Update 883 – Drill-Down on Housing,
Sector Stuck in Rate and Supply Ruts
It has been a year since we’ve covered housing in depth, and since then, we’ve seen some troubling developments in the housing market. Earlier today, the National Association of Realtors reported that monthly sales had dropped more than expected last month as median home prices hit yet another record high. Housing affordability is lacking, and an ever-increasing share of Americans cannot afford to cover their housing costs while also trying to cover rising costs elsewhere.
The housing market has chronic problems, but the federal government does not seem to be on track to do anything substantial about it, even as state and local elected officials have given the issue more attention. This week, we provide a look at the overall health of the housing market and its impact on housing affordability, before diving into how things got to where they are and where they might be headed.
Best,
Dana
American voters consistently rank affordability and inflation as their top concerns. Among these, housing affordability stands out, affecting millions of Americans. With this in mind, the Trump administration and GOP-led Congress’ priorities might seem paradoxical, as crypto, cutting Medicaid, and expanding ICE took the spotlight during Trump’s first six months in office. With Trump’s major legislative battles mostly settled without doing much to address housing, the President now appears to be shifting course by announcing that he’s considering eliminating the capital gains tax on home sales, even though most homeowners already don’t pay taxes on their sales, and blaming Fed Chair Jerome Powell for high mortgage rates. This comes even as Trump’s decision to cut rental assistance programs by $27 billion has slowed the nationwide development of affordable housing.
With the fight over the GOP reconciliation bill over and the fight over appropriations just starting to pick up steam, the time is ripe to take a step back and look at the ongoing housing affordability crisis facing American households, a leading voting issue.
Snapshot of the Housing Market
The housing market is in rough shape. Here are some of the most salient facts:
- As of this month, the national median list price of a single-family home stands at a record high of $435,300.
- High prices have weakened the demand for homes, with sales dropping 2.7 percent from May to 3.93 million on a seasonally-adjusted, annualized basis.
- New listings for homes dropped 3.2 percent in June to about 517,700 homes, the lowest level in two years, and the total number of unsold homes has risen 20 percent over the past year.
While pending home sales rose by 4.8 percent month-over-month (much more than expected), sales are still down 7.8 percent year-over-year. This uptick was mainly driven by new home sales, as existing home sales fell 2.2 percent month-over-month to an adjusted annual rate of about 4,159,900. Rental and homeowner vacancy rates remain below their average over the past few decades at 7.1 percent and 1.1 percent, respectively, meaning that those looking to move into a new house or apartment have fewer options to do so.
Source: Redfin
High housing prices have put a strain on the pocketbooks of American families, and the problem is no longer confined to specific regions of the United States. A study from Harvard’s Joint Center on Housing Studies released last month revealed that 24 percent of homeowners and 50 percent of renters are “cost-burdened,” meaning that they spend at least 30 percent of their income on housing. The housing burden issue reaches all regions of the nation, even parts of the U.S. that once defied the upward trend in housing costs, such as the Southeast. The housing market, in total, has made Americans pessimistic about their chances for homeownership, as 38 percent of renters believe they will never own a home, while 67 percent of Americans now think homeownership is an unrealistic goal for young people.
Source: Harvard Joint Center for Housing Studies
The reason: housing inventory has not kept pace with household growth, meaning that supply has not yet caught up with demand. This is not helped by the fact that builder sentiment, as measured by the National Association of Homebuilders’ (NAHB’s)/Wells Fargo’s Housing Market Index (HMI), remained underwater for the 15th month in a row at 33 (50 is the break even number), meaning that construction companies and developers feel less inclined to build new homes in today’s market. It is no surprise, then, that, as per the US Census Bureau’s latest report, permits for single-family housing units were 4 percent lower than they were a year ago, meaning that fewer single-family homes are being built. The situation for rental units is not better, as even with an overall surge in apartment construction, the growth in rental households has more than negated any potential gains in rental housing inventory.
This squeeze on housing inventory means that the cost of buying a home remains elevated, even as fewer people can afford to do so. The unaffordability of single-family homes is compounded by the difficulty in obtaining an affordable mortgage. Mortgage rates remain elevated, hardly deviating from slightly below 7 percent for the last several months. When homeownership remains unaffordable, households must pile into the limited number of affordable rental units, putting pressure on the similarly constrained rental market.
When housing becomes unaffordable, no matter where people live, they often end up stuck in whatever housing they can find, instead of relocating to new cities, states, or even neighborhoods to pursue better economic opportunities. This is reflected by America’s slowing rate of domestic migration, as states that have attracted new residents for decades are now seeing the rate of migration slow as fewer people are willing or able to make the move. If people cannot afford their current homes, many become homeless, as the number of people experiencing homelessness in the US reached a new record in 2024.
How We Got Here
Limited supply and the high cost of building
This housing affordability crisis is decades in the making, and all roads lead back to the issue of inventory. In America, it is not only difficult to build more homes, but also to put more existing homes on the market. Many of these issues originate from the aftermath of the 2008 housing market collapse. After a long period of high growth in housing construction, the sudden, severe downturn in the housing market and the following recession crippled the homebuilding industry.
Illustrating how severe the decline was, there were 1.35 million new construction starts in 2007; in 2009, there were only 554,000, a drop of nearly 60 percent. While the housing industry regained some life during the recovery, it was not until fairly recently that housing construction returned to its pre-crisis annual rate of 1.5 million, which was the norm in the decades preceding the collapse.
Beyond the workings of the private sector, many policy failures also compound the difficulty of building more homes in America. One that has garnered considerable attention is red tape. The vast majority of important housing policy decisions are decided at the state and local levels, and American states and municipalities require developers to adhere to a long list of rules and regulations that govern what kind of housing they are allowed to build and where, including but not limited to:
- Zoning laws that not only determine where residential housing can be built, but also what type of residential housing, such as single-family vs. multifamily.
- Building codes that decide the physical characteristics of what can be built, such as the height of housing.
- Zoning laws for what can be built in specific districts, such as historical districts or areas adjacent to schools and parks.
While zoning laws are essential for ensuring housing is safe and serves the needs of their communities, many kinds of zoning laws have come under increased scrutiny in recent years. Navigating such a strict regulatory landscape increases the amount of time that it takes to build homes and makes them less profitable to build, often in the places that are in most need of new construction. In New York City, for example, it takes a median of 30 months to get a building permit for a project, largely thanks to the land-use review process; in Santa Monica, it’s much higher at 77 months. Land-use regulations are proven by multiple studies to increase development costs by restricting supply, costs which are passed on to potential homebuyers and renters as the price to put a roof over their heads rises.
Furthermore, Trump’s tariffs and trade wars mean that homebuilders are expecting higher prices on everything from Canadian timber to Chinese appliances. According to NBC News, Trump’s current tariff proposals/threats would raise the cost of building a mid-range single-family home by more than $4,000, as a conservative estimate. Additionally, immigrants make up a remarkably high percentage of construction workers, especially in the Southeastern and Western states. The Trump immigration crackdown means that construction companies will face a labor shortage in the near future, if they do not already, further hindering new home construction.
People “locked into” their mortgage rates
As new home construction lags behind market demand, not enough existing homes are going on the market to pick up the slack. Likely the biggest reason for this is that, with mortgage rates as high as they are, more borrowers are “locking into” their existing mortgage rates. What that means is that mortgage borrowers – who, on average, have a much lower mortgage rate than the current market, typically around 4 percent compared to today’s 7 percent – are choosing not to buy a new home since that would mean sacrificing their current mortgage rates. As such, existing homes count for far fewer homes for sale in the current market than would be expected, with new homes accounting for well over the 10-15 percent expected of home sales in many markets.
Investors Buying Up Homes
While not as huge a factor as those listed above, it is worth noting that, with home values continuing to rise, real estate investors are purchasing a growing share of homes to rent them out for a profit. According to ABC News, nearly 27 percent of all homes sold in Q1 2025 were bought by investors, the highest in at least five years. This trend has been particularly frustrating for many potential homebuyers, as the average homebuyer often cannot compete with the average investor, who can pay a higher price for the same home upfront, in cash, and without contingencies.
How The Market Could Change
With all of this said, there are a few reasons to believe that the current status quo of high costs and low inventory will not last.
Tipping Point: What Will Bring Prices Down?
The first reason potential home buyers could finally see some relief boils down to simple economics: if buyers cannot afford available homes, then demand for homes will drop, and sellers will eventually have to lower their prices. With housing affordability falling to such low levels, it should come as no surprise that the growth in home prices has already slowed, though it is unclear if the median home prices will become affordable for the median income.
According to Redfin, 11 of the 50 most populous US metro areas are already seeing prices fall, a trend that Redfin’s economists expect to extend to the housing market as a whole by the end of the year. Notably, the metro areas where prices are already dropping are some of the areas which are famous for their rapid increase in housing costs, such as cities in California and Florida. The trend will continue as the number of sellers continues to outpace the number of buyers, with over 500,000 more homes for sale on the market than there were buyers willing to pay for them as of April. In many ways, the fact that it is taking so long for home prices to fall is a testament to how strong demand has remained from those wishing to achieve the dream of homeownership.
Interest Rate Cuts
Home buyers are also hoping that the Fed’s overall success in bringing inflation closer to its two percent target will allow it to begin lowering the federal funds rate again. That is certainly what Trump is hoping for, as he has not been subtle about pressing the Fed to lower interest rates, going so far as to threaten to fire Fed Chair Powell as the Fed continues to delay doing so. Trump blames Powell for high mortgage rates. His position is questionable, as the Fed acting cautiously on monetary policy is not particularly unusual, and other factors, such as the dour mood in the bond market, also have a significant influence on mortgage rates and are not in the Fed’s control. Ironically, Trump’s own policies have strengthened the case for delaying cuts, as expectations of increased inflation in the coming months due to the Trump administration’s tariffs and uncertainty around Trump’s trade policy have made Fed officials more cautious about moving to lower rates too early.
Push for Policy Reforms
With housing affordability becoming such a problem, it should come as no surprise that state and local governments are under pressure to take action, and this pressure is increasingly leading to genuine policy reforms. The movement that most exemplifies this is the YIMBY – or “Yes In My Backyard” – movement. The YIMBY movement started in contrast to “NIMBYS” – or “Not In My Backyard” – a pejorative for local residents and organizations that represent them, like homeowners associations, which have worked to enact restrictive zoning laws and block new developments in the name of protecting the character of their current communities, usually suburbs with single-family zoning. YIMBYs focus on reforms to increase housing supply, most notably loosening restrictive zoning laws and allowing for more density and multifamily developments. Movements such as the “Abundance” movement have hit similar beats, focusing on solving the housing supply issue by making it easier for developers to build.
While the overall efficacy of YIMBY policies is far from a settled debate, YIMBY activists do have an apparent success story that they can point to as proof positive of their vision. Minneapolis adopted a model of many YIMBY policies, and is now seeing higher housing production and falling rent costs.
Eager to satisfy their constituents’ desire for affordable housing, many state and local politicians have turned to YIMBY and the elimination of red tape to pave the way for more housing construction:
- In January, the New York City Council passed Mayor Eric Adams’ big attempt to address housing in the city, the City of Yes Plan, with much of the focus on reforming and streamlining the city’s decades-old zoning restrictions
- At the end of June, California passed a bill that significantly rolled back the California Environmental Quality Act (CEQA), which had been blamed for hindering housing development
- In Chicago, the City Council passed an ordinance eliminating parking mandates in large swathes of the city
Politicians increasingly see YIMBY as their go-to reform for housing as the housing costs for their constituents continue to climb. That said, YIMBY is just one approach to addressing the housing crisis, and more attempts to address the problem can be expected in the future as housing affordability remains elusive for millions of Americans.
An Opening for Housing Reform
Even if it is not getting attention from the Beltway and much coverage in the news, housing affordability is one of the key economic challenges facing the average American, and if housing does not become more affordable, households will continue to see financial strain, miss out on building wealth through home equity, and even perhaps lose their homes and become homeless. If Americans do not see their elected officials taking action on housing, they are likely to elect officials who will. Trump and Congress should address housing now, while it is still early in Trump’s second term, an opportune time for substantial legislative activity. Voters may end up rewarding candidates who focus on an issue treated now with partial reforms at best and neglect at worst in next year’s midterm elections.