My son and I recently visited a fast-food restaurant in CA’s Central Valley where the new minimum wage laws ($20 per hour starting in April) had been implemented – and where prevailing market wages were previously much lower.
Our meal cost $37; the restaurant, which would normally be quite busy, was mostly empty at lunchtime; and there were only 4 employees present.
The minimum wage law was supposed to benefit everyone – by making fast food employees wealthier, better able to support themselves, and more able to spend money elsewhere.
But, what it instead did is make food too expensive, pushing away customers and forcing the restaurant to employ fewer workers (I would not be surprised to see the restaurant close altogether). The minimum wage law didn’t help inflation numbers either.
As a sidebar, in areas where wages and wealth levels are higher, the minimum wage laws are not having the same impact.
In any case, the above is a great example of a well-intentioned government policy gone wrong.
I thought of this when Mr. Biden touted his housing assistance plan during his State of the Union address last week.
This is because well-intentioned government policies almost always miss their mark and have unintended consequences.
President Biden’s Housing Plan
Mr. Biden proposed two things: (1) a $400 per month tax credit for two years for first-time buyers; and (2) a $10,000 tax credit to middle-class families selling their starter homes to owner-occupants.
This is to help homebuyers, to help stimulate the slowest housing market since 1995, and, of course, to buy votes. 😊
Payment for Same House Went from $2,700 in 2021 to $4,400 Today
When rates were 2.875% (where they were for much of 2021), the total housing payment for a $500,000 home with 10% down was about $2,700 (depending on property tax and insurance rates).
Today, with rates about 4% HIGHER, the payment for a $500,000 home is about $3,800 or $1,300 higher.
And – If one accounts for the fact the median home price has risen about 20% since 2021, the payment for that same $500,000 home from 2021 (now costing $600,000) is actually about $4,400.
So – we have two issues that are killing the housing market: (1) 4% higher rates; and (2) very tight inventory/housing shortage.
Mr. Biden’s $400 per month tax credit will stimulate demand and only make things worse in states like CA – where the housing shortage is particularly acute.
In Texas, however, where builders are actually allowed to build, the plan might actually help a bit – but not that much when one accounts for how much higher payments are for the same home compared to 2021 ($1,700 higher in my above example).
Mr. Biden’s tax credit to encourage sellers to sell may also help too, but again – the assistance is not that significant when considering today’s 4% higher rates and the much higher payments today’s sellers will face if they sell and then buy another home.
What we really need to help housing are two things: (1) lower interest rates; and (2) more housing supply.
Logan Mohtashami was on today’s HousingWire podcast, discussing Biden’s housing plan.
He too was not encouraged by Mr. Biden’s plan, and he made a very strong case for lower rates, pointing out that the Fed Funds Rate, currently far above inflation rates, is far too restrictive.
Logan also pointed out how stimulating more demand when we’re facing such severe inventory shortages makes no sense at all (a point I make frequently).
Governments simply need to ease up on zoning restrictions, building requirements and development fees – so builders can more easily build entry-level housing.
Governments do not need to give away more money.
And the Fed needs to bring rates down to be more in line with today’s inflation numbers.
So, like all government policies, Mr. Biden’s plan will probably do very little, and only help in areas where the price points are lower (so the assistance will be more appreciated) and where there is a higher supply of housing already.
