Three Policy Ideas That Could Actually Fix Housing Affordability in America

The Real Problem Nobody Is Solving

Affordability is the defining challenge in the American housing market right now. It is not a new observation but it is one that deserves more honest analysis than it typically receives. The combination of rapidly accelerated home values during the pandemic years and a sharp increase in base interest rates delivered a one-two punch to everyday homebuyers that has made the monthly mortgage payment a genuine stretch for a large portion of households that were perfectly capable of managing homeownership just a few years ago.

The conversation about solutions has been noisy but not particularly substantive. Here are three specific ideas worth taking seriously, two of them variations on the same theme and one that has not gotten nearly the attention it deserves.

Idea One: Update the Capital Gains Exemption on Home Sales

Most people have heard the term capital gains without fully understanding what it means in a real estate context. It is simply the profit made when a home is sold. If a house was purchased for $100,000 fifteen years ago and sells today for $500,000 the capital gains on that transaction is $400,000, the difference between the purchase price and the sale price.

Under current tax law a single filer can exclude up to $250,000 of that profit from capital gains taxes. A married couple filing jointly can exclude up to $500,000. Those exemption amounts were set by Congress nearly thirty years ago when home values looked nothing like they do today.

The problem is straightforward. Many homeowners who bought their homes a decade or more ago have accumulated equity that significantly exceeds those exemption thresholds. Selling means a substantial and unexpected tax bill. The result is that homeowners who might otherwise be ready to move are choosing to stay put rather than face that financial hit. Homes that could be coming to market are not and inventory that buyers desperately need never materializes.

As Zack Jones explains updating those exemption numbers to reflect the reality of today's home values would remove a significant barrier that is keeping homes off the market. When properties at the top move they create openings throughout the chain and inventory increases in ways that benefit buyers at every price point.

Idea Two: A Capital Gains Moratorium for Mom and Pop Investors

The second idea builds on the first but focuses on a specific and often overlooked segment of the rental market. Mom and pop investors, defined as those owning ten or fewer properties, own the vast majority of investment real estate in the United States. These are not institutional landlords or large corporations. These are grandparents who accumulated a handful of rental properties over decades and have been using them for monthly income.

Many of these investors would consider selling but the capital gains tax burden on properties they have held for twenty or thirty years is prohibitive. Rather than sell and face that tax liability they let the properties pass to heirs through inheritance. Under current estate law the tax basis resets at inheritance which means the heirs could ultimately sell those same properties with little to no capital gains exposure. The government ends up collecting no tax revenue from those transactions anyway.

A targeted capital gains moratorium for small investors, perhaps allowing the sale of one or two properties per year over a five-year window with full exemption, would unlock a significant amount of inventory that is currently frozen. The proceeds from those sales would flow into the broader economy. Some would help grandchildren make down payments on homes. Some would fund education. Some would stimulate local spending. All of it represents economic activity that is currently blocked by a tax structure that produces no government revenue from these transactions in the long run anyway.

The math on this idea is more favorable for the government than it might initially appear. Freeing up properties that are destined to pass tax-free at inheritance in exchange for taxable economic activity in the near term is not actually a revenue loss. It is a reallocation of when economic activity occurs.

Idea Three: A Zero Down Payment FHA Product for First-Time Buyers

This is the idea that has not gotten nearly enough discussion and it is potentially the most impactful of the three for first-time buyers specifically.

The FHA loan program is one of the most successful and well-managed financial products the federal government has ever created. Three and a half percent down, reasonable mortgage insurance, and underwriting guidelines that serve average and below-average credit borrowers in ways that conventional loans simply do not. The program has been in existence for decades and its performance has been exceptional.

At the last available audit the FHA reserve fund held approximately four times the capital required by Congress to protect against financial difficulty. The program has performed so well for so long that it has accumulated reserves well beyond what its own rules require. That performance history is both a track record and an asset that could be leveraged thoughtfully.

Zack Jones proposes adding a product to the existing FHA program that allows for one hundred percent financing with no down payment requirement. Rather than inventing something new the idea is to build on what already works. A higher minimum credit score requirement, perhaps 640 to 660, would ensure the zero down product attracts stronger borrowers. A modest increase in the monthly and upfront mortgage insurance premiums would build additional reserves to account for the incrementally higher risk profile of zero down lending. Seller concessions for closing costs and the continued allowance of gift funds would allow qualified buyers to come to the table with effectively zero out of pocket.

The rationale for this proposal is grounded in what down payment and closing costs actually represent for a first-time buyer today. On a $300,000 home the combination of a three and a half percent down payment and typical closing costs approaches $21,000. For a young person or a young couple trying to establish themselves financially that amount represents years of disciplined saving. The delay it causes is not just a financial inconvenience. It pushes the first home purchase into the mid-thirties or later which compresses the timeline for building equity, paying off a mortgage before retirement, and achieving the kind of financial stability that homeownership is supposed to help create.

Getting people into homeownership in their early twenties rather than their late thirties or early forties changes their entire long-term financial trajectory. A mortgage that begins at twenty-three is likely paid off well before retirement. A mortgage that begins at forty-two probably is not.

How These Three Ideas Work Together

The most compelling case for these ideas is not any one of them in isolation. It is what they produce in combination. Updated capital gains exemptions encourage long-term homeowners to sell, adding inventory to markets that have been constrained by the lock-in effect. A mom and pop investor moratorium frees up additional inventory from the rental market, including entry-level and workforce housing, while injecting capital into the broader economy. A zero down FHA product removes the single largest barrier to first-time homeownership and allows buyers to enter the market years earlier than the current savings requirement permits.

More inventory coming to market from multiple directions. More buyers able to access that inventory without years of upfront saving. A healthier, more liquid housing market that serves everyday Americans rather than those lucky enough to have bought before values accelerated.

These are not radical ideas. They build on existing frameworks, work within the existing tax code, and leverage a federal mortgage program that has already proven it can manage risk responsibly over decades. What they require is the political will to prioritize housing affordability with the same seriousness that the problem deserves.

Zack Jones has worked as a mortgage lender for over twenty years and welcomes conversation about any of these ideas and what they could mean for buyers navigating the current market. Reach out to Zack Jones to talk through your own homebuying situation and what options are available to you right now.

Sources

IRS.gov HUD.gov NAR.realtor TaxFoundation.org MortgageNewsDaily.com