Why Kamala Harris' Plan for Housing Is a Bad One for the Market

The Weekly Recap

Happy Q4 to all of those who celebrate, especially if you’re a Mets fan this morning. The Feds preferred inflation gauge showed inflation slowed to 2.2% in August, mortgage rates increased for the first time in seven weeks, inventory levels will be the determining factor for a rebounding housing market in 2025, Americans are quitting their jobs at the lowest rate since 2020, port workers went back to work after a brief strike, we witnessed a refreshingly civil VP debate and New Yorkers who haven’t yet perfected the craft of recycling will also be forced to start composting beginning next week.

If you missed last weeks newsletter on What Do the Fed Rate Cuts Mean For Housing Prices, you can read that through the link.

Why Kamala Harris’ Plan for Housing Is a Bad One for the Market

I aim to keep these newsletters apolitical and rarely spotlight individual policies or ideas from either side of the political spectrum. However, following the recent Vice Presidential debate (which was a welcome display of decorum) a question arose regarding the potential impact of Vice President Harris’ proposed $25K in homebuyer assistance and $10K in tax benefits on the housing market. The U.S. is facing a significant housing shortage, which is closely tied to the issue of housing affordability. The Harris campaign’s plan aims to address both of these challenges. However, the risk is that it will make homes even less affordable, rather than more. Here's my analysis of how this policy would worsen the current challenges facing the housing market.

Understanding the Housing Problem: Nationwide, home prices have steadily risen year after year since the COVID-19 black swan event. A significant factor driving these price increases has been limited supply struggling to keep up with surging demand. Despite efforts to curb inflation through rising interest rates in recent years, prices continued to climb when they should have stabilized. At the same time, the cost of borrowing skyrocketed, making mortgages four times more expensive. As a result, the average mortgage payment as a percentage of income doubled, rising from 17% in 2020 to 33% by mid-2024.

Why the Policy Fails to Address the Issue: The fundamental flaw with this policy is that it targets demand, offering financial incentives without addressing the critical supply-side issues. While $25K in down payment assistance may sound appealing during an election cycle, it does little to solve the most pressing problem in the housing market—insufficient supply. The reason is straightforward. A subsidy to new homebuyers would have an immediate impact on demand. Measures to support supply would take longer to kick in (like building on Federal land, I’ll get to that in a moment). Add those two things together and the plan would push prices up — turning the Harris subsidy into a boon for sellers, not buyers. On the rental side trying to control pricing, the policy targets landlords who rely on pricing tools to set rent. However, this approach overlooks the fact that rising insurance costs, mortgage rates, and property taxes along with rent controls in most major cities, have already made it increasingly difficult for landlords to keep up.

Whenever the Federal government intervenes in specific markets through subsidies, the result is often an increase in the cost of the subsidized goods or services. This trend is evident in various sectors, such as higher education, electric vehicles, and solar energy, where government involvement has ultimately driven prices higher, making life more expensive for consumers. These examples illustrate a common pattern: government subsidies, although well-intentioned, often create an imbalance in the market.

Impact on Affordable Housing: The plan would make it harder for low-income or first-time buyers to compete in markets where wealthier buyers or investors can still outbid them for homes that are now priced higher than before. While the proposed assistance may provide a lifeline for some buyers, it does little to tackle the underlying issue of housing scarcity.

Where the True Solutions Are: The real solutions to the housing supply issues don’t lie with the Federal government, but with State and Local governments. These entities are the ones making it increasingly difficult for builders and developers to bring new housing to market. Restrictive zoning laws, lengthy permitting processes, construction bottlenecks, and the general inefficiency of local municipalities act as major barriers. These hurdles disincentivize developers from taking on the financial risk required to create new housing projects, particularly affordable ones.

In cities like New York, we're already seeing the effects of these local challenges. The future of new development looks challenging, with potential projects stalling due to zoning restrictions and a lack of political will to reintroduce essential tax abatements like 421-a, which historically spurred new construction. Without addressing these localized issues, policies that focus solely on boosting demand, such as down payment assistance or rental incentives, will only exacerbate the imbalance, pushing prices even higher and worsening affordability.

Ultimately, real solutions require loosening restrictions, streamlining approval processes, and offering incentives that encourage new development. It's not just about building more homes but creating a sustainable framework that supports growth over time.

I’m Paul Cibrano and I approve this message.

Market Performance

Here are how some other indexes and asset classes have performed as of this morning’s opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past WEEK as well as newly signed contracts in Manhattan.

Mortgage Rate Update

Decline in mortgage rates has stalled due to a mix of escalating geopolitical tensions and a rebound in short term rates that indicate even further the rate cuts we saw a few weeks ago were already priced into the marketplace. Over the last 12 months, interest rates have fallen one and a half percentage points while the leveling off of home prices and slight increases of inventory nationwide are providing a positive backdrop for buyers that should continue into the rest of the year.

News You Can Use

• Key Fed Inflation Gauge at 2.2% in August, Lower than Expected CNBC

• Powell Says Fed Not in a Hurry, Will Lower Rates ‘Over Time’ Bloomberg

• Mortgage Rates Increase in US for First Time in Seven Weeks Bloomberg

• Fed’s Go-To Measure Shows Slowing Signs of Inflation Axios

• Powell Indicates Further, Smaller Rate Cuts Are Incoming CNBC

• BlackRock’s Fink Says Market is Wrong on Fed Rate Cut Bets Bloomberg

• Eurozone Inflation Fell to 1.8%, Below the Central Banks 2% Target CNBC

• Americans Are Quitting Their Jobs At the Lowest Rate Since 2020 Yahoo Finance

• Inventory Will Be the Gating Factor For US Home Sales in 2025 CNBC

• US Hiring in ADP Data Rebounds After Five Months of Easing Bloomberg

• Port Strike Ends As Workers Agree to Tentative Deal CNBC

• Mandatory Composting Begins For All Five NYC Boroughs Next Week NY Post

The Deep Insight

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