Guest Opinion: A Possible Plan To Increase The Housing Stock While Improving Affordability

WRE News August 5, 2023


Guest Opinion: A Possible Plan To Increase The Housing Stock While Improving Affordability

The housing supply has fallen to a historic low. Builders have not been able to keep pace with demand, resale stock is in short supply due to many social and economic factors, and the demand for housing from the millennial generation continues, with a younger generation of Zoomers right behind them.

Affordability at all levels remains a challenge, the diversity of housing stock as means of allowing greater affordability continues to be a problem, and public officials are searching for answers in zoning, construction, tax credits, and repurposing of commercial office space as a means to boost supply and affordability. All of these efforts are important, but there may be, yet another means of restoring harmony and balance to this supply equation.

What we are proposing is a moratorium of two years at the federal level on the capital gains tax for real estate as a possible means for increasing supply, easing demand, offering more opportunity and selection, and just perhaps, returning appreciation to a more acceptable norm.

The Boomer generation is one of the wealthiest and has a lot of investment property, much of which falls into the affordable housing range, under $1.2 million in urban and metro areas. Many (not all) are hanging onto this property because of the 15% capital gains tax at the federal level, combined with the 5% capital gains tax at the state level, and a depreciation tax on top of this, making selling too expensive and egregious.

By having a finite period of two years in which to financially motivate these individuals to sell, the housing market could be made to resemble a four- to five-month supply and force the market to return to some level of normalcy. This solution, however, must be implemented with considerable care and oversite so as to avoid flooding the marketplace and causing another housing recession.

There would need to be a set of parameters that the moratorium would follow:

  • Only persons over 78 years of age or persons qualifying under Medicare as disabled could sell their principal residence, and benefit from the tax moratorium. This is to incentivize seniors to move to smaller residences, over 55+ communities, retirement, or nursing facilities to free up housing stock for the generations below them. While persons who sell their principal residence receive a tax exemption on $250,000 single or $500,000 married, this is insufficient for most seniors who own their homes outright.
  • Only persons, or corporate entities owning less than 12 investment properties could benefit from the tax moratorium. If the number of investment properties exceeds 12 in their respective portfolio, then they would be allotted the benefit on up to 12 properties but no more. This is to allow institutional investors who purchased so much of the affordable housing stock during the 2009-2011 recession to participate and reap the benefit of the tax gain and simultaneously provide more options to first-time homebuyers.
  • If they own six or more in one jurisdiction, county, or locale, they would not be allowed to list and sell all at one time, but intermittently selling all six over a period of one year but never more than two at one time could be actively listed for sale. Total sales for one entity or person could not exceed 6 sales in one location for any given year. This would not apply to properties located in different parts of the state or country. For example, if a person owned 12 homes in 12 different states or 12 different counties in the same state, they would be allowed to sell all at the same time. However, preferably there should be a quota of half the first year and the remaining portion of the second but that can be debated.
  • During the two-year moratorium, the revenue from the state capital gains tax would naturally increase due to the number of homes being sold, and a percentage of that tax revenue should be allocated to affordable housing programs in jurisdictions with the highest employment rates and salaries, and the greatest need for affordable housing to persons earning 60% or less of the area median income. By allocating a large portion of the tax revenues, these programs could be more generously funded, helping them to achieve their goals.

At each four-month interval during the two years, the program would be re-assessed for its efficacy. The parameters would be re-evaluated to ensure they are not producing a deluge of homes coming to market, nor a shortage. The numbers could be adjusted up or down, or not at all, based on what the national housing data is showing.

The program could be regulated by the Department of Housing and Urban Development, which would have the right to change the parameters if the program needs to be accelerated or decelerated based on the number of homes coming to market or languishing on the market; it could do so by issuing a change at the end of each fourth-month cycle. Because real estate is hyperlocal, each state would have the right to end participation at the end of each six-month interval during the two-year moratorium.

While this program could be very successful for some states suffering from a lack of inventory, it could be potentially catastrophic for the sun and sand states of California, Nevada, Arizona, and Florida which have a larger number of seniors living in them, as well as investment properties. By allowing the individual states to have control over the implementation of the program, it would help to mitigate the risk of flooding the market and manage the intended results of the program.

There are definitely more parameters or control measures that might be added, or considered, but this paper is only intended to spark imagination, debate, and just maybe implementation and passage at the federal and state levels if deemed appropriate. So, thank you for reading, and I hope to hear back from you. All input and feedback are appreciated.

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