Median Home Price

Greenie agrees that there is no Housing Bubble (which makes me nervous).

Interesting observation from reader Rita:

"Being a baby boomer that have bought my primary residences from 1982 to now, I think apart from the extremely low interest rates, the change in tax law in ~1997? that allows the homeowner to keep up to $500K tax free capital gains from selling your primary residence and $250K for individuals is a key to the rapid shotup in prices.

Before this change in tax laws, we had to roll our house into a larger house to avoid the capital gains. My problem is: is there a cap for $1-2M homes in NJ that normal people cannot afford to buy even with the tax fee gains."

In other words, the change in tax policy is partially implicated in the home price runup.

CPI versus Home Prices

click for larger chart


Do note the spike at the right end of the chart

25 YEARS OF HOUSING AND THE ECONOMY. Click on the tabs to see how the
national average 30-year fixed-mortgage rate and CPI compare to the
growth in median existing-home prices.

Home Prices March Higher

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What's been said:

Discussions found on the web:
  1. Jordan commented on Jun 9

    The best evidence of a housing bubble is investor sentiment. I believe 36% of all homes bought in 2004 were a 2nd home. I know people quitting their jobs to become flippers. That is just like day trading. I think we are setting up for a huge bursting of the bubble and it will get ugly if the deficits get worse. driving interest rates into double digits to stabalize the dollar. I also think the CPI is complete BS, as it is manipulated lower so that the Fed can continue to pursue its easy monetary policy. True inflation is running at 10% a year. Im very dissapointed in how the American consumer escapes this.

  2. Jack K. Miller commented on Jun 9


    Thank you for another excellent post. In an old text from the 60’s I recall that Phase I (the recession phase) in real estate is typically kicked off by anti-real estate tax legislation. Phase III is the phase with favorable tax legislation which of course then leads to excessive new development. You nailed the 1997 act as a significant part of the favorable legislation.

    We are clearly in Phase IV which is concurrent with increasing new construction and increasing vacancies. The tricky part that these are 18 to 22 year cycles with each phase lasting 4 to 6 years. The last true real estate recession was in 1990-1991.

    Many a boomer can afford two homes–even with no rental income. This is a good thing as rental vacancies are creeping up in resort areas.

    Do you see indications that anti-real estate legislation is near? There is talk again about a flat tax, with no deduction for home interest, but I find the chances of such radical legislation to be unlikely.

  3. Barry Ritholtz commented on Jun 10

    MS writes: It seems to me that if you DON’T have to roll your gains into another house, it creates LESS demand for housing.


    I had to think about that for a moment. . . BUT — its like cutting the capital gains tax on stocks. The thought process before was an orderly, one house replacing another purchase — each individual would swap 1 for 1.

    You had to roll over into the next property to avoid the big tax hit. It DISCOURAGED speculation or even 2nd home purchases, because of the potential expenses.

    With that much larger 1/2 mil exemption, people are free to play the market – and they are. That reduced tax crats more profit incentive, driving demand higher.

    As George W. likes to say, if you want less of something, tax it more.

    We now tax real estate transactions less. Its no surprise that RE activity (including speculation) is up

  4. spencer commented on Jun 10

    Before the 1997 tax law change a person over 55 —
    the age span the baby boomers are now in in force — could have a large exemption for selling their home
    without having to roll it over. The 1997 law just gave the same treatment to people under 55.

    So the 1997 law change may have some impact, but I doubt it was that big.

  5. papillon commented on Jun 10

    I agree with Jordan that inflation is running in double digits. I also agree with Spencer that the tax law change did not have a big effect on real estate. I think the biggest factor was when the rules were changed that allowed the real estate buyer to purchase a home up to 10 times his gross income. It use to be a maximum of 4 times gross income even in the 1950’s when rates were this low. And of course. the second most important factor was when the regulators allowed interest only loans which was unheard of until recently. The average loan today would be equivalent to junk bond status 20 years ago.

  6. Bruce commented on Jun 10

    I agree that changes in tax policy are very influential in real estate.

    Reagan’s aggresive loosening of the depreciation rules in the early 80’s was a key part of the 80’s real estate boom, and the reconfiguration of the depreciation rules in the late 80’s was instrumental in causing the decline in real prices in the early 90’s.

    I would like to note a recent piece of anti-real estate tax regulation that was enacted:

    At time “T1” you could sell your personal residence with a one time exemption of the gains if you were 55 or over. Gains on a property not your personal residence (investment property) could be deferred (put off for a future date, not exempted) by rolling them into an equally expensive or more expensive property using a “section 1031 exchange.”

    At time “T2” the tax law change Rita notes came into effect. In addition to stimulating real estate transactions among those under 55 (and note that this exemption can be used again and again and again every 2 years, not just one time in your life as the old rule allowed, a key difference absent from MS’s comparison or the rules), this rule allowed people with real estate investment (not personal home) property a wonderful loophole: You could take the gains from an investment property, roll them into a new investment property, then in a subsequent tax year convert that investment property into your personal residence, and then sell the newly personal residence and keep all the gains tax free. The time involved in this cycle at the beginning of the regulation change was about 3-4 years, depending on how agressive you were.

    Extreme Example: I read a few years ago in an investment newsletter about a person who had 1.2 million dollars of gain from an investment property (they owned it free and it was fully depreciated) who used that money to buy a 1.2 million dollar condo complex with 6 units. They rented out the units, as is required for a section 1031 tax free exchange of investment property. Two years after purchase they moved into one of the units, converting it to their personal residence. Two years later they sold this unit, taking the gains tax free, and moved into another unit. They planned to repeat the process over the next 12 years, and at the end they would have pocketed 1.2 million dollars tax free. That’s $100,000 per year tax free.

    At time “T3” (a year or two ago) this regulation was tightened up ever so slightly: there was a loophole in the occupy your personal residence for 2 years rule that allowed people who had not occupied it for that length of time to take a partial tax exemption of gains limited to the proportion of 2 years they had spent in the property. For example, a married couple could get a $250,000 exemption (half of the limit) if they just lived in the property for one year instead of two. Prior to this tightening, it was easier to cut time off the cycle if you had a smaller gain to shelter.

    This year, at time “T4”, the regulations were tightened again: a property owner taking advantage of this loophole must now pay capital gains if they sell the property purchased with 1031 exchange monies within 5 years of purchase, regardless of personal residence status. This lengthens the amount of time the cycle takes to complete.

    This will result in fewer transactions, which will take steam out of the market. How much? Who knows.

  7. George commented on Jun 11

    In some areas with higher priced houses, the medium housing price can be greatly inflated by “knockdowns” or major renovations. But this is not necessarily a “bubble” situation.

    In my area, a typical scenario is as follows- A builder buys an old home for 850K for the land value. The builder knocks it down and invests another 800K and builds a new luxury home and then puts it on the market for over 2 million. In my development of 600 homes, I would estimate that at least 100 homes have been “knocked down” over the last five years. Many others that have not been knocked down have had significant home improvements.

    If you tabulated the average medium homeprice for the neighborhood it would show a very high annual percentage appreciation, but this is very deceiving since most of the appreciation reflects the sweat equity and significant capital investment of the builders.

    I think it would be more accurate to just look at land price increases, which in many areas on the East and West Coast would show lower percent increases than housing prices.

  8. Sally commented on Oct 20

    if I bought my house in 1980 for 90k and because of refinancing and cash out thru out the years I now have a 400k loan balance, and because of personal circumstances I am now forced to sell at about 800k, my question is what is my capital gains? 710k based on the original price I bought it for, or 400k, based on what my current loan balance.

  9. Steve commented on May 26

    George, you basis is what you paid for the house, 90k. So yes you capital gains will be 710k. The amount you borrow using your house as collateral has no bearing on your capital gains.

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