Home Sellers Disappointed by Biden’s $10,000 Tax Credit

Homeowners like MacKenzie Kipp who capitalized on historically low mortgage rates during the pandemic would stand to lose a substantial amount of money under President Joe Biden‘s proposed $10,000 tax credit for selling their starter homes.

In an effort to ease the housing market’s tight inventory and support homeowners looking to upgrade, Biden announced a proposal on Thursday aimed at incentivizing the sale of starter homes.

“For homeowners looking for a new place but worried about giving up their lower mortgage rate, I’m proposing a $10,000 tax credit if they sell their starter homes,” Biden tweeted. The initiative seeks to make more homes available to first-time buyers and allow current homeowners to transition to residences that “better suit their needs” with the $10,000 tax credit serving to ease the financial strain.

But doing so would see the homeowner who had the low mortgage rate actually pay hundreds of thousands of dollars more in interest than they would have if they just remained in that home. “I understand the intention behind Biden’s proposal, but frankly, the math doesn’t add up for me,” Kipp told Newsweek via phone call on Friday afternoon.

For example, consider a homeowner who took advantage of the average mortgage rate of 2.96 percent in 2021, securing a 10 percent down payment on a $450,000 home with a 30-year fixed-rate mortgage. Over the life of the loan, they would pay a total of $611,557.81, including interest of $206,557.81.

In contrast, say that same homeowner sold their home, and purchased a similarly priced home in March 2024 at the current interest rate of 6.91 percent. The homeowner would face total payments of $961,214.41, with interest amounting to $556,214.41.

The difference is clear. “Losing out on hundreds of thousands in interest savings for a $10,000 tax credit is just not worth it,” Kipp said.

Opting for Biden’s tax credit and selling the home to secure a new mortgage at a higher rate would result in an additional $339,656.60 in interest payments, far overshadowing the offered $10,000 incentive.

This is the “lock-in” effect, and according to the Federal Housing Finance Agency (FHFA), the number of homeowners experiencing it is rising.

The effect, defined as a situation where rising mortgage rates discourage homeowners from selling due to the prospect of forfeiting that low-rate mortgage for significantly higher rates, has tangible impacts on housing mobility, market supply, and ultimately, home affordability, the FHFA said in a report issued earlier this week.

The report found that nearly all active mortgages in the U.S. are fixed-rate, with most of the loans featuring interest rates considerably lower than current market rates. The disparity creates a strong disincentive for selling, according to the agency’s findings. “For every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale decreases by 18.1 percent.”

Consequently, the lock-in effect has led to a 57 percent reduction in home sales involving fixed-rate mortgages in the last quarter of 2023 alone, according to the FHFA, preventing over 1.3 million sales between the second quarter of 2022 and the fourth quarter of 2023.

The supply constraint, fueled by the reluctance to sell, has inflated home prices by 5.7 percent, the FHFA said, overshadowing the direct impact of higher rates, which would typically depress prices.

However, there are still buyers, even with high rates and prices. Last month’s existing- home sales jumped by 9.5 percent, marking the largest monthly increase of existing- home sales in a year, according to a National Association of Realtors report issued Thursday.

But year-over-year sales slumped by 3.3 percent, which suggests that some would-be buyers remain on the sidelines.