Incentives to Stimulate Housing Market

It is no secret that the housing market has been battered by climbing interest rates and low inventory. After the housing crisis of 2008 and during Obama’s first term as President in 2009, homebuyer tax credits motivated more homebuying.

2009 Tax Credit for Buyers

Congress passed a bill, which allowed first-time buyers to claim a credit worth $8,000 - or 10% of the home's value, whichever is less - on their 2008 or 2009 taxes. While the credit effectively stimulated better opportunities for buyers, there was also a surplus of inventory in 2009.

That is not the case today. The housing market faces higher borrowing costs for buyers at the same time that we have record low inventory numbers. Would-be sellers are reluctant to give up lower interest rates to move.

So, just how much can the government do to alleviate a housing crisis?

Taxpayer Relief Act of 1997

In 1996, we faced a similar shortage of inventory.

The Taxpayer Relief Act of 1997, particularly the provision related to the capital gains exclusion for the sale of a primary residence, addressed the issue of "empty nesters" and others who were reluctant to sell their homes due to the significant equity they had accumulated.

"Empty nesters" were homeowners whose children had grown up and moved out, leaving them with larger homes than they might need or want. These homeowners often accumulated substantial equity in their homes over the years, especially considering the steady rise in home prices during the 1980s and 1990s.

Selling a home often incurred significant capital gains taxes, particularly for those with substantial equity. This tax liability acted as a disincentive for empty nesters and others to sell their homes and downsize, relocate, or otherwise change their living situation.

We face something similar today, in that would-be sellers don’t want to sell, creating a lack of inventory, similar to 1996. This is because they have home loans with interest rates far below what is being offered today.

The introduction of the capital gains exclusion in the Taxpayer Relief Act of 1997 provided a solution to this issue. By allowing individuals to exclude up to $250,000 (or $500,000 for married couples filing jointly) in capital gains from the sale of their primary residence, the act effectively reduced or eliminated the tax burden associated with selling a home for many empty nesters and other homeowners.

This change incentivized homeowners to sell their homes and unlocked a significant amount of housing inventory that might otherwise have remained off the market. It allowed empty nesters to downsize, relocate, or otherwise transition to new living arrangements without facing substantial tax liabilities, thus stimulating housing market activity and providing opportunities for new buyers.

2024 and 2025 Incentives for both Buyers and Sellers

President Biden has proposed a few economic stimulus programs to make housing more affordable and to increase inventory. This includes tax credits for both homebuyers and sellers, rent relief, and the development of 2 million homes to address the housing shortage.

Biden's proposed housing plan includes a one-year tax credit of up to $10,000 for middle-class sellers. Like the tax changes in 1997, incentivizing sellers through tax savings, may be a way to bring more inventory onto the market.

At the same time, he is proposing a mortgage relief credit for middle-class first-time homebuyers of up to $5,000 for two years. This credit would effectively reduce a buyer’s mortgage rate by over 1.5 percentage points for two years.

Since the beginning of the pandemic, home prices have surged 27%. By offering tax savings to both buyers and sellers, the administration seeks to bridge the period of waiting for mortgage rates to come down. These incentives wouldn’t be permanent, but be enacted for purchase and sales in 2024 and 2025.

So far, the Trump campaign has not offered any insight about their economic plans to spur the real estate market. It is clear that while the FED holds mortgage rates steady to decrease inflation, something more might be required to stimulate the market.

Contact me today for more information about sales activity and new homes for sale in Lake Tahoe and Truckee.