Why We Won’t Do The Things That Will Fix Real Estate

Just a warning so you don’t waste your time … stop reading now if you think it’s unreasonable that homes return to 2020 valuations in order to prevent a complete real estate (and economic) disaster, post 2030. This article is not for you. That said …

The housing crunch seems like a complicated problem … but not when you look at it as a supply/demand problem.

The problem is supply. What happened to it? And why isn’t anyone, AND I MEAN ANYONE, asking that question?

The supply didn’t disappear, it was stolen.

The answer to that question is uncomfortable for homeowners, and most people are homeowners: Fixing real estate means doing things that bring unoccupied-homes back on the market, and thereby make prices go down, and thus, make the average equity go back down for each homeowner. Preferably see and adjustment back to 2020 valuations, because without such an adjustment we could see a deep problem in about 10 years.

“The study predicts that the change in home-buying behaviors by younger generations may result in a glut of homes that could grow as high as 15 million by 2040” …This study was in 2020 before home values exploded, the reality is far worse today given the radical increase in home prices since then. https://www.sciencedaily.com/releases/2020/08/200811153909.htm

At the heart of this analysis is an ugly fact: One in seven home sales that were transacted in 2021 resulted in homes that remained unoccupied afterwards. https://www.bizjournals.com/austin/news/2021/12/08/second-homes-market-austin.html

One in seven. In fact, during the pandemic there was a craze of people buying 2nd, 3rd, and 4th homes. While most young families can’t afford to buy a house that costs 2x what it did 5 years ago, investors and people who just want extra homes were buying up as many homes as they could, and keeping them for themselves.

One in seven. This, at a time when most prospective owners can’t even come close to justify the skyrocketing price of their 1st home. So they don’t. Instead they rent for 2x of what the home’s house payment is for the actual owner. It’s Robinhood, in reverse.

One in seven homes going to investors as extra homes, sitting empty, eventually to possibly be listed for rent at insane prices. How is this possible? Well, consider that 1/3 of the wealth in this country is owned by 1% if the population … it’s not hard to figure out who can afford to buy up to 15% of all homes as extra homes, even at current prices, and then leave them empty (until someone finally agrees to pay rent at stratospheric rates). For them, it’s pocket change.

It’s a good value proposition for owners of multiple homes because they can depreciate the homes on their taxes, even if in real life it is appreciating. This is doubly bad for the prospective homeowner because when owners depreciate their extra home on their taxes that also penalizes them with higher capital gains tax if they sell the home, so they homeowner has no choice but to hang on to it forever (or reinvest it into another home), making the home forever unavailable for others to buy. If you were trying to invent a situation that makes homeownership impossible for a renter you couldn’t do better than that.

Unsurprisingly, all of those who sit on the housing Committee are in fact owners of multiple homes. And that’s why this a complicated problem. It’s not in their financial interest to do the right thing.

In fact, most people reading this are probably home owners. If the housing market corrected, would you like that? Your home value, dear reader, would go down, and thus so would your equity.

Don’t worry, because this is one of those cases where doing the right thing is NOT the popular thing, and so the solutions I propose won’t ever happen. Unfortunately. Even though they should.

And that is why nobody is reporting this in the news. News agencies? Also run by homeowners, with the decision-makers owning multiple homes.

Who is most hurt by this Machiavellian situation?

Who gets hurt most? Young families, just starting out, and who are now stuck with far higher living costs as a portion of their earning potential compared to their landlords when they were young. Their hope of a more equitable situation is buying a home that costs 2x what it cost in 2015. Not equitable.

And here’s the compassion they get: “Sorry dude, it was worse in the 70's” … really? That’s the standard for what’s acceptable?

Can Freddie Mac, Fannie Mae come to their rescue? Let’s be frank: that just enriches the previous owners for a house that costs way too much, while getting a young family a home at a price they’ll never pay off when the bottom drops out, in the glut expected post 2030. This therefore makes them less likely to buy as things get worse.

The Infinitely-Ignored Solutions (Applied only to those who are to blame)

There’s a few solutions that will safely lower costs and keep the real estate market healthy (not at the insane level it’s seen the last 5 years — those days are gone forever) for many years to come … they come from legislation that could only affect the small group of investors mainly to blame for the current housing shortage. Also they can only apply to purchases going forward (meaning nothing will be retroactive, ie. if you already have a home, or even multiple homes already then this will not affect you if you don’t plan on adding extra homes any time soon).

And yes, laws can be drafted that way with taxes that automatically go away when homes return to 2020 valuations. This still means everyone gets to keep the home appreciation that let up to that point, which brings us to the next sticky question:

What about those who bought their first home in 2021 and 2022 and will see their home prices fall below their purchase price as a result of this correction? No problem, it is covered by the solutions (below) that will generate tax income to offset their loses. That gives them a break on their taxes equal to the difference between the cost they paid and the 2020 valuation.

Solution #1: Extra sales tax for buying too many extra homes

For that very small group of investors mainly to blame for the current situation, they will have a financial disincentive (sales taxes, yes we all hate them) when adding that 3rd or 4th house while home prices are still ridiculous. Then when things correct (which will happen more quickly and with less heartache for owners) that tax will expire.

Solution #2: Temporary alleviation of capital gains tax when selling investment properties

If, for a short period until the housing market corrects, owners could sell their extra homes for fewer massive capital gains taxes (which taxes are huge because they depreciated their home value) then that would incentivize them to sell, and thereby increase the availability of homes.

Of course there would still be capital gains taxes, but if they could be reduced by say 50%, for a short period of time, then the government would get a windfall from the sales to fund the reimbursements for those who bought their first home in 2021 or 2022 (see above). The owners could also get out of what they consider a topped-out home market, and they could also justify lowering the price because of the reduced tax burden. Lastly that lower price and the increased housing availability is a win for prospective home buyers.

Like the other solutions this opportunity would also go away for them once 2020 home values have returned.

Solution #3: Fix the home-depreciation loophole

Finally, going forward, fix the tax loophole that incentivizes homeowners to buy multiple homes and depreciate them in spite of what the market does.

This is just a messed up loop hole that makes no sense. Sure they’ll still be able to depreciate, but only when the market depreciates, so the depreciating schedule changes each year to reflect reality, as the law should’ve always been.

All of these solutions would also be temporary, non-retroactive, applies only to homeowners with multiple-homes, and would be repealed when home prices return to more rational levels, and are designed so that it would naturally only affect markets that are currently out of control (where prices have double since 2015).

Sadly, as previously mentioned, it is unlikely that any of these proposals will see the light of day in any legislative branch of any lawmaking facility because lawmakers are homeowners, 2nd and 3rd homeowners, and so are their influential constituents. So, instead, we’ll probably just see more bad solutions like “Build more”, increasing the vacant glut of unoccupied homes in a market held hostage at stratospheric levels.