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The Buy-and-Hold Connection: Investing Fundamentals Courtesy of the American Homeowner

Jul 20, 2007

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Cocktail Economics: Discovering Investment Truths from Everyday Conversations

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Endnotes

U.S. Census Bureau. According to the National Association of Realtors, U.S. homeownership could exceed 70 percent by 2013.
Jennifer and Carlos are fictional representations of real-life Americans in terms of the average period of time they held on to their properties before selling and their rationale for doing so (e.g., their mutual desire to profit on their investments, which required that they hold on to their investments long enough so that their initial transaction costs were covered and their desire for capital gains was satisfied).
If you own a home, you might have to move regardless of whether you covered your transaction costs or whether you can get a better return on your investment elsewhere: Maybe your job changes or the size of your family outgrows your living space, and you simply must relocate. But without these pressures, the combination of when you cover your transaction costs and the total financial attractiveness (new transaction costs + the promise of higher gains) of housing alternatives determines when you leave one residence for another. Not only is this stated in terms of a financial best-practice, but it is how most American homeowners behave.
Since the passage of the Taxpayer Relief Act of 1997, married couples filing jointly have been exempt from taxes on profits (i.e., capital gains) of up to $500,000 on the sale of their residences. For singles, the exemption cut-off is $250,000. In both cases, sellers need to have lived in their homes for two out of five years prior to the sale.

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