The federal government can do more about home costs than you think
The cost to buy a home has reached historic highs in the U.S. — the median price of a home is $420,800, according to the Federal Reserve Bank of St. Louis — and housing and mortgage costs are increasingly turning into a November election issue.
Home shoppers today need to an annual income of $114,000 in order to comfortably afford a typical home in the U.S., according to Redfin, nearly double what was needed to afford a typical home in 2020. That figure is far above the 2022 median household income of $74,580, according to the Census Bureau.
Higher monthly payments are driven by higher home prices as well as significantly higher interest rates. Mortgage interest rates, which dipped to an historic low of 2.65% on a 30-year fixed mortgage in 2021, have soared beyond 7%, higher than they've been since 2001. Interest rates are set by the independent Federal Reserve, and President Joe Biden has insisted on the Fed's independence. The Federal Reserve has been raising interest rates since 2021 in order to combat stubborn inflation.
So what tools does the federal government have at its disposal to make home ownership more affordable? Here are things the Biden administration and Congress could consider, according to experts who study the issue.
Provide tax benefits for builders who produce entry-level homes
There should be an effort to increase the housing stock, particularly of smaller, entry-level homes, several experts agree.
Once interest rates are removed from the picture, "then you're left focusing mainly on the supply shortfall," said Jim Parrott, fellow at the Urban Institute and former Obama White House economic adviser.
The housing market has seen a severe shortage of smaller starter homes, Parrott said. Builders, he said, are incentivized to build large, often mansion-like homes, which more easily turn a profit.
"The cost of building larger homes tends to be quite high, and it's easier to recoup those costs if you're making big, expensive homes," Parrott said.
The federal government needs to "make the math for building homes at the bottom of the market more favorable" for developers, Parrott suggested. And Congress can do this with the tax code. One approach would be to give a tax cut to any builder who constructs a residence for a first-time home buyer at below the median home price, Parrott said.
"You need to provide some sort of tax benefit for building homes in the parts of the market where we need them the most," Parrott said.
But getting this divided Congress to work together on something like this would be challenging, Parrott said.
"I'm afraid that the legislative environment right now just isn't conducive to this sort of big, bipartisan effort," Parrott said. "Hopefully after the election we'll see a reboot that provides a more hopeful window."
Withhold funding from localities that don't change zoning laws
Most of the control over zoning lies with state and local governments. And states have been working to overhaul zoning to ease restrictions on denser residential construction. But the federal government isn't entirely powerless on zoning.
Parrott said the federal government has used a carrot approach to encourage localities to rezone in favor of denser housing, but now he thinks maybe it's time to use a stick. For instance, any federal funding for communities could be conditioned on how zoning decisions are made. Communities receive substantial financial support from the Department of Housing and Urban Development (HUD), the Transportation Department and other agencies for projects, Parrott noted.
"If federal policymakers were to condition even a little bit some of that funding on whether or not local decision-making is supportive of or prohibitive of more density,...then you could begin to change things at the local level in a way that would really matter," Parrott said.
Such a move would be almost certain to trigger strict opposition from localities and unions. But more states have already been enacting legislation to supersede local zoning rules, said Alex Horowitz, director of housing policy at The Pew Charitable Trusts. Horowitz said nine states have passed laws allowing accessible dwelling units or ADUs — like small, independent, mother-in-law suites — on homeowners' properties.
Sell federal land to use for housing
"The federal government owns hundreds and hundreds of millions of acres, and we're not talking about the National Parks here," said Edward Pinto, co-director of the American Enterprise Institute's Housing Center.
But that's a proposal that Congress would need to authorize.
It has been tried. Sen. Mike Lee's HOUSES Act of 2022 would have approved the sale of federal land to states and localities for below-market rates for housing projects. The federal government owns two-thirds of the land in Lee's home state of Utah, and the gap between median household income and median home cost is largest in the West, according to HUD.
But his bill went nowhere. The Bureau of Land Management, which oversees federal land, said in written Senate testimony that it would be forced to "sell land without sufficient evaluation of the values to the public or to future generations, or sufficient compensation to the American taxpayer."
The sale of unused land could also attract opposition from environmentalist groups, though sometimes that can be overcome. In March, Washington Gov. Jay Inslee signed a law that will allow that state's Department of Natural Resources (DNR) to transfer some of its property to localities to build affordable housing.
Washington state GOP Rep. April Connors, who introduced the bill, noted that that the DNR had 7,000 acres of land that was unusable for timber harvesting because it was too close to developed land. Building housing on it could ease the shortage of homes in Washington, Connors noted in a statement, pointing out that the state has the "fewest housing units per household in the nation and nearly half of renters spend a third of their income on rent."
Improve consumer access to financing for manufactured housing
Manufactured homes are factory-built residences built after 1976 — formerly known as mobile homes — that can be placed on land. The average new manufactured home sold for $126,600 in November 2023, according to the Census Bureau.
But loans are harder for homebuyers to secure for manufactured homes than for traditional ones, Horowitz said. And since manufactured housing usually involves shipping over state lines, the federal government plays a big role. HUD controls access to financing for manufactured homes, and rules are stricter than they are for traditional homes.
Interest rates are typically also higher for manufactured home loans than for traditional home loans, in part because unlike traditional homes, which tend to appreciate in value over time, manufactured homes can depreciate. The structures are also viewed as riskier than conventional homes because they're usually harder to sell on the market. Horowitz suggests HUD could make it easier for borrowers to access loans.
Eliminate tax breaks for second (and third) homes
Congress could increase the national housing stock over time by eliminating tax breaks for any homes that aren't a primary residence, said AEI's Pinto.
Getting rid of the mortgage interest rate deduction for non-primary residences would eventually encourage many homeowners to sell, Pinto said.
"Why should they be subsidized by the tax code," Pinto asked.
Without that tax break, hundreds of thousands of homes would come back onto the market as primary residences, Pinto said.
"It would cost the federal government basically nothing," Pinto said. "They'd actually save some money on the tax savings, and it would not increase demand at all."
This isn't likely to happen soon though. Such a measure would have to be passed by Congress — and many lawmakers own second and third residences. And a number of their constituents and donors own multiple homes. Realtor interest groups would oppose it, too, Pinto said.
The most Congress has done in recent years to address tax breaks for expensive residences was in 2017, when the GOP-controlled Congress capped the deduction limit for state and local income taxes, which hit coastal, heavily Democratic states like New York and California particularly hard.
Still, eliminating the tax break for secondary homes is "low-hanging fruit," and would increase supply and reduce demand simultaneously, Pinto said.
Lowering interest rates probably wouldn't lower housing costs
Economists mostly doubt that action by the Federal Reserve to significantly lower interest rates would help much.
"If the Fed were to cut rates in a way that allowed mortgage rates to fall to the 4% range, we would see both supply and demand increase in the housing market," said Chen Zhao, who leads the economics team at Redfin.
And whether home prices rise or fall would depend on what then happens to housing supply and demand.
"If demand increases more, then prices would grow at a faster rate than they are currently," Zhao said. "However, it's also possible that supply would increase more because sellers have been so locked in by low existing mortgage rates. If that's the case, then price growth could fall. I think it's unlikely in either case that prices would fall outright."
Would Biden or Trump's policies help or hurt housing costs?
Former President Donald Trump hasn't offered policy suggestions to address housing affordability yet, although he criticizes mortgage interest rates and home prices under President Biden.
The president has proposed giving a $10,000 tax credit to first-time middle class homebuyers, and up to $25,000 to first generation home buyers. He's also introducing a $20 billion fund that in addition to helping build affordable rental units, is meant to peel away local barriers to housing development and spur the construction of starter homes.
Down payment assistance may help home shoppers in the near term, although the tax credit probably falls short of the traditional 20% down payment on most homes. With monthly payments at record highs, this down payment assistance would not lower monthly costs. And down payment assistance could have unintended consequences, Pinto said: "It would increase the price of entry level homes."
The effect down payment assistance or a buyer tax credit would have on the housing market is complicated in a supply-constrained market, Horowitz said.
While Trump hasn't made specific proposals on housing, his proposals in other policy areas would likely drive home prices up, Parrott said. Mass deportations of undocumented migrants, for instance, could drive the cost of labor higher, and raising tariffs on China could drive up material costs, Parrott said.
"The things that Trump has said relevant to housing almost all cut the wrong way," Parrot said.
How home costs could affect the election
The cost of home ownership is a top concern for Democrats and Republicans, city dwellers and rural residents alike, said Parrott. Once an issue has broken through the barriers of red and blue, metro and rural, "then it changes the probability of something happening," Parrott said.
"Housing has found its way to the grownups table, in effect, for the first time," Parrott said.
And even though it's the Fed that controls interest rates, Mr. Biden could be held accountable by voters.
"President Biden's reelection is closely tied to the cost of homeownership and thus, the fixed mortgage rates," Mark Zandi, chief economist at Moody's Analytics predicted. "The fixed rate is currently just over 7%. If it rises above 8% for any length of time, his reelection odds will fade, and if it falls closer to 6% his odds will increase meaningfully, all else equal."