Norbert Michel and Jerome Famularo
In the aftermath of the COVID-19 pandemic, the United States experienced a much higher rate of inflation than at any time during the prior few decades. Like the prices of many goods and services, the cost of housing rose rapidly. The median home price, for instance, jumped from less than $350,000 to almost $450,000. (Figure 1.)
So, it is unsurprising that potential homebuyers were—and still are—shocked and upset.
It is also not surprising that many politicians have latched on to this issue. For instance, during the 2024 presidential campaign, both Donald Trump and Kamala Harris offered their own proposals for quashing rising home prices, ranging from subsidies to selling federal land.
Long before the pandemic, though, various groups claimed that the United States was experiencing a housing crisis, one marked by some combination of a housing shortage and unaffordable homes. A recent Brookings Institute article shows how conventional this view has become, arguing that “experts broadly agree that the US has millions fewer” homes than it needs.
But is America really facing a housing crisis? Is there really a shortage of millions of homes? And will these latest federal proposals really help improve housing affordability? Though it may seem surprising, a great deal of evidence suggests that the answer to each of these questions is “no.”
Over the next two weeks, we will present a series of Cato at Liberty blog posts that examine these issues. The series, which relies heavily on a new paper that we coauthored with S. Sayantani, argues that the United States is not facing a housing crisis and that less government intervention—not more—is needed to strengthen housing markets.
This introductory post provides perspective on federal housing policy and a basic overview of the crisis story to get things started.
Costly History of Federal Involvement in Housing
If history is any guide, Americans should beware of politicians promising to make housing more affordable. For most of the past century, officials have promised to improve affordability while expanding federal involvement in housing markets. Yet, each Congress is marked with the same affordable housing debates. And, for the most part, the policies that officials are promoting now are no different from the failed policies of the past.
From both the demand side and the supply side, decades of expansive federal policies have increased the nominal cost of housing. On the demand side, the constant expansion of subsidies and federal backing of mortgages has fueled growth in home prices and debt. On the supply side, the expansion of subsidies such as tax credits has done little more than enrich developers for building housing that would have been built anyway.
While these policies have cost Americans hundreds of billions of dollars in bailouts and inflated both mortgage debt and home prices, they have failed to create any lasting change in the homeownership rate. (Public housing has also been an abysmal failure, but we’ll set that aside for now.)
Today’s Economy and the Crisis Story
These past few years, many Americans have taken an economic beating—real wages fell and prices have not reverted to pre-COVID-19 levels. Therefore, it is no surprise that many people have been calling for increased government intervention, as in years past.
However, if federal officials answer those calls, it will likely increase Americans’ economic burden. Evidence shows that over the long-term, people have overcome the many federal roadblocks that increase the nominal cost of housing, but affordability would be much improved in the absence of those harmful federal policies.
At the state and local level, zoning and regulatory restrictions make it unnecessarily burdensome to build new housing. State and local officials should reduce those restrictions because, holding other factors constant, such changes would put downward pressure on home prices. But federal officials should stay out of these decisions and refrain from enacting policies that exacerbate problems in local housing markets.
Aside from being far removed from local communities’ needs and wants, most federal housing policies boost demand across the entire nation, putting upward pressure on prices regardless of local zoning rules. Congress has shown little appetite for fixing this problem, but federal officials should eliminate these demand-boosting policies.
The lessons learned from the post-COVID-19 inflationary episode are directly applicable to the housing market. In both cases, federal policies that distort demand and supply result in harmful outcomes. The housing market is simply a microcosm of what can go wrong—and how difficult it can be to fix—when the federal government interferes with markets.
Taking a step back, it is important to determine whether the United States is really facing a housing crisis. Federal officials can’t afford to gloss over this question. If they enact a set of policies to solve a crisis that doesn’t exist, the results could be disastrous.
At the very least, it is worrisome that officials are promoting a far-reaching federal effort based on such a wide range of estimates of the so-called housing shortage. These estimates have ranged from about 1.5 million to 20 million units in the past several years. Presumably, a policy designed to close a national shortfall of 1.5 million units would be very different than one aiming to add 20 million units.
So, it is important to consider, at minimum, the following questions:
Is the United States really facing a housing crisis?
Can people generally buy or rent at market prices?
Have home prices and rents really become unaffordable, to the point that people have no place to live?
Our new paper and this blog series carefully examine these issues and present evidence against the crisis story. They also present evidence that elected officials should temper their expectations regarding how much relaxing zoning restrictions might reduce home prices. Local officials should strive to improve their communities through zoning and regulatory reforms—nothing in the paper or the blog series suggests otherwise—but the price effects from these kinds of changes tend to be rather small.
Looking Ahead
Here is a preview of the future posts for the blog series.
Post 2: Questioning the Housing Crisis: A First Look at the Affordability Data
Post 3: Questioning the Housing Crisis: Crisis or Consumer Preference?
Post 4: Questioning the Housing Crisis: Demand Moves Faster Than Supply
Post 5: Questioning the Housing Crisis: A First Look at the Housing “Shortage”
Post 6: Questioning the Housing Crisis: A Different Approach to Estimating Housing Availability
Post 7: Questioning the Housing Crisis: Recap and Reforms to Improve Affordability