According to The Wall Street Journal, annual sales of existing homes have plummeted to about 4.1 million, a level not seen since the mid-1990s when the population was 22% smaller. This stagnation is pinned on a “lock-in effect” from mortgages with rates below 3% and capital gains tax exclusions that haven’t been updated since 1997. For example, a homeowner with a $400,000 mortgage at 2.9% would lose over $100,000 in loan value by selling and facing today’s 6.27% average rate. Meanwhile, in high-cost areas like the Northeast, the average home price has soared from $231,400 in 1997 to $1.17 million in Q2 2025, creating massive tax liabilities. The authors propose two legislative fixes: allowing “mortgage defeasance” to monetize cheap loans and simply doubling the capital gains exclusion to adjust for inflation.
The Golden Handcuffs Problem
Here’s the thing: we’ve never seen a rate environment like this. People aren’t just emotionally attached to their 3% mortgage; they’re financially handcuffed to it. That $100,000+ difference in loan value isn’t Monopoly money—it’s a massive financial penalty for moving. So you don’t. You stay put, your house doesn’t hit the market, and inventory stays bone-dry. It creates a bizarre two-tier system where anyone who bought pre-2022 is essentially trapped in their current home, unable to trade up, down, or across the country without taking a huge financial hit. The market isn’t just slow; it’s fundamentally broken for a huge chunk of potential sellers.
The Danish Fix And The Tax Hangover
The “defeasance” idea is fascinating because it’s not some theoretical academic concept. It works in Denmark. Basically, you replace the house as collateral with a bundle of U.S. Treasury bonds. The lender gets their guaranteed payments, the seller gets to cash out the value of their low-rate loan, and the buyer gets a house. It’s a neat financial engineering trick. But the real kicker is how blindingly obvious the tax problem is. The $250k/$500k exclusion limits were set in 1997. Since then, consumer prices and home values have basically doubled. Not adjusting them for inflation is pure legislative neglect. It’s hitting long-time owners, often Baby Boomers, with a massive tax bill just for selling the family home they’ve lived in for decades. That’s not a policy; it’s a trap.
Winners, Losers, And A Frozen Market
So who wins if these ideas became law? Practically everyone except maybe mortgage servicers who lose a tiny bit of administrative control. Younger homeowners trapped by low rates could finally move. Older homeowners facing a tax cliff could downsize. Buyers would finally see more inventory. The entire economy benefits from labor mobility—people being able to move for jobs. The loser is the status quo of a frozen, dysfunctional market. But let’s be real: the political hurdle is enormous. It requires Congress to act on two complex financial fronts simultaneously. Still, the authors have a point: pairing the fixes creates a coalition. It helps multiple generations and could actually unstick a critical sector of the economy. The alternative is just waiting for rates to maybe, someday, fall back to 3%. And that could take a generation.
