Houston Skyline by Randall Pugh is licensed under CC BY-NC 2.0

The U.S. housing market is increasingly unaffordable as rent controls, supply shortages, and government intervention consistently elevate housing and rental prices. The Federal Reserve’s recent monetary stance and mortgage guarantees by Fannie Mae and Freddie Mac have also significantly weighed on housing affordability. The result has been a severe mismatch in housing demand and supply. 

Multiple studies have outlined the deleterious effects of rent control. John Cochrane, a senior fellow at the Hoover Institution, recounted an old essay by Milton Friedman comparing San Francisco rent controls in 1946 to free market San Francisco in 1906. As Cochrane analyzes Friedman’s essay, he explains “how the worst hit people are those who are less desirable tenants, how capping the price not only reduces the incentive to build but increases the incentive to sell rather than rent.” A supply shortage is the result of rent controls. A new study from Chapman University found that California’s housing policies have contributed to extreme unaffordability in the state—making it difficult for young people, minorities, and immigrants to move up the economic ladder. 

Politicians looking to intervene in the housing market are misguided in blaming institutional investors. Instead of impugning institutional investors, Republicans should find ways to expand the housing supply (without artificially increasing demand) by encouraging investment, thereby lowering housing prices. Rent controls and other Democrat-backed regulations will only depress the housing supply and artificially subsidize demand. 

By allowing institutional investors to participate in the market, they are increasing the supply of rental homes and potentially making rental homes more affordable. Texas and Florida are seeing more homebuilding activity than the rest of the country—possibly because states with lighter regulations attract more institutional investors.

Some Republicans are wrongly accusing institutional investors of distorting the housing market for buying single-family homes. Institutional investors own a minute portion of homes in the U.S.—“the vast majority are small mom and pop investors.” Lawmakers must focus their energy on the federal government and remember that the Federal Reserve’s (Fed) monetary policy is to blame. The Fed’s sudden shift from a low-interest rate regime to one where rates have reached two-decade highs has put commercial real estate in a precarious position. Fed policy has also disincentivized homeowners from refinancing mortgages or moving to a new home altogether—albeit in certain areas the rental supply is increasing because obtaining a mortgage has become prohibitively expensive for many buyers. 

High mortgage rates have slowed down the pace of home sales—limiting supply. Higher interest expenses are raising housing prices to near-record highs. In fact, “[t]he national median existing-home price rose 5.7% in April from a year earlier to $407,600.” According to Barron’s, “[a] relatively low supply of homes has kept prices high, with April’s median existing-home sale price just 1.5% off the record high set in June 2022. Still-high mortgage rates add to housing costs for prospective buyers, keeping home sales at relatively low levels.” The article goes on to mention how Federal Reserve Chair Jerome Powell talked about how “[l]ower inflation and target interest rates won’t solve the housing shortage, which existed before the pandemic.” One report by “Ned Davis Research estimates that nationwide, the U.S. remains short by 2.2 million housing units.” The housing supply is a consistent issue that will likely continue to put upward pressure on housing prices. 

Demand for rentals is outpacing supply. According to the Wall Street Journal, “[a] key reason market rents have moderated is that the industry is adding a record amount of new apartment supply. Some industry executives say, though, that that supply is being quickly absorbed because of increased immigration and solid job and wage growth.” According to one report, “[d]emand for rentals from millennials and Gen Z adults has coincided with the country’s housing shortage, causing rents to quickly rise.” According to a report published by KKR, “U.S. rental vacancies are at their lowest levels in 40 years” and at the same time, “household formation is outrunning the construction of new rental units.” More supply is needed from the market to satisfy current demand levels. Another option is to reduce demand by withdrawing government subsidies. Government housing subsidies usually take the form of grants, tax credits, or government guarantees of mortgage-backed securities. Downscaling these programs would be a good place to start if the government is serious about fixing housing costs and making home ownership a feasible opportunity for millions of Americans.

Much of the excess demand in the housing market is a consequence of the Fed’s monetary policy. The Fed engaged in large-scale purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, and U.S. Treasury bonds “between November 2008 and April 2010.” During this time, “interest rates in the conforming mortgage market decreased by more than 100 basis points.” At the same time, the security purchases “led to a 170 percent increase in conforming-mortgage origination.” Lower interest rates spurred demand for mortgages and led to an overall increase in demand for housing. 

Between September 2010 and June 2011, the Fed participated in a second round of quantitative easing by buying “U.S. Treasury securities.” From 2012 to 2014, the Fed conducted a third round of quantitative easing by purchasing more Fannie Mae and Freddie Mac guaranteed mortgage-backed securities and U.S. Treasury bonds. Once the Fed slowed down its purchases after the third round, “interest rates in the conforming market rose and its loan originations fell 30 percent.” These balance-sheet expansions demonstrate the Fed’s power to induce or reduce the demand for housing by adjusting monetary policy levers, such as open market operations.  

In March 2020, the Fed restarted Treasury and mortgage-backed securities  purchases again. After lockdowns ended, pent-up demand led to record home purchases amid a favorable low-rate environment. When the Fed changed its course to deal with the inflationary consequences of its actions, mortgage rates surged. A CBS News article cited a report from Zillow Research, reporting that the income needed to afford a home has risen sharply from $59,000 four years ago to $106,500. Data from the U.S. Bureau of Labor Statistics also show that shelter and housing prices are outpacing the general consumer price index (CPI) and the core CPI. In fact, “rents have gone up 19.5% over the last three years, and the more-encompassing shelter component of the CPI has risen 19.4% over the same time” while “the median sales price of existing homes is up 23.7% in the last three years.” The Fed has an outsized effect on affordability in the U.S. housing market. Monetary policy, not corporate greed, is a major locus for housing price variability.  

Intervention from government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, is also a significant contributor to increased housing prices. According to one analysis, GSE “interventions have led to higher prices by increasing demand through easy access to mortgage credit, which may have adversely affected poor and low-income groups.” Recently, Freddie Mac proposed to buy second mortgages for single family homes. It stands to reason that this would distort the market by incentivizing homeowners to take on more debt—backfiring by leading to even higher housing prices.  

Republicans on the U.S. Joint Economic Committee (JEC) published a report in response to the 2024 Economic Report of the President highlighting the Biden Administration’s failed housing policies. The report points out that regulations have largely contributed to the cost of single-family and multi-family homes:

It is estimated that regulation accounts for nearly a quarter of the cost of a new single-family home. For multi-family units like apartment buildings and condominiums, regulations are estimated to account for 40.6 percent of development costs.

Some positive legislative reforms have been moving through Congress as of recently. Lawmakers introduced and marked up bipartisan legislation that stipulates Community Development Block Grants may only be issued if applicants submit a plan to ease land use restrictions. Additionally, the U.S. Senate Banking Committee’s Ranking Member, Sen. Tim Scott (R-S.C.), introduced a housing reform package to help stabilize the housing market. The bill’s provisions include cutting red tape, creating access to more small-dollar loans, requiring testimony from housing officials in the executive branch, updating the definition of “manufactured home,” and improving financial literacy. JEC also has some interesting ideas to reform labor laws. 

Other legislative reforms that could help alleviate risk to the taxpayer include requiring Fannie Mae and Freddie Mac to taper down mortgage purchases and guarantees. For instance, prohibiting Freddie Mac from purchasing second mortgages while in conservatorship would limit taxpayer exposure. Additionally, limiting the GSEs to only use one credit score—as opposed to using multiple credit scores to more easily guarantee more mortgages—would be a way to limit risk to taxpayer dollars. Whitewashing credit reports, such as the Consumer Financial Protection Bureau’s (CFPB) recent proposal to ban consideration of medical debt, is irresponsible and puts the entire credit market at risk of becoming unstable. Borrowers need accurate credit reports to produce accurate credit scores, so lenders are not underinformed, lest borrowers overexpose themselves to leverage. For mortgages, this is especially important. Underwriting mortgages for borrowers that cannot afford mortgage payments would fuel a repeat of the conditions that led to the 2008 Global Financial Crisis. Ignoring real risk in the name of “equity” or “fairness” is not fair to the borrowers who will ultimately default and have their homes foreclosed. 

Making housing more affordable in the U.S. can be done by increasing supply, eliminating government subsidized demand, and removing burdensome regulations and rent controls that have distorted the market for years. It is also imperative to loosen Fannie Mae and Freddie Mac’s grip on the U.S. housing market while they remain in conservatorship. This is a good reminder that conservatorship is supposed to be temporary. Their losses should not be perpetually backstopped by the U.S. taxpayer. 

Lawmakers need to unleash housing supply and remove regulatory barriers that are making housing unaffordable for Americans. A bloated government presence in the housing market is the root of affordability issues. It is time for Americans to say no to proposals by politicians calling for even more intervention and regulation.