Economists Highlight Tax Code's Role in Housing Market Stagnation Affecting Seniors

What's Happening?

A recent analysis by Moody's Analytics, led by Chief Economist Mark Zandi and Deputy Chief Economist Cristian deRitis, has identified outdated capital gains tax caps as a significant factor contributing to the stagnation in the U.S. housing market. The Taxpayer Relief Act of 1997 introduced capital gains exclusions of $250,000 for single filers and $500,000 for married couples, which have not been adjusted for nearly 30 years. This has resulted in many empty-nest seniors remaining in homes that no longer suit their needs due to the prospect of steep capital gains taxes upon selling. The issue is particularly pronounced in high-cost metro areas, where property appreciation can lead to substantial tax bills, creating a 'lock-in effect' that prevents the turnover of housing inventory. This situation has led to a misallocation in the housing market, with older Americans occupying larger homes while younger families struggle to find adequate space.

Why It's Important?

The stagnation in the housing market has broader implications for the U.S. economy and society. The lock-in effect limits housing availability for growing families and first-time buyers, contributing to a housing shortage and increased rental demand. It also affects labor mobility, as people are less able to relocate for job opportunities, which can hinder regional economic growth. The current tax structure disproportionately impacts middle-income homeowners in expensive regions, often following life events such as divorce or the death of a spouse. Adjusting the tax code to reflect inflation or home price growth could alleviate these burdens, increase housing turnover, and stimulate economic activity through increased property sales and associated spending.

What's Next?

Economists suggest that indexing or eliminating the capital gains exclusion caps could release pent-up housing inventory, allowing seniors to downsize and freeing up homes for families. This change could be implemented as a time-limited adjustment to jump-start the market without destabilizing prices. Additionally, increased housing turnover could generate new revenue for local governments through transfer and property taxes, while boosting employment and economic growth in metro areas. The proposal also includes potential compliance savings for taxpayers and the IRS, as fewer individuals would need to track extensive paperwork related to capital gains.

Beyond the Headlines

The analysis highlights a demographic shift in the housing market, with baby boomers owning a significant portion of U.S. homes and many being mortgage-free. This trend has implications for the economy, as seniors may increasingly rely on home equity for financial stability. The proposal to adjust capital gains exclusions could address market frictions and support families across different income levels, while also considering the long-term economic impact of an aging population.