Left with just a souvenir, Eiffel Tower snow globe and a stale macaron, the Olympic flame still glows bright in our memories; a highlight reel of competitive grit and achievement. While worthy of a collective, merci beaucoup and empty promises to only wear berets, we are not totally unburdened of cosmic questions crowding our consciousness like the traffic jam at the start of the Marathon. Does Snoop Dogg go to a doctor or a veterinarian for his annual wellness exam? Was Sydney McLaughlin\u0002Levrone disadvantaged by having to wear a larger running bib to accommodate her name? Did Elon Musk\u2019s SpaceX get credited with assists for Steph Curry\u2019s interstellar 3-pointers? Given Cole Hocker\u2019s improbable, closing surge to win the 1500 meters race, will all distance runners sport aerodynamic-enhancing man buns from now on? And did Tom Cruise have to compete in the Olympic Trials to secure his spot in the closing ceremonies for his mission impossible, \u201cHollywood Pentathlon\u201d event: zip\u0002lining, motorcycling, parachuting, rappelling and flag-carrying? The Paris Olympics were sensational – the ultimate escape from our burdens, but alas, only temporary relief, for which we need to wait another four years. Long anticipated as well, will falling mortgage rates, the lowest since May, 2023, represent a similar \u201cescape\u201d for long-suffering American homebuyers; a cyclical \u201cbreather,\u201d or maybe, just another respite? All is not glitter and gold with U.S. housing.
Home ownership has, until recent years, been a bedrock constituent of the American Dream. It is not only aspirational but an unambiguous positive for society. It confers pride of ownership, stability of the nuclear family, \u201cmembership\u201d in a community, critical property tax revenue for many municipalities and the second-most important contributor to personal wealth creation. Homeowners are the all-important \u201clocal\u201d in the governance of schools, cities, counties and states. Even though not always annealed to similar objectives, those possessed of home ownership are a source of societal cohesion. Then, why, has our housing market been so imbalanced, so dysfunctional, for so long? While our politicos obsessively focus on the quid pro quo of providing permanent housing in return for removal of homeless tents, why do policy-makers struggle with making housing more accessible to those who are law-abiding taxpayers? Critically, otherwise powerful market forces have been ineffectual in influencing the costs that impact home ownership: sales price, financing availability and cost, and
insurance. This dynamic is captured in the National Association of Realtors\u2019 (NAR) housing \u201cAffordability Index.\u201d It factors the purchase of a median-priced existing home with a 20% down payment and a 30-year fixed-rate mortgage, assuming a median family income. It altogether showed housing to be \u201cmore affordable\u201d from 2010-2020 and then plummeting to a 15-year nadir where it has resided for the last few years. The change in affordability has been demonstrable. The home buying math is now daunting, if not demoralizing. The income required to buy the \u201caverage-priced\u201d home has more than doubled over a short period! In January of 2021, it took an income of about $49,000 to buy the median-priced single-family home (priced around $275,000) with a 20% down payment whereas now, it requires a family income of about $110,000 with the median home priced at $423,000. Even prospective homebuyers with that level of income, can only afford 40% of homes. Formerly, the rule-of-thumb was that housing costs should not consume more than 30% of household income. It now requires 40% of income to cover payments on the average house. Talk about being Unequivocally, a lack of housing supply has been the major problem. There has been a woeful undersupply reaching back to the aftermath from the Great Recession. Our housing stock has not kept pace with population growth. Annual U.S. housing starts averaged 1.7 million from 2000-2007 and have averaged about 1.1 million new starts since then. It takes about 1.6 million starts to keep up with population growth. Consequently, homebuyers face sky-high prices and a \u201csellers market,\u201d despite the spike in mortgage rates since 2022. My cursory calculation shows that we have incurred a cumulative shortage of 7 million homes since 2010 which augurs for a persistence of high home prices until housing starts can catch up with baseline demand. This will require not only lower interest rates but amelioration of zoning and environmental laws, raw land development for subdivisions plus more vacant lots. Another contributor to the supply shortage has been the low inventory of existing homes for sale; resulting in annual sales of only about 4.2 million units for the last two years versus a 5.5 million rate since 2000. Inventories, which have been steadily declining since 2007, look to have bottomed out (1.33 million homes currently), but need to almost double to get back to an historical trendline. Most observers attribute this contributor to the pall in housing to a \u201clocked-in\u201d dynamic whereby homeowners with sub-4% mortgages may not become prospective sellers until current mortgage rates breach 6%, or even 5%. But, is there more to this hesitancy? Mortgage rates are falling (now, a sub-6.4% 30-year fixed rate) and expected to fall further, with imminent Fed rate cuts. This development alone will provide a cyclical \u201cpop\u201d to housing growth. But just how much improvement will be dependent on the speed and downward trajectory of these rates. Typically pegged to the benchmark, 10-Year U.S. Treasury interest rate, this heretofore unassailable linkage has become more tenuous. Mortgage rates are now priced about 2.6% higher than benchmark Treasuries and could stay relatively elevated for two reasons:<\/p>

1) banks have generally been raising their mortgage lending standards and reducing these loans in their asset portfolios and<\/p>

2) the Federal Reserve is selling mortgage-backed securities, among other securities, in an effort to shrink their bloated balance sheet that has ballooned with successive, \u201cquantitative easing\u201d sprees since 2007. Nevertheless, mortgage rates will decline; likely reaching a \u201c5 handle\u201d (between 5% and 6%) within the next 6-months. However, is this enough? Should we be satisfied with only a cyclical bounce when this vital part of the American Dream is so elusive, for so many? More can be done to create greater liquidity and access in the housing market. And with residential real estate more than doubling in value over the last 50-years, after stripping out inflation, more home ownership equates to less wealth disparity. Here are three ways to accomplish this:<\/p>

Increase Capital Gains Tax Exclusion<\/strong> – Popular theory has it that persistently low housing inventory is solely the result of homeowners being locked into low cost mortgages; paying rates that are 2%-3% below the prevailing rates. Consequently, they are supposedly \u201ctrapped,\u201d since selling would occasion higher financing costs on their subsequent purchase. My view is that there is more to the problem. Practically anyone who has purchased a home over the last 5-years has experienced a significant increase in value. When you further extend the ownership periods, especially for Boomers, the gains are orders of magnitude, larger. These embedded capital gains have been further increased as a result of mortgage debt pay-downs or payoffs over time. So, many are not \u201ctrapped\u201d by low mortgage rates, but rather, by their capital gains. The government offers a home-sale tax exclusion of $500,000 for jointly-filing taxpayers. Here is the \u201crub.\u201d Even after deducting capital improvements, many homeowners would have capital gains far exceeding the exemption. Federal and State capital gains taxes could exceed 30%! Older Americans wishing to downsize by purchasing a one-floor, smaller footprint home or condo, realize that much higher square-footage costs for these formats could easily result in a purchase amount in excess of the after-tax proceeds from the sale of their long-standing residence. I call this \u201ctax friction\u201d and a major impediment to mobility and housing liquidity. The $500,000 exclusion was instituted in 1997 and has not been adjusted for inflation. In the intervening period, if indexed to inflation, this exclusion would have doubled. Increase the tax exclusion to $1 million and marvel at the unlocking effect.<\/p>

Encourage Mortgage \u201cBuy Downs\u201d <\/strong>– Many home builders, through their mortgage finance arms, will \u201cbuy down\u201d blocks of mortgages by paying \u201cpoints\u201d upfront in return for lower mortgage interest rates. This allows them to sustain buyer demand, especially when rates are high and lending standards, prohibitive for many buyers. What if the Feds and\/or States offered a similar inducement by encouraging homeowners to seller-finance sales (become the mortgagors) and \u201cbuy down\u201d the interest rate paid by the buyer through tax incentives? For example, if the prevailing mortgage rate is 6.0% and the seller finances the buyer at a 4.5% rate, a tax deduction or credit of some amount would be forthcoming. This would open up the housing market to many, who were heretofore priced out.<\/p>

Partner With First Time Homebuyers <\/strong>– The home purchase down payment for a first time homebuyer is dependent upon the type of loan undertaken from conventional to FHA, but it is reported to have averaged 8% in 2023 according to NAR. Assuming a purchase price of $250,000 (39% below the median home price) for a first time home buyer, the down payment would be $20,000. With home equity being the second biggest contributor to personal net worth after financial assets,the government should be prioritizing the facilitation of first time home buying. There is a right way and a wrong way to accomplish this. It needs to be in the form of a partnership where the government takes an equity stake in the home, rather than a subsidy that confers some sort of non-refundable tax credit. In this case, the government would invest up to $20,000, depending on the buyer\u2019s equity commitment. After some period (10-years?), if the buyer was consistently current in meeting mortgage payments, property taxes and insurance obligations, the government could vacate its equity position which would revert to the buyer. This would encourage expanded and responsible home ownership. Some advice is patently inadvisable; like Hong Kong authorities recently admonishing their teenagers to abstain from sex by playing badminton. My advice is decidedly, more credible. For example, I recently petitioned the International Olympic Committee, that consistent with their promotion of pseudo sports like breakdancing, they should scrap gymnastics\u2019 dastardly Balance Beam competition in favor of the Limbo. The beam now becomes a bar; just add sand and pina coladas. Voila! \u201cHow low can you go\u201d instead of, \u201chow frightfully can you fall?\u201d For most Americans, what would be the equivalent of winning an Olympic medal? Undeniably, being awarded the keys to their new home.<\/p>

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