Housing starts have fallen to their lowest level since 2020, and builders continue pulling back as higher interest rates, rising construction costs, and slower sales compress profit margins. While this may eventually benefit apartment owners and landlords by limiting future housing supply, it does little to improve affordability for renters or homebuyers.

From an investment standpoint, fewer new homes should help stabilize home prices over time because less inventory will enter the market. However, builders simply aren’t motivated to build when inventory is sitting, borrowing costs remain elevated, and profits continue shrinking. In many cases, selling the land is now more profitable than building a new home.

Then there is the concern over the federal capital gains tax exclusion for primary residences, which has remained unchanged since 1997. Some argue that many longtime homeowners—particularly baby boomers—delay selling because gains above $250,000 for individuals or $500,000 for married couples become taxable.

Personally, I don’t believe this is a major reason homeowners stay put. Taxes are simply part of selling an appreciated asset, and those taxes are paid from the sale proceeds. While no one enjoys paying taxes, I don’t think this issue limits housing inventory.

Tax policies can also influence behavior, citing examples like California’s property tax rules that encourage homeowners to hold properties longer. While that may have some impact in high-value markets, I believe the overall effect on national inventory is relatively small.

Let’s talk about proposed legislation targeting house flippers, particularly in New York. With flipping profits already shrinking due to higher renovation costs, slower sales, and softer prices, adding another layer of taxation could make many projects financially unworkable.

If taxes continue increasing while margins continue shrinking, more investors will simply stop flipping homes. That doesn’t punish investors as much as it reduces housing supply, lowers property values, and ultimately hurts sellers who receive lower offers because buyers must account for higher costs.

The takeaway is that today’s tax system creates inconsistent incentives. Different industries and investment strategies receive different treatment, making long-term planning increasingly difficult. Whether discussing builders, homeowners, or flippers, profitability drives behavior.

When returns disappear, investment slows—and eventually, housing supply follows.