This post originally appeared at https://www.badgerinstitute.org/aei-report-harris-housing-plan-will-cost-milwaukee-homebuyers-thousands/

Vice President Kamala Harris’ new housing down payment assistance proposal, which would give $25,000 to qualifying first-time home buyers, would dramatically increase housing prices, particularly in Midwestern metro areas such as Milwaukee, according to a new study by scholars at the American Enterprise Institute.

“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 by Edward Pinto, Tobias Peter and Sissi Li.

The injection of down payment assistance, a government subsidy of first-time home buyers, would cause home prices in metro areas to increase by an additional 4.1% on average nationwide.

Home buyers in the Midwest would see the sharpest increases in prices, the scholars argue, because the region is already experiencing a “sellers’ market,” where a supply imbalance puts upward pressure on prices.

The AEI report confirms that Milwaukee would be among the hardest hit by further price increases due to the Harris proposal. Nearly 80% of home sales would be affected, and price increases would be 5.1%.

As a Badger Institute report from this summer demonstrated, Wisconsin already has experienced some of the fastest growth in housing prices in the country, outpacing other Midwestern neighbors.

Harris pitched the plan as a solution to help families keep up with the rising prices of housing, but the analysis reveals that injecting more funds into the market will only put further upward pressure on prices.

Indeed, while the Harris plan would hand out $100 billion to qualified households looking to purchase a home, the subsidies would cause a total of $177 billion in price increases for all first-time buyers.

“This is yet another example of seemingly well-intended policies resulting in massive unintended consequences,” Pinto, Peter and Li argue. “In a housing market with historically low inventory, demand-side policies end up increasing home prices for a wide swath of buyers, not just the intended beneficiaries.”

The report argues that prices will increase due to several factors. For one, home buyers, including those already intending to buy a home, would have additional purchasing power. The program also would encourage some households that would have otherwise continue renting to change plans and pursue buying a home, adding additional demand.

For regions such as the Midwest where houses already are in short supply, home prices would increase as assistance recipients bid against other buyers and each other. The authors estimate that about 3.7 million of the 4 million total recipients will face higher prices directly because of competition with other recipients.

About 7 million non-recipients will also face higher prices as a result, for a total of 10.8 million affected borrowers.

The report estimates that areas affected by the Harris program will see an average additional increase of 4.1% in home prices. That equates to an increase of $16,400 on a median home. In other words, about two-thirds of the subsidy will go to sellers in the form of higher prices, on average. For Midwest metro areas such as Milwaukee, the ratio could be even higher.

When that increase of $16,400 is multiplied across all affected borrowers, it adds up to an estimated $177 billion in higher housing prices for first-time buyers. The authors also project that higher prices will ripple through the entire housing market, estimating the total inflationary impact to be $1 trillion.

Wyatt Eichholz is the Badger Institute’s Policy and Legislative Associate. He has a master of arts degree in economics from the University of Alabama.

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