Incentivizing current owners to sell is key
The U.S. housing market is in the midst of an inventory crisis. The number of homes for sale in the U.S. is hovering near record lows, caused by a pandemic-induced housing inventory death-spiral.
At the same time, home sales have soared close to record highs, suggesting the housing market suffers exclusively from a supply (and not demand) problem. Thus, federal policies must focus as much on increasing housing supply as boosting demand.
Rolled out in isolation, first-time homebuyer tax incentives (FTHB) – such as the Biden Administration’s proposed $15,000 advanceable FTHB credit – are only likely to make housing inventory scarcer and prices higher. Instead of just bolstering demand, policies that focusing on increasing supply – such as tax incentives that encourage owners to sell and builders to build – is what the U.S. housing market desperately needs.
The federal government could quickly incentivize owners of existing homes to sell using one or a combination of carrot-based or stick-based approaches. Using a carrot-based approach, opening a temporary window of capital gains exemptions would incentivize owners of investment homes with capital gains, as well as owner-occupiers with over $250k-$500k in gains, to sell.
Alternatively, a stick-based approach might raise taxes on single-family rental income, implement nation-wide rent control, and/or reduce bulk ownership of single-family homes. In our current political environment, though, it seems carrot-based approaches would be much more likely to garner bipartisan support than stick-based approaches, especially given the hardship that both renters and landlords have experienced during the pandemic.
The efficacy of a carrot-based supply approach could also be heightened by combining it with the $15,000 FTHB credit in a targeted way. For example, capital-gain exclusion eligibility could be tied to the sale of a home to a first-time homebuyer. This would incentivize transfers of housing units from owners of homes with taxable gains to renters. In this way, policies would assist first-time homebuyers by helping them solve the search (supply) problem while also assisting them with the demand (affordability) problem.
This approach, however, doesn’t come without challenges. Incentivizing the conversion of rental stock to owner-occupier stock reduces the supply of rental housing. The beauty of a combined cap-gains and FTHB approach, however, is that in aggregate there would be no net loss of rental stock relative to rental demand. First-time hombeuyers who are, by definition, renting, would purchase previously rented homes or homes of long-time residents who moved elsewhere.
But the switch may not always be direct. In other words, owners of single-family rental units may not always – or even ever – sell directly to their tenants. This would create a temporary – but painful – problem for renters whose owners decided to sell since they would likely be forced to move. Assistance to state and local housing agencies could help displaced renters find new accommodation and moving-related tax breaks could help alleviate some of the financial pain of a relocation.
The federal government could also implement similar incentives for homebuilders by offering tax breaks to sellers of new homes who either sell to existing homeowners who sold to first-time homebuyers or to first-time homebuyers themselves. This would help break up congestion in the housing market by not only incentivizing home builders to cater to FTHBs, but in the case of markets where this isn’t feasible (because of high construction costs), it would also incentivize current owner-occupiers to trade up and sell their existing home to a first-time homebuyer, thus freeing up the housing inventory ladder.
In sum, providing an advanceable $15,000 FTHB credit alone is a well-intentioned policy that would likely have severe, un-intended consequences in today’s housing inventory-strangled market. However, when implemented in parallel with supply-oriented tax breaks for owners and builders, the Biden administration could help promote the largest wave of homeownership not seen in a quarter-century.
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