Buying a home has become increasingly out of reach for Americans, who are grappling with a double whammy of high interest rates and surging home values. In his State of the Union address on Thursday, President Joe Biden proposed a new tax credit that would provide $10,000 to first-time home buyers. 

Biden is also proposing a separate $10,000 tax credit for current homeowners who sell their “starter home” in order to jump into a bigger house. That could help melt a real estate market in which homeowners who locked in low mortgage rates during the pandemic and are hesitant to move because they now face significantly higher mortgage rates. 

Biden’s proposals — which must be enacted by Congress — were cheered by advocates of affordable housing, with National Housing Council CEO David M. Dworkin calling it “the most consequential State of the Union address on housing in more than 50 years.” On a practical level, the tax credits would lower the cost of purchasing a home, an issue that affects Americans of all ages and stripes.

“Housing affordability has become a key issue for Americans spanning all demographics and political divides, and housing policy has mostly remained steady in recent congressional budgets,” noted Moody’s associate economist Nick Luettke in a report touching on Biden’s efforts.

Here’s what to know about the proposals. 

What are Biden’s home-buying tax credits?

Biden is proposing two tax credits aimed at helping Americans buy homes at a time when housing affordability is near an all-time low.

Currently, Americans must earn a six-figure salary to comfortably buy a typical home, compared with $59,000 just four years ago. Home prices have surged about 27% since the start of the pandemic, while mortgage rates have spiked, making it costlier to purchase.

To help offset the cost of buying a home, Biden is proposing the following tax credits:

• A first-time homebuyer tax credit of $10,000
• A one-year tax credit of up to $10,000 to current homeowners who sell their starter homes

Who would qualify for the tax credits?

First-time homebuyers would qualify for an annual tax credit of $5,000 per year for two years, for a total of $10,000.

The one-year tax credit for current homeowners would be available to people who own starter homes, defined as homes below the median home price in their county. The owners would have to sell to another owner-occupant, rather than an investor, according to the White House. 

Both tax credits are geared toward “middle-class families,” although the Biden administration didn’t specify whether the credits would have income limits.

For instance, some tax credits are only available to people who earn below a certain amount, such as the child tax credit, with the full amount available to single taxpayers earning below $200,000 or married filers earning below $400,000. 

How would the tax credits impact the housing market?

The Biden administration said the tax credits would help unfreeze the real estate market and make homebuying more affordable for millions. 

The first-time buyer tax credit could help 3.5 million middle-class families buy their first home, with the tax credit providing an equivalent reduction of about 1.5 percentage point for two years on the median-priced home, the White House said in a statement. The homeowner tax credit would help about 3 million families buy a bigger home, it added.

“Many homeowners have lower rates on their mortgages than current rates,” the White House said. “This ‘lock-in’ effect makes homeowners more reluctant to sell and give up that low rate, even in circumstances where their current homes no longer fit their household needs.”

When would these tax credits go into effect?

That’s unclear, because Congress would need to pass legislation to change the tax code — an uphill climb as Democrats and Republicans spar ahead of the November election. 

Passing tax credits could be “a particularly arduous task in an election year – though their inclusion in the address underscores the salience of the skyrocketing cost of housing for Americans nationwide,” noted Luettke of Moody’s.