The Government Wants You to Sell Your Home

The lower home supply tends to keep housing prices high. In an economy where inflation is a threat, that’s a problem. That’s why the US House of Representatives has debated a bill to increase the housing supply. The “More Homes on the Market Act” wants to encourage homeowners to get off the fence and list their homes.

What the “More Homes on the Market Act” proposes

To be clear, this bill hasn’t been passed into law yet, but it’s worth considering what’s in the bill, especially if it starts to make its way in that direction.

According to HousingWire, the bipartisan bill would look to increase the sales gain tax exclusion to $500,000 for single filers or $1 million for joint filers. The current sales tax exclusion only has $250,000 in sales gains excluded from capital gains taxes or $500,000 for joint filers.

So the bill would expand the exclusion of capital gains taxes depending on how much you earned from your home sale. Rep. Jimmy Panetta of California believes that these original amounts, set in 1997, simply aren’t keeping up with inflation. Given that inflation is exactly what this act aims to address, those lower exclusions might not make sense in the world of 2023 and beyond. After all, the median price of a home sold in the US during the first quarter of 2023 was $436,800.

Why home buyers are struggling

Previous attempts at this bill have come and gone, and housing supply remains an issue nationwide. It’s the result of a combination of factors stemming all the way back to the Great Recession of 2008.

More recently, many homeowners secured mortgages pre-2022, an era of historically low-interest rates. Those low-interest rates also meant low mortgage rates. Since inflation has been aggressive since then, mortgage interest rates have also increased. That makes it harder for homeowners to move, refinance, or even take out a loan for renovations.

This further restricts an already compressed housing supply, which has been driven by demand and compounded by labor shortages and delays in new construction. But since demand hasn’t waned too much, prices are still appreciating.

That’s a problem for people buying a home in a higher interest rate environment. It means that even while mortgage rates have been elevated over the past couple of years, home prices haven’t come down to compensate.

Is Capital Sales Gains Tax the Main “Lever” to Pull Here?

The “More Homes on the Market Act” wants to incentivize homeowners to sell their homes, even in a higher interest rate environment.

While reducing a potential tax burden for selling a home can be an incentive, it doesn’t necessarily address every reason a homeowner might sell their home.

“I have been preparing taxes for 20 years and yet to have a single client come in saying they sold their house because of the $500,000 Capital Gain Tax exemption for a personal residence,” said Crystal Stranger, EA, COO of Cleer. “Plus, the people selling their primary residence and getting the exemption are going to buy another house. So increasing this exemption doesn’t do anything to increase the number of homes on the market.”

Other real estate professionals agree tax considerations aren’t the only reason homeowners make decisions, which could represent a critical flaw in the bill. All sorts of macroeconomic factors weigh into a homeowner’s decision on whether to move.

“Homeowners’ decisions to list their homes depend on various factors beyond tax considerations,” said Mike Gregor, a real estate agent based in Connecticut. “Personal circumstances, housing market conditions, relocation needs, and other financial concerns also play a significant role in the decision-making process.”

For many individuals, the decision can come down to issues as simple as job opportunities in their region; after all, some people move from one home to another just because a new job awaits them elsewhere.

Addressing the other challenges in the housing market

Supply is one of the issues facing today’s real estate market. And the high-interest rates can be a major factor in turning away home buyers.

Real estate investor Perry Zheng, CEO & Founder of Pallas, believes a more comprehensive approach could work, including “addressing supply constraints, streamlining the selling process, and offering incentives beyond tax benefits. It is also important to monitor the effectiveness of the bill once implemented and make adjustments if necessary.”

The bill’s attempt to address the supply crunch by getting people who are thinking about moving to list their homes is just one approach to addressing the shortage of listings. However, we’ll have to keep watching the macroeconomic factors–like interest rates–to gauge whether the housing supply will change over the next few years.