A frustrating thing about today’s housing market is the paltry number of homes for sale. Would-be buyers outnumber sellers, even as high mortgage rates strain affordability.
After all, the government paid people to buy houses after the 2008 financial crisis, when there weren’t enough buyers. Now, it could pay people to sell houses when there aren’t enough sellers.
We’re not talking about something as direct as the feds cutting checks. Payments would be handled through the tax code.
The notion has drawn support in the U.S. House, where a bill to double the capital gains exclusion on primary residences has 15 co-sponsors from both parties. That’s not the only way Congress could tweak the tax code to pay home sellers: The National Association of Realtors commissioned a study that came up with two more ideas, although neither has been drafted into legislation.
Read: So you want to buy a house? Expect to pay more than 30% of your income.
Why inventory is low
Not enough homes are for sale in large part because homeowners don’t want to give up their low mortgage rates. “The primary reason why inventory is low is because about 80% of homeowners have an interest rate that’s lower than 5%,” Sherry Chen, a Realtor with Kappel Realty Group in San Diego said in an email. “Even if a homeowner thinks their house is too small, too old, etc., they cannot afford to sell and purchase a bigger/better property at a rate that may be double than what their current rate is.”
Chen expects more homes to come to market “once rates come down to the 5% range.” Meanwhile, the government could use tax incentives to prod people into selling homes even when mortgage rates are high.
Related: As mortgage rates hit 7%, what exact interest rate will convince homeowners to sell — and boost house sales?
Option 1: Double the capital gains exclusion
When you sell a house for more than you paid, the profit is a capital gain. You’re taxed on that capital gain if it’s over $250,000 for single tax filers or $500,000 for joint filers. A bill to double those amounts was introduced into the House in March by Reps. Jimmy Panetta, D-Calif., and Mike Kelly, R-Pa. Dubbed the More Homes on the Market Act, H.R. 1321 hasn’t had a hearing yet.
In a news release, Panetta said he has met people in his district “who want to sell their homes, but can’t afford to due to the financial hit they’ll incur.” Doubling the capital gains exclusion “would allow homeowners to downsize, sell their homes, and keep their nest egg intact.”
His reasoning goes like this: A lot of older homeowners flutter in big empty nests, and they would prefer to sell their homes and buy something smaller. But under current tax law, they would pay capital gains tax. Many keep the home until they die, so their heirs will benefit from gentler tax treatment.
Homeownership has become an older person’s game: 56% of homeowners are older than 55, compared with 48% a decade ago. “As older owners stay in their homes longer than usual, their homes do not turn over to a younger generation, thus limiting an important and traditional source of supply,” according to the NAR-commissioned report, “Tax Policy and Single-Family Home Supply: How Targeting Tenure, Capital Gains, and Investor-Owners Would Change the Market.”
The study was written by Andrew Hanson, an associate professor of real estate at the University of Illinois Chicago, and Ike Brannon, president of Capital Policy Analytics, a think tank in Washington, D.C.
Hanson and Brannon estimated that increasing the capital gains exemption would result in 159,000 to 344,000 more homes being put on the market in the first year.
Don’t miss:The dilemma for many retirees who have paid off their mortgage: sell or stay?
Option 2: $25,000 credit for 20-year homeowners
Hanson and Brannon analyzed another proposal: giving a $25,000 tax credit to homeowners who sell their primary home after living there for at least 20 years. The authors estimate that it would spur 296,000 to 640,000 owners to list their homes for sale.
This would be a more generous tax credit than the ones that were handed out to home buyers from 2008 to 2010. Those credits were intended to boost home sales, and they were modestly successful.
Option 3: Cut capital gains tax on small landlords
Another proposal discussed by Hanson and Brannon: a limited-time, 50% reduction in the capital gains tax rate for small-time landlords who sell single-family rental properties to first-time home buyers. This measure would increase the supply of homes for sale by 67,000 to 146,000, they estimate.
Why give tax breaks to small-time landlords, defined as those who own five or fewer properties? Because they own half of the single-family rentals nationwide.
See: ‘We’ve become a renting nation’: Landlords benefit from high house prices, but millions of renters find themselves trapped
Make the incentives limited-time offers
Hanson and Brannon recommend that two of their proposals — the 20-year tax credit and the landlords capital gains tax cut — should last for “a short time window” and then expire. Setting a selling deadline would force property owners to act quickly to ease the shortage of homes for sale now, while there’s a shortage, and not later. The same tactic worked with tax breaks in 2009 and 2010 when there were spikes in home sales in the months before those tax credits expired.
As for doubling the capital gains exclusion on sales of primary homes, the authors recommend against allowing the exclusion to rise with future inflation. Such a policy would encourage homeowners “to move their home on the market with expediency.” The More Homes on the Market bill, however, would allow the exclusion to increase annually to keep pace with the inflation rate.
Also on MarketWatch: Remember the tiny house movement? How’s that working out?
But resales alone won’t do enough
The tax-related proposals would be short-term fixes. They wouldn’t increase the number of houses overall, points out Lisa Sturtevant, chief economist for Bright MLS, a multiple-listing service in the mid-Atlantic region.
“Talking about those types of policies misses the bigger picture,” Sturtevant says. “And the biggest thing government can do is to make sure it’s easy to build more housing, to increase the overall supply.”
But she’s not talking about the federal government, which has little power to compel homebuilding. Cities and counties are where land-use decisions are made, so progress has to be made from the bottom up, not the top down. That’s another frustrating thing about today’s housing market.
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Holden Lewis writes for NerdWallet. Email: [email protected]. Twitter: @HoldenL.
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