A capital gains tax exclusion for home sales, set in 1997 and not indexed to inflation, now traps seniors in large homes. Facing a substantial tax bill if they sell, many choose not to downsize. This prevents family-sized homes from entering the market, exacerbating the inventory shortage for younger generations.
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The most powerful voting bloc—homeowners—is financially incentivized to oppose new housing development that would lower prices. This political reality means politicians cannot address housing affordability without alienating their core voters, leading to policy stagnation and an intractable crisis.
The most effective way to lower housing prices is to increase supply. Instead of artificially freezing rents, which discourages investment, policymakers should remove regulations that make building new units difficult. More construction creates more competition, which naturally drives down prices for everyone.
High home prices should not be interpreted as a sign of a healthy market. Instead, they indicate a system that is malfunctioning as designed, where artificial scarcity created by policy and corporate buying drives prices up. This reflects a structural failure, not robust economic demand.
Housing scarcity is a bottom-up cycle where homeowners' financial incentive is to protect their property value (NIMBYism). They then vote for politicians who enact restrictive building policies, turning personal financial interests into systemic regulatory bottlenecks.
To address the housing supply crisis, policymakers should index the capital gains tax exclusion for home sales to inflation. The current thresholds, unchanged since 1997, create a disincentive for long-term homeowners to sell. Adjusting the exclusion would incentivize downsizing, releasing existing housing stock onto the market for new buyers.
A major driver of today's housing scarcity is that homeowners, particularly Boomers, who refinanced into sub-3% mortgages have no financial incentive to ever sell. This seemingly positive economic condition has had the negative side effect of locking vast amounts of housing inventory in place, worsening the supply crisis.
New rent control laws don't just limit rent; they fundamentally cap the equity upside for real estate investors. By limiting potential cash flow growth from an asset, these policies make building or upgrading apartment buildings less attractive. This discourages the very capital investment needed to solve the housing supply crisis.
A significant cause of today's housing inventory shortage is that homeowners are locked into low-interest mortgages. "Portable mortgages," which are being actively evaluated by the FHFA, would allow homeowners to transfer their existing mortgage to a new property, removing the financial disincentive to move and potentially unlocking market liquidity.
The American housing market is increasingly inaccessible to younger generations. The median age of a homebuyer has hit a record high of 59, the same age one can access retirement funds. Even the median first-time buyer is now 40, indicating a systemic affordability crisis.
Politicians at all levels actively restrict housing supply through zoning and other policies. This is not incompetence, but a deliberate strategy to protect and inflate property values, which satisfies the large and reliable homeowner voting bloc, ensuring re-election at the expense of renters and future buyers.