Housing is the foundation of the economy. Homes represent the single largest asset for most Americans. They are a vital source of wealth creation that supports consumer spending, which in turn represents about two-thirds of U.S. economic output.
It’s not a surprise, then, that the Trump administration recently said it was considering declaring the housing crisis a national emergency. Well, no kidding. Years of insufficient new housing, rising construction costs and elevated mortgage rates have put homeownership out of reach for a growing share of the country. The latest Federal Reserve survey of consumer finances confirms that affordability has worsened. The median home is worth more than 4.6 times the median family income. In 1995 it was 3.8.
The federal government alone can’t solve the housing crisis. Some of the reasons for rising prices, such as lack of building permits, can be addressed only at the local level. That said, the Trump administration could take steps that would meaningfully help make American housing more affordable. It just needs to rethink some of its signature policies.
One of the biggest issues is supply — especially smaller starter homes for younger and lower-income households, which typically aren’t as profitable for developers. In 2023, just 9 percent of new homes were smaller than 1,400 square feet, a typical measure. In 1982, 40 percent hit that mark.
Congress is considering legislation that includes tax credits for builders and incentives for local governments to streamline permitting. That will help. But here’s the trickier problem. According to the National Association of Home Builders, immigrants represent one in four American construction workers. Want a ceiling for your new home? More than 60 percent of ceiling installers are immigrants.
These workers were already in high demand before President Trump’s crackdown on immigrants. Nearly two-thirds of U.S. home manufacturers said last year they faced shortages of carpenters and other key construction workers. Today, even fewer available workers means higher wages, which adds to the cost of new housing, and fewer homes getting built.
Then there are tariffs that hit the housing industry, including 35 percent tariffs and related duties on Canadian lumber. The United States produces a lot of lumber for housing, but can’t meet demand without imports. Canada is America’s largest foreign provider of construction lumber, supplying just under a third of the total used in home building.
While they’re at it, White House officials should take a look at tariffs on steel, aluminum and copper, and abstain from imposing tariffs on furniture (something Mr. Trump has hinted he is considering). Tariffs may help bring manufacturing back to the United States over the long term. For now, they are worsening the housing affordability crisis by increasing the price of stuff that makes and fills a home. Household appliance prices rose 3.3 percent this year through July, according to the Yale Budget Lab, which tracks the impact of policy on the economy.
That’s supply. What about demand? Many homeowners, reluctant to give up their ultralow mortgage rates, are staying put. Buying a new home today means accepting significantly higher borrowing costs, which eats into what you can spend on the home itself.
The Federal Housing Finance Agency estimated that as of the first quarter this year, nearly 70 percent of outstanding U.S. mortgages were at 5 percent or below, with nearly a quarter of mortgage rates below 3 percent. Who would think about buying a new home when mortgage rates are closer to 6.5 percent or even 7 percent?
The White House can help by reconfiguring monetary and fiscal policy in a way that lowers, not increases, the interest rate on the 10-year Treasury bond, the number that generally anchors mortgage rates.
Recent comments from the president suggest he believes the “housing market will swing” if the Fed cuts interest rates. In recent decades, it was true that such a move would reduce not only short-term rates but also longer-term ones, as measured by returns on the 10-year U.S. Treasury.
Today, however, that is far from assured, given persistent inflation, chronic fiscal deficits and the White House’s campaign to take control of the Fed. When the Fed lowers rates, as it did last week, investors can reasonably anticipate that the economy will heat up, raising the chance of rates increasing later on and thus pushing mortgage rates higher. That’s what happened last year when the Fed cut rates by one percentage point, to 4.5 percent. From September to December, the 10-year Treasury yield rose from 3.6 percent to 4.5 percent, pulling the 30-year fixed mortgage rate higher in turn.
A central bank that is perceived as political could make mortgages even more expensive. With central bank independence eroded, investors would probably demand higher returns to make long-term loans to the government, which would also drive up the mortgage rate.
The Boston Fed president, Susan Collins, captured what’s at stake in a recent speech. She said low and stable inflation is essential to create “stable, predictable economic conditions that benefit the housing market over the medium to longer term.” Put another way, the White House should stop undermining the Fed’s policy credibility, because that could undermine the broader economy — including housing.
One last suggestion: Leave Fannie Mae and Freddie Mac alone.
The administration has discussed privatizing Fannie Mae and Freddie Mac, the government-supported giants that provide liquidity to the mortgage market. They have been under federal conservatorship since the 2008 financial crisis. Selling shares to private investors would be useful for a government short on revenue.
Unfortunately, privatization could also result in higher mortgage rates. The implicit government support that comes with federal control reduces the perceived risk of Fannie Mae and Freddie Mac-backed mortgages, encourages investors to fund them and keeps costs low.
This administration has shown an ability to be pragmatic, especially on economic policy. Making American housing more affordable is a worthwhile and achievable goal. It just requires reconsidering the policies that are making the problem worse.
Rebecca Patterson is an economist and a senior fellow at the Council on Foreign Relations who has held senior positions at JPMorgan Chase and Bridgewater Associates.
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