It’s not a surprise to learn there’s a housing shortage in America. There are countless stories out there talking about ways to combat that shortage.

The most common solution people support is building more homes. And while that is definitely a worthy strategy, it would take years to overcome the current shortages if that were the only plan of attack.

Another one that has cropped up, as part of the Biden Administration’s infrastructure plan, is the notion of rehabilitating existing homes that may be out of date and get them up to code so they can once again be livable.

According to the National Association of REALTORS®, there were 1.7 million older housing units that were demolished or taken out of stock in an eight-year span between 2009 and 2016. According to Freddie Mac, if those homes were renovated rather than demolished, the housing supply would have at least doubled, if not grown even larger, by 2017.

The Biden Administration wants to harness that notion and use it to help stop the housing shortage and make more homes available, especially for lower-to-middle income earners.

On June 1, Biden announced his plan for the Neighborhood Homes Tax Credit, an initiative that would incentivize rehabilitation, rather than total demolition, of outdated homes.

Investors would be able to claim the credit on their federal tax returns if they sell the home and it is then occupied by an eligible buyer who makes no more than 140% of the area median income.

The credit would make up the difference between the costs of the rehabilitation and development, and the eventual sales price. However, there would be a cap on the final sales price that could not exceed four times the area median family income.

In addition, homes must be located in areas where there is a poverty rate of at least 130% of the area poverty rate, the median family income is below 80% of the area median, and median home values are lower than the area median in order to be eligible for the credit. The White House indicated that would cover approximately 25% of all census tracts.

According to a White House press release:

• Approximately 40 percent of U.S. housing stock is at least 50 years old, and more than 15 million properties are vacant even as families struggle to find affordable housing. In many neighborhoods, these properties make it difficult to attract or retain local homebuyers, reducing property values and community wealth.
• Modeled after the Low-Income Housing Tax Credit and the New Markets Tax Credit, state housing finance agencies would receive an annual allocation of Neighborhood Homes Tax Credits based on population.
• Each state’s housing finance agency would then award tax credits to project sponsors—developers, lenders, or local governments—through a competitive application process. Sponsors would use the credits to raise investment capital for their projects, and the investors could claim the credits against their federal income tax when the homes are sold and occupied by eligible homebuyers.
• As mentioned earlier, these tax credits would cover the difference between total development costs (including acquisition, rehabilitation, demolition, and construction) and the sales price. This would, for example, make it financially viable to spend $120,000 acquiring and rehabilitating a vacant property that would only sell for $100,000 on the open market by offering a $20,000 tax credit to cover the difference.
• The Tax Credit would bolster homeownership rates for low- and moderate-income homebuyers in underserved communities, while protecting against gentrification.

The U.S. is home to consistent disparities in homeownership and wealth. Across the country, just 49 percent of Hispanic Americans and 45 percent of Black Americans own their own homes, compared to 74 percent of White Americans.

As home prices rise, the proposed Tax Credit would make a generational investment in homeownership affordability, thus enabling low- and moderate-income buyers – including homebuyers of color – to purchase their own homes and build wealth.

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