For the first time in recent memory, housing policy is at the forefront of a US presidential election campaign, reflecting the deep challenges millions of Americans face in finding affordable, stable homes.
Housing is an incredibly complex and politically sensitive issue, but it’s also one that cannot be ignored if we want Americans to thrive.
The challenge for candidates is to provide solutions that have both clear economic logic and are politically feasible. While both candidates have mentioned housing as an issue on the campaign trail, neither Harris nor Trump have long-term, quality solutions to the nation’s housing crisis.
Here are a few critical issues the candidates should be thinking about in this election.
Stimulating Demand Alone Is Not the Answer
While almost all federal housing policies focus on providing financial support to home buyers or renters, these subsidies increase demand. When demand for housing increases without an equivalent rise in supply, prices rise. Higher house prices or rents reduce affordability rather than improve it. Demand subsidies end up transferring wealth from taxpayers to existing homeowners or landlords rather than helping first-time home buyers or struggling renters.
This issue bedevils the $25,000 tax credit the Harris campaign proposes for 4 million first-time homebuyers. The policy would push up house prices, not only for most recipients but for everyone else. The same logic applies to the mortgage interest deduction, the holy cow of housing policy. The MID not only results in higher house prices but also in too much mortgage debt in the system, which leads to financial vulnerability as well as redistribution to the rich. Any new housing policy that stimulates demand drives up housing costs unless it comes with a concerted effort to also increase supply. So how do we increase supply?
Stimulating Supply by Shortening Construction Timelines
Over the past 40 years, the productivity of the construction sector has fallen far behind that of every other sector in America. Bureaucratic headwinds are partly to blame. But we should also redouble our federal investments in modular construction (at HUD, FEMA, DOD, VA, and DOE) and other technologies that have a track record of improving construction productivity.
The Trump campaign’s proposals to deport immigrants risks doing serious damage to the supply side of housing. About a quarter of construction workers are immigrants; in some places like California, the share is even higher. Some trades like roofing, masonry, and drywall installation are highly reliant on immigrant labor. And there are persistent labor shortages in plumbing and electrical work that immigrants help mitigate. Research has shown that tighter border control results in higher construction costs and lower housing affordability. We need to stimulate the entry of new businesses and new workers into the construction industry.
As the old saying goes, time is money. Regulatory red tape means that it takes at least twice as long to build the same apartment building in states like California than in states like Texas. The entitlement and permitting process in California can take years, with a high risk of sequential legal challenges; a complex regulatory approval process at various agencies, each with its own rules and fees; upwards of 60 separate building permits required per project — 10 times that in Texas; as well as different development codes, ordinances, and city council members to please in each of the hundreds of local jurisdictions. The totality of rules, regulations, permits, approval processes, and fees conspire to dramatically increase construction timelines and costs. The time lags ruin the economics of residential development.
The federal government has limited direct control over local development rules, but it could use its spending power to influence policy change — and there is precedent for this. In 1984, the federal government passed the National Minimum Drinking Age Act. States that did not raise the minimum drinking age to 21 risked losing 10 percent of their federal highway funds. By 1988, all 50 states had raised the drinking age. Similarly, a new administration could make a portion of the Housing and Urban Development, Transportation, and Energy department funds that go to states and municipalities conditional on meeting new housing production and construction timeline targets. Other mechanisms could include the Treasury Department allocating relatively more tax credits under the popular but inefficient Low Income Housing Tax Credit program to states that have promoted densification through zoning reform or to states that are delivering the tax credit units at or below the cost of unsubsidized Class A housing. HUD’s $85 million community development block grant PRO Housing program is a small step in the right direction.
Consider the Climate Risks
Unwittingly, Americans have been moving into locations that are more vulnerable to climate risks like flooding, hurricanes, and wildfires. The price mechanisms we rely on — such as the cost of insurance and mortgage interest rates — need to better reflect the growing climate risks so as to discourage building in dangerous areas. Property insurance rates are beginning to reflect underlying climate risks, but subsidized flood insurance and state insurance bailouts distort accurate property insurance pricing. Similarly in the government-backed mortgage market, there’s cross-subsidization from borrowers in climate-safe areas to borrowers in high-risk areas. If we don’t address this imbalance, the government (read, taxpayers) will end up owning lots of climate-stranded real estate. Housing policy must emphasize both resilient building standards and climate-forward living, favoring areas with lower exposure to extreme weather events. Denser urban living is also more climate friendly.
Creative Pathways to Homeownership
Owning a home has been one of the primary ways Americans build wealth. But rising prices and high mortgage rates have increased the barriers to homeownership for many households, including a generation of millennials and Gen Zers whose parents were already homeowners at the same age.
The UK government’s Help to Buy Equity Loan scheme is a creative program that allows households to buy a home with down-payment assistance from the government. The loan has no interest for five years and a below-market interest rate thereafter, but the loan repayment depends on the market value of the house. That way, the homeowner and the government share in the capital gain when the house gets sold. Borrowers can increase their home equity by buying out the government’s stake over time if they wish.
If we were going to continue subsidizing home ownership, a program like this could work better than the mortgage interest deduction, provided we can build more housing. To limit some of the price impacts emphasized earlier, the program could be targeted to first-time home buyers, making below-median income in their area, and apply to only new-build properties. Having less debt and more equity makes the overall financial system less vulnerable. Any capital gains the government earns on its stake can be redeployed to help future first-time owners. The result is a “housing sovereign wealth fund” that invests in Americans’ shared prosperity.
Let’s Not Forget the Most Vulnerable
Rental subsidies and rent control policies are often promoted as solutions to the housing crisis, but they have unintended consequences. Many subsidies, such as the Low-Income Housing Tax Credit, end up going to developments that would have occurred anyway and in places where no subsidy was needed. In such cases, they benefit landlords and landowners more than renters. Rent control policies can provide meaningful stability for renters but they reduce incentives to build new housing and maintain existing properties. Since they are not means tested, they create massive distortions to the housing market.
The challenge lies in creating carefully targeted policies that help only those in need. With (much) better information technology and data management — integrated Internal Revenue Service and housing subsidy datasets — building more targeted renter subsidy programs should be feasible.
One particularly vulnerable group is the homeless population. Research shows that providing stable housing for homeless individuals is much cheaper than paying for extra emergency room healthcare, law enforcement, and incarceration expenses in the absence of stable housing. It’s a policy that pays for itself in the long run, a fiscal and ethical win-win. We cannot be the greatest nation on earth when 650,000 people, in effect the population of Boston, are sleeping in the street.
Reducing the historically high cost of shelter and therefore reforming housing policy is one of the most urgent issues facing Americans today. Reducing regulatory and administrative complexity to speed up construction timelines, boosting the construction sector and its labor force, and stimulating innovation in construction technology can add up to meaningful supply stimulus. Once we increase supply, carefully targeted subsidy programs can help improve housing affordability for the young and most vulnerable in society. In the process, we must prioritize a housing finance system with more equity and less debt, and one that is resilient to rising climate risk.
This election offers an opportunity for reform. Let’s not miss it.