On January 22, Ed Pinto testified before the Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs of the House Oversight Committee. 

Pinto’s keys to unlocking capital:

1. An income tax exemption on rental income from newly rented rooms would unlock an estimated 3.2 million of the 32 million spare rooms in owner-occupied single-family homes over 10 years. 
2. Eliminate or increase the current capital gains exclusion caps of $250,000 and $500,000 for home owners aged 65 or older.  This would unlock an estimated 200,000 move-up homes per year.
3. Eliminate capital gains taxes on starter single-family rentals (SFR) sold to an occupying tenant in good standing with at least 24 months on-time rental history. This would open the door to homeownership for an estimated 900,000 families.
4. Unlock the potential of land by incentivizing the building of more starter homes with the a state small lot bounty program. This would unlock 20,000 more homes per year and boost homeownership.
5. Tax profits from newly built, for-sale developments as a long-term capital gain, not income. This would boost homeownership.
6. Legalizing mortgage prepayment penalties is a straightforward way to lower upfront rates by 0.40% – 0.50%. This would boost homeownership.  

Full testimony is below.

Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs of the House Oversight Committee

Hearing Title: “Housing Affordability: Saving the American Dream.”

January 22, 2026

Edward Pinto, Senior fellow and Co-Director of the AEI Housing Center

The views expressed herein are those of the author, and do not necessarily reflect the views of AEI.

Thank you Chairman Burlison, Ranking Member Frost, and members of the subcommittee for the opportunity to testify.

The current state of housing supply is best described as an irresistible force meeting an immovable object.

The immovable object consists of the overly restrictive land use regulations promulgated by most of the nation’s 33,000 state and local jurisdictions, leading to unaffordability, and a dearth of starter homes on smaller lots.

The irresistible force consists of the federal government’s efforts to make homes “affordable” by means of credit easing and subsidies.

According to Realtor.com, returning the housing market to 2019 levels of affordability is a daunting task. Mortgage rates would need to fall 2.5 percentage points, incomes rising 56%, or home prices falling 35%. At the same time, President Trump has cautioned about “creating a lot of housing all of the sudden, and [driving] home prices down.”  

Yet inaction on supply has its own risks. Implementation of multiple demand boosters combined with a strong economy would ignite strong home price appreciation.

Deregulation is needed to unlock capital. Large swaths of our existing housing stock is frozen by tax regulations.  Higher and better uses of land are frozen by state and local land use regulations that are so inflexible that it is illegal to build starter homes. Deregulation would improve expand supply, improve affordability, and increase homeownership.

The keys to unlocking capital:

An income tax exemption on rental income from newly rented rooms would unlock an estimated 3.2 million of the 32 million spare rooms in owner-occupied single-family homes over 10 years

• These rooms are in every congressional district, are near amenities, and would rent at attractive levels.
• This existing vacant capital stock currently yields no rental income, so the exemption would have no impact on existing federal tax revenue. 

Eliminate or increase the current capital gains exclusion caps of $250,000 and $500,000 for home owners aged 65 or older.

• Capital gains exclusion levels are unchanged since 1997 and are operating to lock homeowners in place.  This creates a housing mismatch problem, as most are owned by empty nesters aged 65 and older. 
• Additionally, upon death, one’s heirs get to have the basis in a home stepped up to current market value, thereby eliminating the tax on capital gains, keeping many homes vacant while the family waits for the stepped-up value.
• Providing an incentive to sell and more rapidly return say 2 million of these existing larger family sized homes to the market over ten years has the potential to unlock 200,000 move-up homes per year. This would also set off a daisy-chain of moves, promoting a redistribution of home sizes so that supply and demand are better matched. This would boost homeownership.
• Another benefit is that 25% – 30% of the sellers will move to types of housing that do not compete with families buying single-family homes. This includes into rentals, independent and assisted living communities, with family, senior only for sale communities, and nursing homes.  
• Policy options include limiting the size of the exemption increase, and targeting by income and marital status.
• It is estimated that only $6.5 billion dollars are collected annually from excess capital gains on sales of primary residences.

Eliminate capital gains taxes on starter single-family rentals (SFR) sold to an occupying tenant in good standing with at least 24 months on-time rental history. This would boost homeownership.

• Thirteen million households live in SFR, seventy-seven percent of which are owned by investors with 1-9 properties.
• About two-thirds of SFR are starter homes, with an average current value of about $300,000 and an average rent of about $1,800.
• It is estimated that 85% of these borrowers are unable to qualify for a mortgage loan—they are just too risky. This explains why buy-to-rent efforts have not worked.
• The solution is to halve the risk with a down payment of 10% and a loan term of 20 years, and keeping the monthly payment the same as on a 30-year loan.
• This would cost about $46,000 on a $270,000 mortgage–$30,000 for the down payment and $16,000 for a 2% permanent rate buy down to 3.75% on a 20-year loan.
• This is feasible by combining the seller’s savings on capital gains taxes ($18,000 gross and $14,000 net to the IRS), and sales commission and sale preparation expenses ($18,000 and $10,000 respectively). 
• If the selling investor added a shared equity program, an 80% loan to value would be the result.  
• This is a win-win allowing property owners to sell to a good tenant and the tenant benefiting from wealth building through homeownership, again in every congressional district.

Unlock the potential of land by incentivizing the building of more starter homes with the a state small lot bounty program. This would unlock 240,000 more homes per year and boost homeownership:

• The three most important things in addressing affordability are “small lot, small lot, small lot.”
• Many of the 33,000 state and local jurisdictions have lot size requirements that require the building of more costly homes on larger lots. Our research shows that builders will chose to build more affordable homes on smaller lots, if it is legal.
• Under the U.S. Constitution’s 10^th Amendment, land use power resides with the 50 states.
• The federal government should launch a bounty program to incentivize the states to make starter homes great again through the loosening of restrictions on building on smaller lots.
• Building homes on smaller lots can greatly add to supply and improve affordability, especially for homeowners and working and middle class families. These homes would sell for about 20% less than the median single-family detached home currently being built.
• Offer states a $25,000 bounty tied to an increase in the number of homes built on single-family detached home lots of up to 5,000 square feet and single-family attached homes built on lots of up to 2,000 square feet.  Additional bounties (with a limit of two bounties per lot) would be paid on homes on small lots near new manufacturing and technology sites, or built on land sold by the federal government, or on in-fill sites. Each state would be free to determine how to move the policy change needle.
• At an average bounty per lot of $37,500, $9 billion would fund 240,000 family-sized homes/year. Years 1 and 2 could be funded by repurposing $18 billion of discretionary federal funds towards this initiative. Years 3-10 could be funded by Congress repurposing existing funds for affordable housing subsidies.
• These benefits would require no additional land.
• For example, Texas in July 2025 enacted SB15, which provides for lot size flexibility in new residential subdivisions in larger cities by overriding minimum local lot size requirements of >3000 square feet.

Tax profits from newly built, for-sale developments as a long-term capital gain, not income.  This would boost homeownership.

• Treating profits from homes sold directly to buyers as long-term capital gains would make more for-sale developments financially viable.
• Under current law, non-publicly traded homebuilders organized as LLCs can face ordinary tax rates up to 37% on profits from homes sold to individual buyers.
• The same project run as a rental community is taxed upon sale at long-term capital gains rates of 15 percent to 20 percent.
• This disparity gives a clear advantage to build-to-rent over build-to-own development, discouraging the construction of for-sale homes.

Legalizing mortgage prepayment penalties is a straightforward way to lower upfront rates by 0.40% – 0.50%. This would boost homeownership.