Capital Gains on home sales. Did the 500k exclusion fuel the bubble?

December 21st, 2008

There is some talk that that the 500k Capital Gains exclusion for married couples helped to fuel the housing bubble by inflating the number of home sales over time.

The exclusion was first suggested during the 1996 Presidential campaign  by Bill Clinton and went into law in 1997.

A Federal Reserve economist is quoted in the NY Times this week as saying that the

"number of homes sold was almost 17 percent higher over the last decade than it would have been without the law."

Is this a manifestation of finger-pointing?

The length of time that home owners are staying in a particular home has been decreasing over the years. But how much?  As an experiment, I dove into the public records to see how long home owners were staying in their homes in my zip code here in Brooklyn.

I live in Park Slope, where there has been a lot of activity in the last ten or fifteen years.   Just out of curiosity I took a look at a sample of around 650 sales of 1 and 2 family homes as well as  approximately 725 condos that have sold since 1986.

What I found from this random sample was this:  the majority of the owners of 1 and 2 family homes have lived in them more than 10 years, whereas the huge majority (72.3%) of condo owners purchased their homes in the last five years. That condo owners are recent purchasers should come as no surprise since condo development did not get going in earnest until the late to mid 90's.

What I didn't find was a wholesale quick re-selling of 1 and 2 family homes in Park Slope. If the Capital Gains Exclusion had been a prime factor in the resale of this category of homes, we should have seen shorter length of ownership overall.

Maybe this was a geographic issue as well.  Other parts of the country have a history of boom and bust housing that we do not have in New York. Mark Zandi, Head Economist for, mentioned this in a article earlier in the month.

In it, he says that because there is less room to build in NYC, we have been insulated somewhat from the wild overbuilding that now afflicts other parts of the country.  He points out that "New York, for example, has the lowest level of construction relative to
its population, which constrains supply and vacancy, allowing the
market to correct more quickly."

I think at the very least that in Brooklyn, the desire for a home, and not an investment strategy, was the driving force in most of these transactions.  What do you think? 

The desire to figure out how we got here is strong, but there is more than enough blame to go around, in my opinion.

Categories: Capital Gains, Demographics, Home Sales, Housing Bubble, Housing Market, Housing Supply

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