The contradictions of the housing affordability dilemma
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This is a golden age for innovative thinking about how to make housing costs less of a burden for Americans. But those efforts are filled with internal contradictions and trade-offs.
The big picture: Some of the very policies that seem to offer affordability relief — using the government's power to lower mortgage rates and make home loans more accessible, for example — risk being counterproductive if they stimulate demand without improving the supply situation.
- There is also an inherent tension, as embodied in President Trump's own comments the other day, between a desire to maintain or raise property values for homeowners and the desire to make housing affordable for new buyers and renters.
- Essentially, a great deal of policy entrepreneurship is underway to address housing, but it's not clear how some of the policies under discussion would play out in terms of results on the ground.
State of play: Consider some of the recent headlines around housing policy.
- Bloomberg reported that major homebuilders are working on a program to develop "Trump Homes," as many as a million of them, perhaps with a rent-to-own financing to entry-level homebuyers.
- The White House announced that the administration is directing Fannie Mae and Freddie Mac to purchase up to $200 billion of mortgage-backed securities, which should, all else being equal, bring rates down.
- The president issued an executive order to try to keep large institutional investors from buying up single-family homes as rental properties that might otherwise be purchased by owner-occupants.
- Congress, meanwhile, is working on the bipartisan ROAD to Housing Act, with a wide variety of provisions that aim to encourage more housing supply while also reducing barriers to homebuying. The Senate Banking Committee passed it unanimously, but the House has not yet acted.
Reality check: Homebuilders producing more entry-level housing could help families looking to find an affordable place to live, but it's unclear whether this proposal represents a net addition to supply or just a different way to finance the existing development pipeline.
- To the degree that restrictive zoning policy is the reason for a dearth of supply, that is largely a state and local concern. The ROAD Act consists more of federal nudges for additional supply than directly liberalizing homebuilding.
Zoom in: Reducing mortgage rates is great for people with existing high-rate mortgages who can refinance.
- It might prove advantageous for those looking to buy a new place in a location where builders can respond quickly to demand.
- But it can paradoxically make housing more expensive, especially in places where housing supply is inelastic, as homebuyers bid up existing homes.
- When the Federal Reserve was buying mortgage-backed securities en masse in 2020 and 2021 as part of its pandemic stimulus policies, it may have contributed to steep home price run-ups in that span, Aaron Klein and Alan Cui at the Brookings Institution have argued.
More broadly, Trump appears torn between wanting to preserve the housing wealth of current homeowners and making homebuying more accessible for new buyers.
- "We're not going to destroy the value of their homes so somebody who didn't work very hard can buy a home," Trump said in a Cabinet meeting last month.
The bottom line: All public policy involves trade-offs, and the era of policy entrepreneurship over housing involves quite a few that are unresolved.
