The Sconi

Vice President Kamala Harris' proposal to provide $25,000 in down payment assistance to first-time home buyers could lead to significant increases in housing prices, particularly in Midwestern cities like Milwaukee. This is according to a recent study by the American Enterprise Institute (AEI).

The study, authored by Edward Pinto, Tobias Peter, and Sissi Li, suggests that the plan might not alleviate the financial burden on first-time buyers as intended. Instead, it could negatively impact both first-time and repeat buyers. "Scrutiny of the proposal reveals that rather than alleviating the housing burden on FTBs (first-time buyers), the down payment assistance plan will harm both FTBs and repeat buyers," states the study.

According to AEI's findings, the proposed government subsidy would cause an average nationwide increase of 4.1% in home prices. The Midwest is expected to experience even sharper price hikes due to its current "sellers’ market" conditions.

Milwaukee is projected to be among the most affected areas, with nearly 80% of home sales impacted and prices potentially rising by 5.1%. A report from the Badger Institute earlier this year highlighted Wisconsin's rapid housing price growth compared to other Midwestern states.

While Harris presented her plan as a means to help families cope with rising housing costs, AEI's analysis indicates that increasing funds in the market may further drive up prices. The plan aims to distribute $100 billion among qualified households but could result in $177 billion in increased costs for all first-time buyers.

"This is yet another example of seemingly well-intended policies resulting in massive unintended consequences," argue Pinto, Peter, and Li. They emphasize that demand-side policies can inflate home prices across a broad spectrum of buyers when inventory is low.

The report outlines several factors contributing to potential price increases: enhanced purchasing power for buyers and a shift from renting to buying among some households. In regions like the Midwest with limited housing supply, competition among recipients of assistance may further elevate prices.

Approximately 3.7 million out of 4 million total recipients are expected to encounter higher prices due directly to competition with fellow recipients. Additionally, about 7 million non-recipients might also face increased costs, affecting a total of 10.8 million borrowers.

AEI estimates an average additional price increase of $16,400 per median home across affected areas due to Harris' program. This implies that around two-thirds of the subsidy could benefit sellers through higher prices.

The overall inflationary impact on the housing market could reach $1 trillion when considering ripple effects beyond first-time buyers.

Wyatt Eichholz serves as Policy and Legislative Associate at the Badger Institute and holds a master's degree in economics from the University of Alabama.

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