President Joe Biden might have thrown a lifeline to aspiring homebuyers in his State of the Union address on Thursday evening, but some experts fear that it could result in higher home prices.

The president said he would like to provide first-time and repeat homebuyers with a tax credit worth $400 a month for the next two years. The Democrat’s administration estimates this could help more than 3.5 million middle-class families.

Biden also wants to provide a $10,000 incentive to homeowners who sell their starter homes to free up more housing inventory.

“I know the cost of housing is so important to you,” Biden said. “If inflation keeps coming down, mortgage rates will come down as well. And the Fed acknowledges that, but I’m not waiting.”

Homebuyers might be cheering, but some real estate experts have expressed concern that these tax credits, worth about $20,000 collectively, could result in higher home prices. That’s because these incentives are likely to drive more buyers into the market at a time when there is a severe housing shortage.

When there is more demand than supply, prices tend to go up. More bidding wars, offers over the asking price, and waived contingencies could result.

It’s also important to note that these proposals have not been approved by Congress and could face an uphill battle.

“It’s well-intentioned and aims to address the fact that housing faces a supply problem more than a demand problem,” says Realtor.com® Chief Economist Danielle Hale.

“In a best-case scenario, this tax credit gives builders enough confidence to keep building. That could help bring about more supply,” she says. However, “without the supply boost, this tax credit could bring out more buyers, there aren’t more homes for sale, and home prices go up.”

She points out that the typical homebuyer today has a roughly $2,100 monthly mortgage payment (excluding property taxes, home insurance, and homeowners association fees). That $400 a month would cover nearly a fifth of that bill.

Ken Johnson, a real estate economist at Florida Atlantic University in Boca Raton, FL, put it even more bluntly.

“The housing market is on fire, and we’re throwing gas on it with these proposals,” he says. “I’m very worried it would make prices go up. You’re providing economic incentives for consumers to bid prices up.”

Will Biden be able to increase the number of homes for sale?

To increase the available housing supply, Biden is also calling on Congress to provide middle-class homeowners who sell their starter homes with a $10,000 tax credit. This would apply to homes priced below the area’s median home price in their counties that are sold to other owner-occupants.

The White House estimates it would help almost 3 million families.

“To get new inventory onto the market, that could help,” says Johnson.

However, the $10,000 incentive for sellers might not be enough to sway the many homeowners who are essentially “locked in” to their homes due to their low mortgage rates, points out Ed Pinto, co-director of the Housing Center at the American Enterprise Institute, a conservative-leaning think tank.

Those homeowners might be reluctant to sell and lose those low rates, especially if they have to buy a new home with a higher rate.

“Over the years, the government has done a great job at juicing demand but has failed miserably at increasing supply. This is especially true when housing supply is as tight,” Pinto said in a statement.

How Biden plans to make the housing market more affordable

Biden also outlined other ways he’s attempting to make the housing market more affordable and boost the supply of available homes.

For context, the median home list price was $415,500 in February, according to the most recent Realtor.com data. Meanwhile, mortgage rates averaged 6.88% for 30-year fixed-rate loans in the week ending March 7, according to Freddie Mac.

Biden’s administration is also doing away with the need for title insurance on federally backed mortgages. This can save homeowners an average of $750 or more when they refinance their loans, according to the White House.

He is continuing to ask Congress to provide first-generation homebuyers with up to $25,000 in down payment assistance.

The president also touted the 1.7 million new housing units that have been going up. He credited his administration with cutting red tape, which has helped more builders to get federal financing. He hopes to build and renovate an additional 2 million homes.

“Building more homes is the most important factor when it comes to easing shelter inflation, achieving a healthy supply-demand balance in the for-sale and rental markets, and bending the housing cost curve,” National Association of Home Builders Chairman Carl Harris said in a statement. He is a custom-home builder from Wichita, KS.

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