The lack of houses for sale is a frustrating aspect of the current housing market. Even with high interest rates, the number of buyers is still higher than that of sellers.
Here’s a thought: what if government offered to pay people for selling their homes?
After the 2008 Financial Crisis, the government paid for people to purchase houses when there were not enough buyers. It could now pay to have houses sold when there aren’t enough buyers.
The federal government is not going to cut checks. The tax code would handle payments.
This idea has gained support from the U.S. House. A bill that would double the exclusion for capital gains on primary residences is co-sponsored by 15 members of both parties. There are other ways Congress can tweak the tax code in order to reward home sellers. The National Association of Realtors has commissioned two studies that have come up with additional ideas. However, neither of these proposals is drafted as legislation.
Why Inventory is Low
There are not enough houses for sale, largely because the homeowners do not want to lose their low-interest mortgage rates. Sherry Chan, an agent with Kappel Realty Group San Diego stated in an email that the primary reason for low inventory was because about 80% have interest rates below 5%. Even if the homeowner feels that their home is small or old, it is not possible for them to afford to buy a larger/better house at rates which are double their current rate. ”
Chen anticipates that more houses will be on the market once rates drop to a range of 5%. The government may also use tax incentives in order to encourage people to sell their homes, even when rates on mortgages are high.
Option 2: Double capital gains exemption
If you sold a home for more money than what you paid, you made a capital profit. If the capital gain is over $500,000 or $250,000, you will be taxed. In March, Reps. Jimmy Panetta (D-Calif.) and Mike Kelly (R-Pa.) introduced a bill that would double these amounts. H.R. 1321, also known as the More Homes on the Market Act or the More Homes on the Market Act is a bill that doubles the amount. H.R. 1321 is still awaiting a public hearing.
Panetta stated in a press release that he had met many people who wanted to sell their home but couldn’t due to financial hardship. Double the exclusion for capital gains “would enable homeowners to sell their home, downsize and still keep their nest-egg intact.” ”
He explains his reasoning as follows: Many older homeowners are fluttering in large empty nests and would rather sell their home and buy a smaller one. Under current tax laws, however, these homeowners would be subject to capital gains taxes. Most people keep their home until death, and so will receive a more lenient tax treatment.
The game of homeownership is now dominated by older people: 56% are over 55 years old, up from 48% 10 years ago. As older homeowners stay in their home longer than normal, they do not pass their houses on to younger generations, thus restricting an important traditional supply, according to a report commissioned by NAR, Tax Policy and Single Family Home Supply: Targeting Tenure and Capital Gains and Investor Owners would Change the Market. ”
This study was written jointly by Andrew Hanson, associate professor of Real Estate at the University of Illinois Chicago, as well as Ike Brannon, President of Capital Policy Analytics, Washington, D.C.-based think tank.
According to Hanson and Brannon, a capital gains tax increase would lead to an additional 159,000-344,000 homes coming on the market within the first year.
Option 2. $25,000 Credit for homeowners with 20 years of ownership
Hanson and Brannon examined another proposal. They proposed a tax credit of $25,000 for homeowners selling their primary residence after at least twenty years. According to the authors, this would encourage between 296,000 and 640,000 homeowners to put their houses on sale.
It would be more generous than the tax credits that were given to buyers of homes from 2008-2010. These credits were designed to increase home sales and were moderately successful.
Option 3. Reduce capital gains taxes on small landlords
Hanson and Brannon also discussed a proposal that would reduce the rate of capital gains taxes by 50% for landlords with limited experience who rent out single-family homes to first time homebuyers. They estimate that this measure will increase the number of houses for sale from 67,000 up to 146,000.
Why should small landlords, those with five properties or less, get tax benefits? They own about half the rental properties in America.
Limit the time of your incentives
Hanson and Brannon suggest that their two proposals — the tax credit for 20 years and the capital gains tax reductions for landlords — be extended only “for a limited time” before expiring. A selling deadline will force owners to sell their homes now to alleviate the current shortage. In 2009 and 2010, the same strategy worked when tax breaks expired. Home sales spiked in those months.
The authors advise against increasing the exclusion with inflation in the future. A policy like this would motivate homeowners to “move their homes on the market quickly.” However, the More Homes on the Market Bill would increase the exclusion annually in order to keep up with inflation.
Resales will not suffice
Tax-related solutions would only be temporary. Lisa Sturtevant is the chief economist at Bright MLS in the Mid-Atlantic Region. She says that the proposals would not increase the overall number of homes.
Sturtevant: “Talking of those kinds of policies is missing the larger picture.” The government should do everything it can to encourage the construction of more homes, and increase overall housing supply. ”
She’s not referring to the federal government which is unable to force homebuilding. Land-use decisions in cities and counties must be taken from the bottom upwards, rather than the top. The housing market is also frustrating.