A new column by The Market Institute President Charles Sauer published in RealClearMarkets examines how outdated tax policy is quietly worsening America’s housing affordability crisis — and how a simple reform could help free up supply and restore the American dream of homeownership.
As Sauer explains, owning property has long been central to the American idea of opportunity and wealth creation. But today, government policy is making both buying and selling a home more difficult.
“Though it was changed to ‘pursuit of happiness’ for our 250-year-old Declaration, John Locke’s original statement about ‘life, liberty, and property’ is the founding sentiment of the American experiment. Indeed, the American dream has always been that normal people can own their own home.”
Unfortunately, that dream is slipping further out of reach for many Americans. Since the pandemic, housing prices have surged while borrowing costs have climbed sharply.
“Since the covid lockdowns, housing prices have gone up 40% while interest rates have about doubled.”
These pressures are affecting not only prospective buyers but also current homeowners who might otherwise sell their homes. Outdated tax rules mean many homeowners face large tax bills when selling, which discourages transactions and tightens housing supply.
“The market distortions take what should be a mutually beneficial transaction – like all free market transactions – and makes it something that neither side is truly happy about.”
One overlooked contributor is a capital gains exclusion on home sales that has not been updated since 1997. Under current law, homeowners can exclude $250,000 in gains from taxation ($500,000 for married couples). But decades of inflation have dramatically reduced the value of that exclusion.
Sauer notes that inflation — driven in part by federal spending and monetary policy — has quietly turned a rule that once protected most homeowners into a barrier to selling.
“A tax rule that once protected most sellers now exposes millions of them to a substantial bill, all from gains derived by inflation.”
A bipartisan proposal in Congress could address this issue. The More Homes on the Market Act, introduced by Senators John Cornyn and Michael Bennet, would update the exclusion to $500,000 for single filers and $1 million for married couples.
According to Sauer, this reform could help unlock housing supply while allowing homeowners to keep more of the wealth they have built.
“This simple change would mean that homeowners would keep an additional $40 billion over the next decade – freeing up housing supply and stopping distorted home prices because of faulty tax law.”
Importantly, Sauer argues that solving the housing crisis does not require new federal programs or subsidies. Instead, policymakers should focus on removing the government-created barriers that are making the problem worse.
“The only solution that is needed is to get the government out of the way.”
Fixing outdated tax policy could be an important first step toward restoring housing affordability and renewing the American promise of property ownership.
“Restoring the American people’s ability to own property seems like a great way to celebrate 250 years of our life and liberty.”
Read the full article in RealClearMarkets
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