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My fascination with housing started in the early 1970s when I bought my first house in Casa Grande, Arizona. It was a modest 1,400-square-foot, single-family property with a spacious carport and a swimming pool. It was the swimming pool that sold me. The price was $27,900.
My monthly PITI (principal, interest, taxes and insurance) was slightly more than $250 — very doable for a young entrepreneur making a whopping $12,000 a year.
Today, that humble desert oasis has a $268,800 valuation. Putting five decades of appreciation aside for a moment, my point is a 22-year-old kid with a few bucks in their pocket could buy a decent home in the 1970s for about twice their annual income.
I doubt there are a plethora of millennials in Casa Grande today making $134,400 a year, especially when you consider the state’s median household income is $73,450, according to the Federal Reserve Bank of St. Louis.
We all have our share of stories about the good old days. But that was then, and this is now.
I fear the homeownership rate in America may be on the decline for future generations of would-be homebuyers if we don’t act quickly and decisively.
Affordable homes are hard to find
Home affordability has become a huge issue across the Nation. Hardly a day goes by without seeing stories of inventory shortages, record-breaking home prices, rising mortgage rates and first-time buyers competing against well-capitalized institutional investors.
We all know too well the factors contributing to the current market dynamic. In my view, the biggest culprit was the lack of new home construction in the decade following the Great Recession. The numbers are startling.
Single-family housing starts averaged 10.7 million units in five of the past six decades going back to the 1960s, according to the Federal Reserve Bank of St. Louis. The notable outlier was the decade from 2010 to 2019, immediately following the Great Recession of 2006-2009.
There were only 6.8 million homes built during that decade, representing a 3.9 million shortfall from the historic average. In addition, the number of U.S. households more than doubled, from 52.8 million in 1960 to 131.4 million in 2023, creating significantly more demand for housing.
This begs the question: Where do we come up with the 3.9 million homes that weren’t built during the decade following the Great Recession? I believe the answer to that question could be right under our collective noses.
Time is of the essence
But time is not on our side, especially for those currently in the market to buy their first home prior to becoming eligible for Social Security.
If we as an industry sit back and allow this to continue without addressing the supply side of the equation, the wealth gap in America will grow exponentially. And we all know how that dystopian movie could end.
According to the Survey of Consumer Finances, released in Sept. 2020 by the Federal Reserve, in 2019, U.S. homeowners had a median net worth of $255,000, while renters had a net worth of just $6,300 — a nearly 40 times difference. With increased home values over the past four years, that difference has become even greater.
Here’s one more alarming fact to support that urgency. The National Association of Realtors (NAR) reports that in 2023, a typical homebuyer’s annual household income required to buy the median price home climbed to a record $107,000, up 22 percent from $88,000 in 2022 — the highest percentage increase in two decades.
If you’re still reading, thank you for allowing me to set the stage.
A solution to affordability
Here’s my proposed public/private sector solution. It’s called “The American Dream Tax Incentive.”
According to Black Knight data, there are 24.7 million single-family, condominium, and townhouse rental properties in the U.S., commonly referred to as SFRs. Contrary to popular belief, the vast majority of SFRs are not owned by large Wall Street institutions.
Some 17.2 million SFRs (69.8 percent) are owned by individuals who own just one rental property. Another 5.3 million SFRs are owned by individuals who own between two to five rental properties (21.3 percent).
Clearly, the SFR space is dominated by small mom-and-pop owner-operators: 91 percent, to be exact.
Most of these small investors have owned their SFRs for many years. In most cases, they have seen significant property appreciation and would face substantial long-term capital gains if they were to sell. In addition, at the time of sale, they would have to pay income tax on the recapture of depreciation.
The proposed solution would be to provide a meaningful federal tax incentive for rental property owners with five or fewer properties who sell to a qualified owner-occupant, first-time homebuyer.
Certain restrictions would apply: First-time buyers would be defined as any individual who has not owned a home in the past three years. Private investors, move-up buyers, institutional buyers, iBuyers or non-owner occupant buyers would be excluded. Eligible SFRs must have been owned by the current owner for a minimum of three years.
The federal tax incentives would include the following:
- Exempt the first $250,000 of long-term capital gain at the time of sale.
- Exempt an additional $50,000 of long-term capital gain if the new owner occupant buyer was the former tenant who lived in the property for one or more years prior to closing.
- Exempt the first $150,000 in depreciation recapture at the time of sale.
- Exempt an additional $25,000 of depreciation recapture if the owner-occupant buyer was the former tenant who lived in the property for one or more years prior to the closing.
Finally, should the SFR owner not sell to the current tenant, they would be required to provide the current tenant with relocation assistance of at least three months’ rent from the proceeds of the sale. That amount would be capped at $12,000 per property and qualify as a tax-deductible selling expense.
We need to get involved
Under normal circumstances, I would lobby NAR to pick up the ball and have their government affairs people run with this proposal. Unfortunately, they have been a bit preoccupied these days with other more pressing matters.
So, I am proposing an Inman nation call to action. If you like the proposal, get involved. Reach out to your elected government officials at the local, state and national level. Send them a copy of this article. Quite frankly, the timing couldn’t be better with elections right around the corner.
The candidates who openly support “The American Dream Tax Incentive” will undoubtedly win votes in November from millions of landlords and millions of aspiring homebuyers and their families who would benefit directly for generations to come — and of course, it goes without saying, the support of real estate professionals across the country who will educate the public and help facilitate these life-changing transactions.
Alex Perriello is the former CEO of Realogy Franchise Group. Email Alex Perriello.
