What Will It Take to Make Housing More Affordable?

How bad is housing affordability in the U.S.? Is it actually a crisis?

There are many ways to define housing affordability, but common indicators point to much higher costs of both owning and renting than what we have seen since pre-COVID times. Average home prices grew more than twice as fast as average incomes between 2020 and 2023. This is an historically unprecedented rise in the U.S. home price-to-income ratio. At the same time, there has been a steady long-term trend of more and more renters spending high fractions of their income on housing costs. The share of cost-burdened renters —defined as those who spend greater than 30% of their income on rent—grew from 20% in 1960 to 45% in 2022. Rental prices have also spiked by 22% nationally since right before the onset of COVID, but this is on par with the rise in wage incomes over the same period.

We might also be concerned about measures of affordability for those who currently own a home or are looking to buy one. The costs of maintaining a home include property taxes, maintenance and repairs, and paying off a mortgage, net of any tax benefits such as itemized deductions. Nationwide, property taxes as a share of income have modestly fallen since the Global Financial Crisis. But compare a new homeowner who locked in a fixed-rate mortgage (the most common type of mortgage in the U.S.) with a 20% down payment on the eve of the pandemic in 2019 to another hypothetical new homeowner who did the same in 2023. The 2023 homeowner would be paying about 50% more each month to service their mortgage than the 2019 homeowner, due to a combination of higher interest rates and purchase prices.

Those looking to buy a home for the first time often consult buy vs. rent calculators like Zillow’s. You enter in your income, mortgage financing terms, and how much you plan to spend on maintenance. Then the calculator tells you, for a given dollar amount of rent you are paying or number of years you plan to live in a house, whether you would save more money by renting or owning. If you were to enter average cost numbers in each major metro area in the U.S. right now, the buy vs. rent calculator would probably tell you it is cheaper to rent than to buy unless you plan to stay in the house for longer than the average six years Americans tend to spend in any one place.

Kamala Harris has proposed $25,000 in down payment support for first-time home buyers. You have a new paper looking at the effects of property tax reduction on housing affordability. Does that research tell you anything about the potential impact of Harris’s proposal?

My new co-authored research looks at the links between local property tax policies and housing affordability for current and prospective homeowners. Property taxes may not seem very relevant to the debate about the current proposal of down payment support for first-time buyers, but they are! We find that offering property tax exemptions to current owners who live in their home puts first-time buyers at a disadvantage. This is because incumbent homeowners benefit from such tax breaks, which lowers their ownership costs, and therefore buyers are willing to pay more for a house. Economists call this the capitalization effect of lower property taxes. Owners are also less willing to give up their tax benefits by selling their current home. Meanwhile, renters receive no immediate cash benefit from these tax breaks, which are pervasive.

Down payment grants like the one being proposed can help counteract these forces. However, this also means a one-size-fits-all amount like $25,000 is not likely to go nearly as far in certain parts of the country, including California, where Proposition 13 has helped prop up home values by capping increases in property tax bills for current owners. Another group of researchers showed that the First-Time Homebuyer Credit offered between 2008 and 2010 helped first-time buyers become homeowners earlier in life, at the cost of mild increases in house prices of around 1%. That earlier policy featured lower grant amounts of between $6,500 to $8,500, so it’s possible that the stimulus effect could be greater for larger down payment grants. Overall, cash assistance to first-time homebuyers would likely benefit a small number of younger households and might even be counterproductive to improving the overall affordability of homeownership.

What are the most effective policy tools for making housing more affordable?

Policymakers can influence demand for housing through tools like down payment assistance and mortgage regulation, or supply through changing the incentives to build.

On the demand side, there is a wide body of evidence from outside the U.S. that making mortgages harder to access helps make ownership more affordable in terms of the sticker price. This is typically done by increasing the standard required down payment—for instance, from 20% to 30% of the sticker price. Down payment requirements lower the attractiveness of buying, freeing up single-family homes for sale. These policies are particularly good at cooling down housing markets when they apply only to investors trying to buy second homes in already expensive areas, as I show in a co-authored paper using a policy experiment in Taiwan. Down payment restrictions are often politically infeasible and difficult to enact unless done in a top-down way through powers delegated to the central bank. In the U.S., the Federal Reserve does not have this power in its toolkit, but we do have something called the conforming loan limit, set by the Federal Housing Finance Agency, which indirectly rations credit by making it more difficult for banks to sell off low–down payment mortgages on the secondary market.

On the supply side, encouraging developers and builders to provide more housing units would help bring down both rents and prices. Construction of entry-level homes is at historic lows, and my research shows that, across most states, permit numbers filed for new housing construction have not recovered since the Great Recession. Overcoming these challenges is easier said than done given the complexities of local land use restrictions and zoning codes.