With mortgage rates hovering near 7% after 10 consecutive fed rate hikes (and one recent pause June 2023), the U.S. housing market is still facing multiple competing offers with a recent increase in mortgage purchase applications. Home prices are higher, interest rates are higher, but the demand for housing seems to remain stable. Why is this happening?
In a typical market, an increase of 2x in interest rates should certainly cool off demand. According to themortgagereports.com and Freddie Mac, the U.S. average 30-year fixed mortgage rate in 2021 was 2.96%. Even with rates now averaging 6.79% (during the first week of June 2023), we are still facing a relative high demand for housing; primarily due to low housing inventory. “…supply is still just 40% of the 2019 levels”, claims PR Newswire.
Nearly 5.65 million homes were sold in 2020, according to data from the National Association of Realtors (NAR). While millions of homeowners may have the desire to sell and buy another home, having a low (30-yr fixed) mortgage rate diminishes just about any motivation to actually sell for a higher cost per square foot at an interest rate that’s significantly higher.
Without having a few hundred thousand homeowners listing their homes for sale, we can expect the high demand/ low supply crisis to continue.
Refer to the illustration below and look at the left-half where the red demand is high and the blue supply is low. In this scenario, the price will continue to increase as this gap widens. This is the current market that we’re facing. In 2009 when home prices were dropping, you may remember that there were many more homes available for sale than there were buyers. That scenario would reflect the right-half of the illustration below.
Home builders across the nation are doing their best to build the inventory, but could take years. The graph below illustrates the number of new homes completed by year (in the thousands). Doing the math, we were roughly averaging 1,532,000 new homes per year between 1968 and 2008. Between 2008 and 2022, the average dropped to 997,000.
In addition to new construction, a much faster solution to helping the housing inventory crisis would be to focus on rental and investment properties; even second homes.
According to Housing Wire 32.4% of home sales were rental or investment properties or second homes, according to a survey of 1,063 listing agents. A lot of these homes are likely financed with historic low rates – even though they are commercial properties. However, given that American real estate values have appreciated significantly over the recent years, wise investors also consider the capital gains taxes that will accompany these sales.
The Solution:
Incentivize these property owners to sell their properties. The incentive: to forgive or at least minimize their capital gains tax.
Everyone has their opinion on monetary policy and it’s likely close to a 50/50 split when it comes to a vote on just about anything. However, there are a few instances when our politicians put on their big boy pants and agree to a bipartisan deal – typically when most agree that the deal is truly in the best interest for everyone.
A strategy like this would cost the tax payers nothing and the fed wouldn’t likely notice much of a difference in tax revenue because real estate investors are likely planning to either hold onto their properties to maximize cash flow or roll their profits over via 1031 exchange to continue deferring capital gains. In both of these scenarios, the fed is not able to realize tax revenue.
Discounting the capital gains tax could be a win/win. Investors will be motivated to sell. Housing inventory will increase. The fed gets a portion of capital gains tax revenue sooner.
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Terry Roberts, USMC Veteran Sr. Mortgage Broker NMLS 397987
E Mortgage Capital, NMLS 1416824
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the home buying process across America.
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