We're at that point during the week between Christmas and New Year's where no one is exactly certain what day it is anymore (there were NFL games yesterday, so I think it's Monday).
In the same way, there's a lot of confusion and uncertainty about what can be done to "fix" the housing market... but no one is entirely sure which ideas will help solve the problem.
Some may be worth discussing and could actually be effective at opening the housing market back up to younger buyers, while others are almost total folly.
As we prepare for the year ahead, let's talk about some of the ways policymakers may try to address the highly dysfunctional housing market.
50 YEAR MORTGAGES - Proposed by the President in December as a possible housing market solution, this one doesn't make any sense. With a 50-year mortgage, approximately 95% of your early year payments would go solely to interest, meaning there's no meaningful principal paydown of any kind for decades. Why not just rent?
MORTGAGE PORTABILITY - Lots of people are in favor of mortgage portability (being able to take your existing mortgage with you to a new property), but here's who is NOT in favor of it: the banks. There are also issues with how to collateralize a portable mortgage (does the lender get to do a new underwrite and appraisal to ensure they are willing to accept the new property as collateral?). Additionally, most mortgages have already been packaged up and sold in bundles as mortgage-backed securities, so how are you going to unscramble that egg?
TAX HOLIDAY FOR PRIMARY RESIDENCE SALES - Current tax law allows for a $250k/$500k (single/married) exemption on profits from the sale of a primary residence. Some are proposing that these numbers be temporarily raised to $500k/$1M to free up inventory owned by older residents who don't want to sell because of tax liability... but the question is, how does freeing up a bunch of $2M homes improve affordability for young people?
TAX PENALTIES FOR PRIMARY RESIDENCE SALES - If a tax holiday is the carrot, a tax penalty would be the stick. If the goal is to increase inventory (thus bringing down prices), reduce the tax exemption by $50k/$100k per year over the next five years until it's gone. That would unlock tons of inventory and probably crater the market, but if you're looking for a housing reset... this might do it.
ENDING 1031 EXCHANGES - Under current tax law, investors are allowed to "carry forward" gains on investment properties without paying taxes using 1031 exchanges. The philosophy for investors using 1031 exchanges is "exchange, exchange, exchange, then die", at which point the gains from all of the properties acquired through this process would be tax-free as long as the owner's estate is valued at less than $15 million (whether the estate tax threshold of $15 million is too high is a separate question - I think that's awfully generous when we're $38 trillion in debt). Apologies to my investor friends, but we don't need to be subsidizing investment real estate anymore.
END/REDUCE TAX BENEFITS FOR LANDLORDS - If we're going to make investors mad anyway, why not look at the whole model of investment real estate? As currently configured, the tax code is quite generous toward landlords through depreciation allowances, the writing off of expenses (including travel) to manage rentals, plus accelerated depreciation for capital expenditures and improvements. Perhaps the solution is to cap rental ownership benefits at 2 - 4 units, since corporate landlords have taken over the industry in recent years.
SUBSIDIZING INTEREST RATE BUYDOWNS - On the subject of subsidies, here's one that makes sense. During the 2008 - 2011 Great Financial Crisis, the government actually gave first-time buyers an $8,000 tax credit for buying a home. (The median home price in Denver was $250k and we couldn't find people to buy them without an $8k tax credit? Yes, that actually happened!) Okay, instead of tax credits, how about a $15k mortgage buydown credit, which is forgiven at $3k per year over 5 years? On a $500k mortgage, this would lower the rate by almost one percent, which would restore a ton of affordability. I don't know about you, but 5% fixed rate mortgages would pull a lot of people back in, thus stabilizing (or increasing) prices and unscrewing a lot of young people who have been deeply screwed by the tax and fiscal policies of the past several years.
Politically speaking, there's going to be a lot of white heat around housing and affordability issues in 2026. Some proposals will be flat out stupid (and there will be plenty of them, don't worry), but there are some approaches that could help reset things for young people with revenue offsets to foot the bill.
As a society, we have to decide if young people are going to have a stake in the future of the country. If we can't figure out how to restore the American Dream, it's highly likely that an increasingly divested population of young people are going to choose political alternatives likely to inflict a lot of pain on those who have benefited from decades of declining interest rates, endless money printing, soaring stock market valuations/home prices and federal debt accumulation.
Change will take courage, which leaves me believing there will be more talk than action in the coming year. But for the sake of the country, we must figure out a path for young people who want to own homes and start families.
The future of the country depends on it.
In terrible policy.
