Economist: Build Back Better Will Put Downward Pressure on Housing Prices


The House version of President Biden’s “Build Back Better” plan includes about $170 billion for affordable housing and people are asking what that means.

Biden’s spending plan includes $65 billion to preserve and rebuild public housing and another $15 billion to help build or preserve more than 150,000 rental properties for lower-income families. It’s part of the administration’s goal to build or preserve 1 million affordable homes.

The bill is almost certain to change drastically in the U.S. Senate. But if the housing policies remain unchanged, what would this spending splurge mean for the overall housing market, at a time when prices are high and supply is low?

The Mortgage Note spoke with Tom Smith, Ph.D. of the Goizueta Business School at Emory University in Atlanta. He sees downward pressure on home prices over time from the policies passed by the House.

“People will have more money available at first, and that will push the demand side,” Smith said. “In my research, when the pandemic started, there was also an increase in demand for housing. The market is a matter of supply and demand.”

Smith explained that when the pandemic started, there was more of a demand for housing, and that pushed prices up. He said there were also a lot of people who jumped in out for fear of being priced out of the market. That assisted in pushing prices up, he said.

“However, we are starting to see the number of new home permits being issued going up, and that could begin to work in favor of prices stabilizing and going back down, at least to some degree,” Smith said.

Smith also sees downward pressure on home prices from the plan’s investment in building and refurbishing housing stock.

“Supply elements in BBB could come in the form of reinvestment or building or community revitalization efforts,” said Smith.

Smith said the counter-pressure will come from incentives for more buyers to enter the market. And that may be happening sooner than some people expect.

“There is an element for first-time down payment assistance and that could be implemented very quickly. Let’s say you are the first person in your family, you could get a grant for up to $10,000 to $25,000 toward a down payment for a home. So that could happen quickly,” Smith said.

“We’ve seen this before,” he added. “There are many elements in Build Back Better that were also available when President Obama passed his stimulus plan [The American Recovery and Reinvestment Act of 2009]. “

Smith said since Biden was Obama’s vice president, it would be logical he would bring back elements of that plan that were shown to work. He expects those first-time buyer elements could be available to the consumer during the first quarter of 2022.

Smith acknowledged the Biden administration’s attempt to dismiss inflation as “transitory” has failed and the White House is now recognizing it’s a more significant, and long-term, problem.

“I predict the Fed will start making some contractionary moves,” Smith said. “We could see easing moves. They could cut back on the amount of assets they purchase, target higher federal funds rates, and increase their own discount rates and the reserve requirements from banks. I anticipate they will raise the federal funds rate target by 50 basis points in the first quarter of next year. This will be based on information they get from the inflation numbers for December. I would not be shocked if they do it by the end of the year. If they are going to wait until next year, they would certainly do it in the first quarter.”