It is generally agreed that the housing market would be healthier with better alignment between supply and demand. Policymakers are aware of the issue and are exploring ways to bring balance back to the market.
Several policy options have been brought to the floor of legislative bodies throughout the country, with some directly aiming to improve supply and others potentially offering an ancillary benefit. Some offer a carrot through development subsidies or flexible zoning codes; others prefer the use of the stick by imposing a more restrictive tax policy.
Of the proposals, the majority fall within two policy strategies—free up housing supply and help create brand-new housing supply. We explored five of the potential solutions across both categories and detail them below. Note, we are not advocating for or against the suggested policies. In fact, we think some of these policies could be counterproductive to solving the affordability crisis. However, we still think it's important to understand those policies being explored and we detail them below.
Here are five ways policymakers could impact supply.
Higher Taxes on Investment Properties
Over the past few years, investors have accounted for a substantial share of total home sales. Investor purchases peaked at 20.4% of home sales at the beginning of 2022 and remained robust through the second quarter of 2023 at 15.6%.
A variety of tax policy initiatives aimed at restricting larger residential investors have been proposed, with the goal of adding to the supply of homes available for primary buyers.
For example, the Stop Predatory Investing Act proposed by Sen. Sherrod Brown and others would stop investors from deducting interest or depreciation on rental homes if they own more than 50. The desired result would be to reduce the tax deductibility incentive for large firms to buy rental housing, allowing more primary buyers to purchase available inventory.
Additionally, a recent bill introduced in Ohio by state Sen. Louis Blessing proposed that corporations owning 50 or more homes in a single county should be taxed $1,500 per month on each of those properties. The intent is to disincentivize residential investment with a tax too large to pass through to tenants, thus encouraging large investors to increase supply by divesting a portion of their properties and reducing competition from these investors for existing inventory.
Increase the Capital Gains Exclusion
Home sellers are allowed to exclude $250,000 for single filers and $500,000 for married couples from capital gains related to the sale. These exclusions are not tied to inflation so with prices experiencing sharp increases over the past several years, significantly more households have surpassed these thresholds in equity. As such, people in high-cost markets such as California and New York are reluctant to sell.
The More Homes on the Market Act was proposed earlier this year to revise these exemptions. Specifically, the exclusion would increase to $500,000 for single tax filers and $1 million for joint. The bill is intended to offer a greater incentive for homeowners who have built substantial equity in their homes to sell due to the lower tax burden.
Eliminate or Ease Land-Use Restrictions
In Zonda's latest builder survey, builders indicated delays and costs from government services continue to be the primary issue causing disruption in delivering more homes. Limited availability of land has risen in 2023 to the second biggest inhibitor. Land-use restrictions are at the intersection of both.
Several strategies could be implemented to increase affordable housing through land-use and zoning reforms, such as moving away from strictly single-family zoning and allowing accessory dwelling units (ADUs) to increase affordability and supply. The Harvard Law Review argues that affordable housing should be recognized as a right through state constitutional amendments in order to further ease the current burdens of overly restrictive zoning laws and to promote new development.
Changes to land-use restrictions sound like a slam dunk, but a paper in Urban Studies notes that zoning reform only marginally increased housing supply. Further, the benefits of such proposed changes would likely take years to come to fruition, assuming they get past legal hurdles brought on by anti-development organizations. Even so, zoning reform would likely at minimum provide some improvement in housing supply.
Subsidize New Development for Lower-Income Households
Sen. Elizabeth Warren recently proposed a bill, the American Housing and Economic Mobility Act, to increase the supply of affordable housing. A key component of the bill is to “control the cost of renting or buying a home by leveraging federal funding to build around 3 million new housing units.”
The bill proposes several other measures to help families afford homes, including proposals to:
- Increase funding for the National Housing Trust Fund to support affordable housing options for extremely low- and very low-income households;
- Invest in rural housing programs;
- Help Black borrowers by creating a down payment assistance program; and
- Improve compliance with the Community Reinvestment Act.
Another proposal is the Affordable Housing Credit Improvement Act, which would expand and strengthen the low-income housing tax credit. This bill also includes provisions to fight NIMBY or not in my backyard opposition by, as it states, removing outdated requirements.
The combination of providing subsidies for additional for-sale affordable housing and reducing the legal barriers to new development would likely provide a stimulus to this underserved portion of the market. These reduced costs associated with development could incentivize developers to become more active in this traditionally cost and fee prohibitive sector of the for-sale housing market.
Public/Private Partnerships to Redevelop CRE Office Space
Following the pandemic, commercial real estate has experienced a sharp increase in vacancy rates. In fact, it was reported earlier this year that office vacancy rates had hit an all-time high. It makes sense that redevelopment of commercial spaces be proposed to increase the supply of housing, especially in more dense urban areas.
Boston is leading the way nationally following its announcement in July to incentivize redevelopment of vacant commercial space by offering sharply reduced property taxes to prospective developers. The idea is to incentivize builders to retrofit vacant office space that is otherwise not being used. Boston isn’t alone. Big cities across the country, including Washington, D.C., and San Francisco, are either embracing or at least discussing conversions as a solution to vacant space.
Redevelopment seems logical, but it is easier said than done. For example, many office buildings would lack windows in interior units (against most residential codes), and numerous buildings would require extensive plumbing work. This could be costly depending on the condition of the building and often results in canceled plans. In fact, conversions represent just 2% of the current pipeline, per Yardi data.
