistance funds for first-time buyers, taxing investors who flip residential real estate, and giving owner-occupants greater leverage to purchase foreclosed homes.

California has led the way in introducing and passing rules that allow tenants and prospective homeowners to match or outbid for-profit investors after foreclosed house auctions. Legislators in Ohio and Nevada have recently introduced nearly identical measures.

The Biden administration has also launched programs intended to direct more foreclosed homes owned or insured by the government to owner-occupants and non-profit organizations instead of investors.

Earlier this month, the Federal Housing Administration announced changes to its Claims Without Conveyance of Title program, adding an extra 30 days to the post-foreclosure sale process of FHA-insured homes for owner-occupants, nonprofits, and governmental entities to bid before investors are allowed.

The programs “can make a difference in certain markets,” said Doug Ryan, a vice president of policy and applied research at Washington D.C.-based nonprofit Prosperity Now. “We have to reduce the barriers of entry for families to become homeowners.”

‘Tough Out There’

Families looking for a starter home are grappling with a U.S. housing shortage, estimated above two million units, and stiff competition for what’s available. First-time buyers are competing with a surge of purchasing by investors.

A May report from the National Association of Realtors shows that institutional buyers made up 13% of the residential sales market last year. Meanwhile, investors bought a record 18% of homes sold in the third quarter—well above the 2020 third quarter rate of 11%, according to realty company Redfin. In growing markets like Atlanta, Phoenix and Charlotte, investor purchases accounted for nearly a third of homes sold that quarter, Redfin researchers said.

“The investors see this a pretty lucrative way to make money right now,” said Matt Emery, Senior Policy Representative on Financial Services for the National Association of Realtors. “It’s really tough out there for first time buyers.”

California has led the way with initiatives prioritizing the sale of distressed properties to nonprofits and owner occupants. In September 2020, Gov. Gavin Newsom (D) signed into law rules allowing tenants and prospective homeowners to match or outbid for-profit investors after the auction of foreclosed houses with one to four family units.

Similar bills have since been introduced in Ohio and Nevada with the aim of giving people more chances to purchase homes that might otherwise be snapped up by investors.

Supporters view the legislation as a way to promote homeownership by middle- and working-class families, but with limited reach.

“It certainly can help but it’s not some panacea that can help fix the whole problem,” said Emery. “The problem right now is that there just aren’t that many homes in foreclosure.”

‘World of Hurt’

Even if new regulations are effective at providing families with first dibs or the final say on foreclosed properties, first-time buyers may be left with properties that are expensive to maintain, said Rick Sharga, executive vice president of marketing intelligence at ATTOM Data Solutions, a real estate data company.

“My concern is setting people up for failure,” said Sharga. “If you’re a first-time home buyer stretching just to buy a house, you might not have the kind of cash to make that property livable.”

Even small investors who target foreclosed properties to fix and flip can find themselves in a “world of hurt” if they overpay for homes in need of extensive repairs, according to Sharga. Villainizing real estate investors is often a misguided approach to dealing with the larger hurdles to homeownership for American families, he said.

Many of the solutions enacted so far only operate “on the margins” of the housing problem, said Ryan of Prosperity Now.

Congress should take up and pass the Neighborhood Homes Investment Act, said Ryan, referring to a bipartisan bill designed to incentivize construction of starter homes and rehabilitating dilapidated houses strictly for owner occupants. The measures were included in the Build Back Better Act, which stalled in the Senate following West Virginia Democratic Sen. Joe Manchin’s refusal to support the spending package.

Biden on May 16 called on Congress to pass the NHIA as part of his plan to tackle the shortfall in affordable housing. He also urged state and local governments to dedicate more funds from the 2021 American Rescue Plan to build additional affordable housing and assist home buyers with down payments.

Down payment assistance can be really effective as long as borrowers qualify to meet regular monthly mortgage bills after the purchase, said Sharga. To promote the president’s goals, local governments should also allow higher density residential areas to incentivize builders to create the desired type of housing stock, he said.

“Right now, builders are not focused on entry level homes,” he said, calling it “simply too expensive.”