Would love to hear from some on this Board who are informed about potential " Strategory " to increase Housing Starts... I spent some time with a Contractor this past weekend who said " Well if we give new Homeowners $25,000-I can promise you contractors will lean in on charging $25,000 more for starter homes "
If we give new homeowners $25K, it will not push prices for starter homes up by $25K. This is basically a question about what economists call the "incidence" of a subsidy -- that is, after all the money filters through the system, who will end up benefitting by how much. Incidence is an important subfield in economics and it's complicated. Here are some considerations:
1. Ordinary versus not-ordinary goods. So by "ordinary" goods, I am referring to goods that resemble things you buy at the grocery store. Well, actually, I am referring to goods that are like "widgets," the fictional consumer items that economists analyze in price theory; most things at the grocery store are widgets in that sense. Note that "ordinary" is my term, not necessarily what you'd read in an economic textbook.
A. Ordinary goods, aka, widgets have a few properties. First, their demand is linear, not lumpy. That is to say, people will buy as many widgets as they want, which is in part a function of how many widgets they can afford. You know, like food items. If I bought a steak yesterday, it doesn't preclude me from buying steak today. Also, demand for widgets is independent of what widget suppliers might do. For instance, if you're hungry, you'll buy food and if you're not, you won't. Food producers can entice you with mouth-watering advertisements for ice cream sundaes or the most unrealistically amazing Big Mac you'll ever see, but they can't fundamentally change whether you are hungry or not. Supply of widgets is also relatively unconstrained. If there's a shortage of widgets, the widget producers will produce more widgets, and the ones being produced will be more or less equivalent (or at least interchangeable) with the others.
So in a market full of widgets, we have a pretty good idea of the incidence of various policies. Sales taxes end up being paid by the consumer, though for bigger ticket items, not entirely. Tariffs are sales taxes, in essence, and also end up being paid primarily by the consumer; for smaller ticket items like consumer goods or raw materials, probably close to 100%. Production subsidies are paid primarily by the government, and so on.
B. Non-ordinary goods, by contrast, violate at least one of the conditions above. For instance, some markets are characterized by supplier-induced demand. That is, if you go to the doctor, and the doctor says you need a follow-up appointment in three weeks, you'll probably do the follow-up. You're seeing the doctor, after all, because you don't know what to do for your body. But the doctor could be using the follow-up to fill some softness in his or her schedule (I've had many appointments which seem to me to be completely unnecessary and basically just a way for the doctor to bill an extra visit). The point is that the doctor, who is the supplier, is a major determinant of the demand for his/her services. This is true for lawyers as well, perhaps even more so. Supplier-induced demand is the type of market imperfection that justifies government intervention. It's one reason why free market medicine can never work.
Houses are a non-ordinary good in two senses here. First, their demand is lumpy. Basically, everyone needs one home. Some well-to-do people might also have a vacation house, but it drops off fairly quickly after that. Only very rich people tend to have a third house. Here I'm not counting rentals, as the landlord is more of a supplier than a consumer. So if everyone has a home, there's little need for more homes. Moreover, there are almost always geographical constraints. If you work in Chapel Hill, you'll want a house in Orange County, or maybe parts of Durham County or maybe you'd drive al the way to Wake but you're not going to live in Asheville. And while you might move to Asheville, you very rarely move for the house. You move for other reasons, and find a house to suit you. The point here is that demand for houses is capped in complex ways that are tied to population growth, migration, economic conditions, etc.
Houses are also a non-ordinary good in the sense that they aren't directly comparable. A house in Chapel Hill is just not the same as a house in Hillsborough. They can be substitutes for each other, but imperfectly so -- as we've noted on these boards many times, in reference to young people frustrated that they can't afford to buy a house where they like to party. Now, imperfect substitution is a property of most economic goods -- i.e. if I can't get kale at the store, I might use bok choy instead. But when I do buy kale, it's pretty much the same thing all the time, as is the bok choy and the difference between them isn't all that significant. Not true for houses at all.
2. So, because houses are not ordinary goods, I would not expect the normal rules of incidence to apply. The answer is more complex -- and for that reason, the idea that prices will rise by 25K in response to a 25K consumer subsidy is likely false. I don't know if it will be 80-20 (that is, prices will rise by 20K out of 25K), 20-80 (prices will rise by 5K) or 50-50, but I very much doubt it will be close to the 100-0 that the contractor is describing.
That's in large part because of the properties described above. First time homebuyers are not the only people buying starter homes, and the mix of first timers and others is not necessarily obvious or predictable. For instance, if a battery manufacturer decides to open a large new factory in a small town or exurban area, the local builders should get busy because they are going to need more homes. Some will be starter homes, for the newly employed workers and for the young, educated low-level engineers who make more money than the line workers. But some of those young engineers might already own homes, and are being forced to buy a new one because their employer transferred them to the new plant. They won't necessarily want or be able to afford a nicer home, but they aren't first-timers. Starter homes can also be appealing to older folks who are downsizing, or to people who own homes but have gone broke and need something smaller, etc. etc.
So if the home builder tries to jack up prices by $25K across the board . . . well, why aren't the prices that high right now? When the mix of buyers is 100% non-subsidized, you'd expect to see an efficient market price. When the mix of buyers is 50% subsidized, prices can increase to some degree but the non-subsidized buyers still need a place to live and aren't interested in paying $25K more than they are now. So what you'd expect to see is a lesser increase. That homes are individually negotiable and exist in price ranges helps mitigate this factor to some degree, but I doubt it would do that much.
In addition, remember the problem of overall housing demand. Only so many homes are needed. Builder over-capacity is really costly for them. So they have an incentive to under-supply the market in normal times. But remember the example of a factory moving to a new location? Yeah, they will start building because they anticipate a very likely surge in demand. Well, a subsidy could do the same thing. It could incentivize new construction, by providing something of a captive market (i.e. people can only get the credit if they buy a home). And that would tend to bring prices down, as other posters have noted. In theory, the increase in new home supply could mean that prices will stay the same, that the effect of the $25K subsidy would be spur enough construction that home prices won't move. I doubt that, but it's possible.
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Bottom line, tl;dr: I would not expect a $25K new homeowner subsidy to increase prices for starter homes (which is itself an artificial category that is only partly justified by economic reality) by $25K. I would expect something less. Let's say 12K, because a 50-50 split sounds good. You'd have to have a lot of data to predict the amount with any accuracy. My intuition, based on old studies I read years ago on analogous non-ordinary goods (e.g. autos, which I would call semi-ordinary; they aren't as constrained as houses for a number of reasons, but they aren't food either), would be that the incidence would hover in the 50-50 region, by which I mean it could be 25-75 or 75-25 but is unlikely to be 10-90 or 90-10. But that's just a guess.
