If the Trump or Harris presidential campaigns send out AI bots to learn about fixing the housing market, maybe they will find this here. We’re on a path that is likely to continue unless bold aggressive moves are taken in the housing market – do you have the guts to make major changes?

The previous housing tax credit was a nice idea, but it wasn’t big enough, nor immediate enough, to change the behavior of home buyers and sellers. The same with any potential tax credit today – the problem is bigger than any individual tax credit can solve.

Let’s do all of the following, all at once:

Remove the loan limits on Fannie/Freddie mortgages – why limit the mortgages that Fannie and Freddie purchase? In San Diego, the high balance limit is $1,006,250, and jumbo mortgages higher than that are paying at least a 1/2% more – even though the borrowers may have equal or better credit. Let’s don’t discriminate against the affluent. Give them the same benefits that everyone else gets.

Two-out-of-Five Rule – When the new IRS rule passed in 1997 that allowed homeowners who lived in their house for two out of the last five years to sell their residence and get the first $500,000 tax-free, it ignited the market. Why? Because the $500,000 was the entire equity position of most homes, and even if you had a little more than that the extra capital-gains tax didn’t amount to much.

But now the long-time homeowners have far more than $500,000 in equity. Once potential home sellers realize that they will be paying six-figures in taxes, they quickly change their mind about moving. Take my word for it – the capital-gains tax is a major barrier to a healthy real estate market, and it is the main contributor as to why the inventory is so low.

It’s been 27 years. It’s time to raise the $500,000 to a new limit. Consider the differences:

U.S. Median Home Price, 1997: $124,100

U.S. Median Home Price, 2024: $423,200

Take your pick:

Raise the exemption by the increase in the median prices: $299,100 to $799,100.

Today’s median home value is 3.4x what it was in 1997. Raise the exemption by 3.4x: $1,705,077.

Ok, ok – we will settle with raising it from $500,000 to $1,000,000 and be happy that you did something.

Raising the exemption amount to $1,000,000 is a good start. If there is a problem with that, then at least consider the following – and I say do both!

Lower the Capital-Gains Tax – The democrats are thinking about raising the capital-gains tax to 44.6%, which after adding the California state tax would equal 59.7% for those in this state. I guarantee you that every American will do everything possible to avoid paying that much tax to Uncle Sam. Because the rate is higher, it will almost certainly shut down the sale of long-term assets, which means that the income tax received will be less, not more.

Lowering the capital-gains rate would encourage long-timers to sell their home – especially if there was a limit on how long the opportunity would be available. Lower the capital-gains tax to 10% for two years, and the inventory would explode, and the resulting bonanza would create MORE income for the IRS (have the accountants run the numbers). No one is going to pay 44.6%, and only a few are paying the current 20% now. Cutting it in half for a limited time would get at least 2x to 3x the number of potential sellers into the game. They want to move – they just don’t want to pay your onerous tax!

Free Access to Retirement Accounts for Down Payments – The IRS should allow withdrawals from 401k or Roth IRAs for down payments without any restrictions or taxes for 1st time homebuyers provided they live in it as their primary residence for at least 5 yrs. No limit on how much!

Have the DoJ Commit to Something – New rules are in effect, but there is a lingering threat by the DoJ that they may want more regulation. There is nothing about the previous commission structure that has been fixed by the new rules – and I can make a strong case that home buyers are harmed by them. Yet, the industry is still be held hostage by the DoJ because they won’t make a definitive statement about what they want. Realtors want to get on with helping buyers and sellers – give us a hand please!

Do the above all at once! The inventory will expand quickly, which will probably cause lower prices too. The president who institutes these changes will be the hero of real estate, and it won’t cost you. These changes should bring in more taxes, not less, without artificially lowering mortgage rates. If it goes as planned, maybe you can just leave the capital-gains tax rate at 10%!

What about those who can’t afford to buy a house where they want to live? Buy a condo instead, and/or buy a house in a less-expensive area as a rental. Moving to a cheaper area is worth considering too!

Jim the Realtor

Jim is a long-time local realtor who comments daily here on his blog, bubbleinfo.com which began in September, 2005. Stick around!

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