These data suggest that about $1.2 trillion of the gain in home values went to the top 20 percent of the population, meaning that their residential capital gains exceeded by a factor of about two the total pre-tax income of the bottom 20 percent of the population.
Housing Appreciation Is Untaxed, Which Benefits Older, Whiter, and Wealthier Households
The skewed ownership of housing wealth means that the gains in wealth are highly concentrated in households that are older, whiter, and higher income than other Americans. But unlike wage income, income from housing appreciation is mostly un-taxed. As a result, the capital gains exclusion for housing is regressive and inequitable. The capital gains exclusion for owner-occupied real estate, is much more valuable to high income households because they are more likely to own homes, own more expensive homes, and generally face higher tax rates that low-income households.
In reality, the $2.2 trillion in capital gains that U.S. residential property owners reaped in 2020 will be lightly taxed, to the extent they are taxed at all. Federal law exempts from capital gains the first $500,000 in gains on the sale of owner-occupied property (for married couples filing jointly). That is to say that you would need $500,000 of appreciation to have any capital gains liability. As a practical matter, few households pay capital gains taxes on residential real estate appreciation. The tax-favored status of income from residential real-estate speculation is a quintessential feature of our system that attempts to promote wealth-building through home ownership. While well intended, it systematically rewards older, whiter, and wealthier households, and effectively denies opportunities to build wealth to the third of the population that is renters. In many ways, it is the worst of all worlds, making housing more expensive for those least able to afford it, and providing most of the gains to those who are already most advantaged.
There’s one final irony here: policies to broaden access to homeownership now, by providing subsidies or other support for lower income, younger, and minority homebuyers don’t rectify these gaps, they likely make them worse. Steps to amplify demand in a surging market tend to drive prices up further, which further enriches incumbent homeowners at the expense of first-time buyers. If you could enable people to somehow buy houses at 1990 or 2010 prices, they could be assured of wealth gains, but the risk is that buying now offers no such expectation of long term gains. Promoting homeownership primarily helps those who are selling homes, not those who are buying them.
The Search for Villains
Rather than talk about the capital gains that flow to older, wealthier, whiter households, much of the housing debate is a melodrama, looking to cast suitably evil villains on which to blame the crisis. It’s fashionable to finger Wall Street investors (who for the past decade or so have been buying up single-family homes and renting them in many U.S. markets); foreign buyers of luxury condominiums in New York, Miami, Seattle and other hot cities (who let the units sit vacant while speculating on higher values); and greedy developers who make excessive profits by building new homes. None of these supposed villains account for more than a trivial part of the problem—at most, they’re picking up crumbs, compared to the the trillion dollar gains logged by incumbent homeowners.
A recent article in The New York Times suggests Wall Street-backed investors now own as much as $60 billion in single-family real estate. That sounds ominous, but it’s less than 1 percent of the $35 trillion or so of residential investment in the U.S. If all these investors earned a 10 percent capital gain in 2020, they would have collectively gotten about $6 billion, or a couple of tenths, of one percent of the $2.2 trillion in home values. It’s also fashionable to blame the construction of luxury condos in a few superstar cities—held vacant by rich, often foreign speculators. The trouble is that such units are a tiny slice of the housing market, and there’s no evidence they affect overall housing costs.
And then there are the developers. Supposedly they make a killing from building new housing. When housing price are appreciating, especially as fast as they have in the past year, the profits that developers earn from building new housing are dwarfed by the capital gains reaped by existing homeowners. City Observatory’s friend Josh Lehner, an economist with the Oregon Office of Economic Analysis, has an insightful study estimating the profits earned by homeowners and developers in Oregon over the past decade. Lehner estimates, that on average, developers reap a margin of about 14 percent on new housing construction. By comparing that total (14 percent of the value of new housing built in any year), with the appreciation of the existing housing stock in that same year, Lehner is able to show how developers profits stack up against the capital gains enjoyed by incumbent homeowners. It isn’t even close: