There has been a great deal of discussion but little written explanation regarding the low housing inventory level. Many factors are contributing to rising prices and limited inventory
in many markets.
1. Capital gains exclusion on primary residence:
The Taxpayer Relief Act of 1997 allows homeowners to take a $250,000 (for singles) or a $500,000 (for married couples) capital gains/appreciation exclusion. When gains exceed the $250K/$500K maximum, higher priced real estate markets experience an unintended outcome: fewer move-up buyers thereby reducing available home supply to new entrants
2. Step-up in basis:
A surviving spouse can sell a marital residence and possibly owe only federal capital gains
tax on the property’s appreciation, reducing the tax consequence of the sale. Married homeowners in higher-priced homes may wait for one spouse to pass away before a move is made, keeping thousands of properties off the market until some point
down the road.
3. Sustained low-rate environment:
Many homeowners and investors have either purchased or refinanced with historically low interest rates and are unlikely to sell these homes as a result of this favorable financing.
4. Market value discounts:
Between 2007 and 2010, many buyers purchased properties in markets that offered significant price discounts. Institutional investors entered the residential real estate market acquiring large pools of properties. Combined with low interest rates, these properties are not likely to be sold anytime soon.
5. Values not at peak levels across the country:
Home values in some regions across the U.S. are still below the historical highs of the mid-
2000s. Until these prices return to peak levels, these homeowners are unlikely to sell.
6. Move up:
If a homeowner cannot find a property to move up to, they will not sell their current home.
Similarly, retirees finding limited options for retirement communities are not motivated to sell unless they know exactly where they are going.
7. Stunted new development:
Since early 2008, there has been an unparalleled low level of new home development. The start-to-finish build cycle is lengthy, often requiring years to plan, approve, build and market. Until new housing development accelerates, new home inventory will remain limited. Given the factors above, nationwide inventory will likely remain low for an extended period of time and the natural solution remains unknown.
Source: Chris Trapani co-founder Sereno