Nothing is forever. Eventually, market conditions shift. We’ve been stuck in a market stalemate for a while now, and I’ve been thinking about what will get us unstuck.
There are two things keeping people in homes longer than makes sense for them: Interest rates and taxes. The majority of homeowners with loans had refinanced to take advantage of ultra low interest rates in 2020-2021, and other homeowners, of course, owe nothing at all. So even if a house no longer fits their needs, many are understandably reluctant to sell their property with a 3% loan (or none) and trade it for a better property with a 6% loan. This has been termed “interest rate lock”, but there are some reasons why people still sell and move.
1. Life events: No matter how low the mortgage rate, if your job just transferred you across the country, or suddenly requires that you actually show up to work in person, you might be a seller. If someone died and left you with a property in a place where you don’t live and have no desire to be a landlord, you might be a seller. If your marriage has ended, and you need to split the jointly owned assets, you might be a seller. Life events don’t care about interest rates.
2. Prop 19: Property taxes in LA are 1.25% of the purchase price. You may have some supplemental assessments later, but usually the annual property taxes you pay are forever linked to your purchase price. It used to be that you could only take your property tax base with you one time when you moved after age 55, and you were limited to certain counties in which you could purchase the replacement property to qualify. Now, thanks to Prop 19, a homeowner 55 or older, severely disabled, or whose home was destroyed by wildfire or disaster can transfer their primary residence’s property tax base value to a replacement residence of any value, anywhere in the state. This is meaningful. If you won’t have to pay higher property taxes on your new house than what you’ve been paying on your current house, moving might be an attractive idea.
3. Doubling in capital gains tax exclusion: Congress is currently working on passing a bill that would double the capital gains tax exclusion on the sale of a primary residence. This is also big. In fact, this bill is called the “More Homes on the Market Act” because the belief is that it will help achieve just that. If you’ve owned your home for 10+ years, chances are you’ve seen a substantial appreciation in the value, and selling means you may have to pay a sizable amount of taxes on the gain. Currently, $250,000 of gain is excluded from taxation ($500,000 for married couples) but this has been the case since 1997, and in some of our markets, $250,000 is a small fraction of the actual gain and tax exposure. If this bill is passed, that amount doubles, and a married couple could exclude from taxation up to $1,000,000 in long term capital gains on the sale of their primary residence.
4. People have gotten used to the new rates and believe they will be able to refinance in the future. Now that the shock has passed of rates adjusting from the historic low meant to keep the economy from collapsing during the worst days of the pandemic to where they are now, people are getting used to them. Most people believe that sometime within the next couple of years rates will likely be more attractive, and they need housing now, so they are buying with the intent to refinance later.
Even if interest rates remain elevated this year, there are clearly other reasons, both personal and financial that will still propel selling and buying. We may not see the frenzy of activity we had in 2021 for a while, but not paying taxes on the gain, retaining your property tax base coupled with one of those big life changes might create enough movement to get us un-stuck.