Can Congress Solve California’s Housing Crisis

Can Congress Solve California’s Housing Crisis

  • Dana Carmel
  • 07/7/23

The real estate market is starving for inventory.

Buyers feel it, sellers think it, and the real estate industry is definitely feeling the pain.

But here’s the question – is there any way out that doesn’t involve waiting for interest rates to drop?

Well, maybe there’s a glimmer of hope. But it’s coming from a sector you’re probably not expecting: Congress!

California’s Housing Crisis is an Endless Tunnel

Like so many others in the Bay Area’s residential market, I am still waiting to see that flickering light at the end of the tunnel.

We cannot turn a blind eye to the severity of California's housing crisis. According to Compass Chief Market Analyst Patrick Carlisle, home inventory is at its lowest point in 20 years, and it’s impacting all ends of the market. With limited options on the market, buyers are struggling to find what they need (within their budget), and potential sellers feel locked into their current properties.

Sales of existing single-family detached homes in California have dropped by a staggering 34.2% compared to last year.  In April, the start of what should be the hottest selling season, San Francisco Peninsula home sales dropped by nearly half when compared to the previous year.

Let’s Talk Capital Gains

When selling a primary residence, I bet your first thought isn’t, “What about capital gains?”

Once upon a time, the thought of paying capital gains on your home wasn’t much of a concern unless you’d held onto your property for a long time. Or if your luxury home has significantly appreciated in value.

But if you take a look at just the median home sale’s price from the start of 2020 to the end of 2022, we are looking at over $150,000 in growth. And that’s just in 2 years, across the entirety of the country. In expensive markets like the Bay Area, that growth has been even more significant.

Now, current capital gains limits are:

  • $250k for a single
  • $500k for a married couple

Now, sellers in less expensive markets are probably still sitting comfortably within this threshold. But in San Francisco, with a median home price of over 1.2M, there’s a lot more concern.

And when we look at the really pricey areas like my hometown of Atherton, with a median price of $7.5M, capital gains tax is a real threat.

Can you see how capital gains might become a concern for some homeowners?

Having to pay capital gains tax means there’s less funds to apply to your next home purchase – which deters sellers from listing their homes.

So, Where’s the Good News?

Okay, let’s go back to talking about what’s happening in Congress and why we should care.

U.S. Reps. Jimmy Panetta and Mike Kelly have reintroduced the More Homes on the Market Act to address capital gains tax. This act provides necessary tax relief for homeowners, ultimately incentivizing more people to sell their homes.

It might just be enough to help increase supply, especially in the Bay Area.

Seniors: The Biggest Beneficiaries of the “More Homes on the Market Act”

It’s not just luxury homeowners who stand to benefit from the “More Homes on the Market Act.” The Act is primarily designed to help senior citizens who have owned their primary residents for a long time. Time in any investment is critical, and your home is no different.

Bay Area residents who have lived in their homes for decades face the highest capital gains tax bills when selling.

Due to tax repercussions, many senior citizens hesitate to sell their now high-value properties. Why downsize only to lose a significant chunk of your equity? The savvy homeowner knows it’s financially advantageous for them to pass on the asset and for their heirs to benefit from a step-up in cost basis.

Inadvertently, capital gains disincentivize seniors from downsizing and contribute to a shortage of available homes for younger and first-time buyers.

The “More Homes on the Market Act” aims to address this issue. This legislation encourages homeowners to sell their homes by providing tax relief. And it’s not an insignificant amount. The Act seeks to effectively double the tax exclusions on sales gains, allowing homeowners to retain a larger portion of their profits.

Here are the key provisions of the Act:

  • Increase the sales gain tax exclusion to $500,000 for single filers and $1 million for joint filers.
  • Require an annual inflation adjustment to the increased tax exclusion amount.

What impact would this Act have on California’s housing market?

If this act gets passed, we expect to see an improvement in the supply of homes on the market.

According to the National Association of REALTORS®, 95 percent of single homeowners and 68 percent of married homeowners in California who purchased their homes before 2000 could potentially face capital gains tax if they were to sell their homes this year. The “More Homes on the Market Act” entices homeowners to sell their homes and receive their profits without the huge tax bill.

This bill will not just benefit the uber-wealthy. Let’s look at San Francisco’s more humble neighbor, Oakland, which, according to the US Census, saw average home values jump from $235,500 in 2000 to 730,200 in 2018 (the most updated census figure). That doesn’t even take into consideration market growth over the last five years.

Yes, this Act will help high-value property owners, but it’s also poised to help everyday homeowners throughout the Bay Area and other expensive markets.

We can talk about interest rates and new construction all day, but this bill might just be the secret weapon that makes a huge impact for buyers and sellers.

How Does the “More Homes on the Market Act” Benefit Californians as a Whole?

  1. Greater financial flexibility. It provides homeowners with more options and flexibility when it comes to their finances. They can take advantage of the increased exclusion limits to make strategic decisions about selling their properties and buying their next home.
  2. Incentives for selling properties. Homeowners are given much-needed incentives to put their properties on the market. That means more listings and more buying opportunities.
  1. Relief for homeowners. Necessary relief for homeowners, especially those with high-value homes. It helps alleviate some of the financial burdens associated with selling a property and potentially paying capital gains taxes.
  2. More buying opportunities. With more homeowners listing their properties, there’ll be an overall increase in market activity. Buyers are starving for inventory, and this Act might just put us a step in the right direction.
  3. Long-term tax benefits. With an annual inflation adjustment to the capital gains exclusion, these limits will no longer get stuck in the past, waiting for yet another Act to increase their limit.  

Growing Support for More Homes on the Market Act

C.A.R. President Jennifer Branchini expressed gratitude for the More Homes on the Market Act, recognizing its potential impact on California homeowners. Additionally, organizations like the National Association of REALTORS®, the California REALTORS®, and trade associations like the National Association of Home Builders have supported this legislation.

The future of California's residential real estate market looks a little more promising with the prospect of the “More Homes on the Market Act” in place. I hope to see a wave of positive changes that will help reshape the housing market in our state.

Younger and first-time buyers may finally get their chance to step onto the property ladder. The Act’s provisions will help create an environment that stimulates real estate activity, paving the way for more transactions and opportunities.

Finally, a push that doesn’t cost buyers or sellers any more money.

The “More Homes on the Market Act” is our catalyst for change—a glimmer of hope for Californians.

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