Opportunities to Improve Housing Affordability in 2025 and Beyond

Introduction

• Housing scarcity is leading to higher prices and rents that are consuming an increasing share of the income of the poorest Americans
• State and local governments are adding to the housing problem with excessive and unnecessary regulation that limit production
• The federal government can best address rising housing costs by improving the transparency and efficiency of its subsidies and requiring local governments to reduce barriers to production 

There is no substitute for safe and affordable housing. For households that earn less money, housing inflation hits especially hard. According to recent Census figures, the median household income in the United States is $71,186. Based on the conventional measure of housing affordability that a household should pay no more than 30 percent of its gross pre-tax monthly income on housing, a household with median income should pay about $1,780 for rent. The average rent in the United States is about $1,700.

When price shocks hit local economies because of lagging supply, housing costs go up, and families earning less money will see housing consume a greater share of their income. More money towards housing reduces resources available for other critical needs like child care and transportation. The 30 percent standard of housing affordability doesn’t adequately account for other costs that have few substitutes like day care and transportation. When those residual cost burdens are factored in, families paying 30 percent for housing can find childcare costs alone as high as $1,200 a month. This doesn’t include the costs of getting to and from work, car insurance, and other transportation costs which can consume as much as 54 percent of a household’s income. Combine those costs and a median income household is spending more than it is taking in.   

Among other things, struggling to keep up can lead to overdue bills, which lower credit scores and thus lock some renters out of homeownership for credit unworthiness. This is part of the homeownership gap between black and white families: one 2021 estimate found that 73 percent of white families owned homes, compared to 44 percent of black families. Housing inflation also reduces the mobility families need to pursue job opportunities. And, naturally, higher costs consume resources that could be used for savings.

Housing prices and rents go up because there is a lack of housing supply to meet demand, often driven by new jobs and population growth. Also, Fed-imposed near-zero interest rates in effect from late 2008 through 2015 and again from 2020 until 2022 created an incentive for large financial institutions to buy up residential real estate. There is nothing wrong with investment in housing, especially rental housing. But when supply is constrained by regulation, rents and prices climb along with potential returns on investment. The best way to avoid huge injections of outside capital into a housing market is to allow abundant supply that would provide competitive prices for consumers. 

It’s difficult to measure the housing shortage precisely, but a recent analysis by Realtor.com found a shortage of about 6.5 million homes. The National Realtors Association tracks a ratio of permits issued for new jobs, and there are currently 246,500 jobs nationally and 61,575 permits issued, or about four jobs for every permit. Historically, that ratio has been more like 2 to 1. 

More jobs means new people moving into a city or region, fewer permits means fewer new homes to accommodate that growth, and that translates into housing scarcity and higher prices. When that ratio doubles, scarcity and prices can crush people who need housing. 

During the pandemic, when millions of Americans were forced out of work and found themselves unable to pay rent, the federal government was slow to act, providing rent relief in late 2020. Two years later, many of those funds and mortgage relief have yet to find their way to families in need because of state and local bureaucracies.

If the cause of housing inflation is so obvious and measurable, then why has the United States struggled with housing prices for so long?

First, the federal government needs to improve transparency to explain where and how existing resources are used. In addition, current programs—like the Low Income Housing Tax Credit (LIHTC) and Section 8—should be easier to use and more efficient. To receive any federal funds, state and local governments must reduce barriers to the production of market rate housing and lose federal funding for not doing so.

Land use and housing policy are the exclusive domain of state and local government, a product of the Tenth Amendment and our federalist system. Thus, zoning and construction rules are left to the states and further devolved to local municipalities or counties. The result is a patchwork of rules, laws, fees, and taxes that make building a unit of housing a lengthy and costly affair.

Counterintuitively, however, more subsidies would do no good. In truth, massive federal funding only aggravates the local situations. This is especially true for the LIHTC which, according to the Congressional Research Service, sends the equivalent of $13.5 billion in tax credits to the states annually. State housing finance agencies then distribute these allocations to housing projects that produce subsidized housing. This tax credit is complex, difficult for developers to use, and results in higher production costs.

In addition to the LIHTC, the Department of Housing and Urban Development (HUD) spends billions of dollars on housing development and services. In 2022, HUD’s budget was almost $68 billion. In 2023, HUD’s budget was more than $70 billion, and is on track in 2024 to exceed $73 billion. 

The United States Housing Act of 1937 created public housing, an intervention that eventually led to other subsidy programs. Most of this funding is allocated through grant programs, distributing money to state and local governments that usually pass funds on to nonprofit developers. Despite the rising level of federal spending on housing since the end of World War II, the broad consensus remains that the United States is in a “housing crisis.” 

While the development of the LIHTC program in 1986 created thousands of housing units, it has done nothing to ease the price problem in fast-growing areas. Arguably, the LIHTC has made things worse by allowing local jurisdictions to make rules that suppress supply, push up prices, then subsidize the problem with billions in federal tax credits. All that building has not relieved the pain for average-income workers. When residual income cost burden is factored in, even subsidized households in LIHTC projects can’t pay the rent. Unaffordable living is an unintended consequence of the LIHTC.

Better data collection and reporting is essential to track success and improve the system. Moving forward, it would make sense to consolidate federal programs, reform the LIHTC, and take a more rational and simple approach to housing vouchers like Section 8. Federal housing dollars, moreover, should be tied to measurable reforms to local housing rules. The market should be allowed to run its course, and subsidies should be available only when and where it fails. 

How innovation can lead to affordable housing 

Deregulation of the housing market is a necessary element of any successful effort to make housing more affordable. But policymakers also need to create the sufficient conditions in which technological innovation can flourish, which, in turn, can lead to increases in the productivity of housing construction. FREOPP’s Jackson Mejia notes that while “mass production and freedom to innovate in production methods spur rapid growth,” the production of new housing “largely lacks this freedom.” The reason lies in how builders create most new homes, which industry experts refer to as “stick-built housing.” This refers to the familiar method that builds houses from the ground-up on site. Mejia contrasts stick-built housing with its regulatorily disfavored cousin, prefabricated housing:  

This [stick-built] method requires highly skilled, frequently unionized workers to produce homes on-site. Prefabricated factory-built housing, by contrast, costs about one-third as much per square foot, but nevertheless constitutes about 10 percent of new single-family home construction, down from 60 percent in the early 1970s.

“[T]he prevalence of stick-built housing,” Mejia continues, “is a function of monopolistic behavior by construction companies and government policy.” Here the culprits were a powerful trade association, the National Association of Home Builders (NAHB), and the federal cabinet agency charged with making housing more affordable for Americans, the Department of Housing and Urban Development (HUD). In 1968, HUD implemented a program that offered generous subsidies for mortgages on stick-built homes, but not factory-built ones. “Given the relative inefficiency of stick-built production,” Mejia notes, “this program effectively subsidized a low-productivity technology at the cost of other, more efficient production methods.” 

Later, HUD and the NAHB pushed the National Manufactured Housing Construction and Safety Standards Act of 1974 through Congress, which operates effectively “as a national zoning ordinance” that “restricts the production of factory-built homes…by requiring such homes to meet certain standards.” By placing its finger on the scale in favor of traditional stick-built housing, these powerful interests sabotaged future innovation that might have led to ever more affordable homes. As Mejia explains:   

[I]t is as if Toyota is required to assemble a Camry in a driveway rather than in a factory. It is therefore no surprise that housing production is needlessly expensive. It is challenging to think of how, for example, apartment buildings would be factory-built. But that’s precisely the point: restrictions on production methods over the past half-century have restricted the creativity that follows from the freedom to innovate and the productivity growth that follows, leaving us without whatever the housing analog is to the iPhone. (emphasis added) 

“Housing,” Mejia concludes,“even with loosened zoning rules, is today stuck with production methods better suited for the eighteenth century. It is time for governments to allow housing construction to regain its place at the forefront of modern industrial production methods.” New technology and innovation are necessary for factory built homes to succeed, but this depends on a sufficient change in regulatory conditions at the local level, especially loosening of building and zoning codes, that would enable new modes of production to scale. 

The next president and Congress should take several concrete steps to make housing more affordable for all Americans.

Executive Action 1: Establish better data collection and transparency of the Low-Income Housing Tax Credit program

It is impossible to identify all the funding for housing allocated or spent by the federal government. This is difficult largely because those resources originate in many different agencies and departments, including HUD. The LIHTC, for example, is a creature of the tax code and is tracked only minimally by the Treasury Department. Not surprisingly, finding comprehensive longitudinal data is impossible because no one tracks tax credit projects at the federal level.

The next administration should issue directives to:

• Create a centralized system to track spending retrospectively and going forward
• Place all federal funding data for housing—i.e., data from every federal department or agency that touches housing policy—in a centralized relational database
• Establish measures of success to track and report quarterly to Congress and the public

Currently, HUD maintains a database of LIHTC projects that relies on voluntary responses to questionnaires completed by Housing Finance Agencies. As a result, there is no way to accurately determine where and how almost 40 years of tax credits have been used. An analysis determined that the data in the HUD database is inadequate for oversight and research. For example, in Indiana, out of 1,139 projects listed in the database, 193 have no unit count, and 769 have no indication whether they are for-profit or nonprofit projects. Incredibly, 916 projects include no indication of construction type.

Within a year, these executive actions should give the government a better picture of past spending by category, typology, geography, and demography. This would allow program administrators and researchers to determine which programs were successful and use that information to make better decisions going forward.

Executive Action 2: Increase intellectual diversity at the Fed

Policymakers in the U.S. Federal Reserve have long believed that lowering interest rates is beneficial for the housing market. Reduced interest rates, according to this view, make it easier for low-income Americans to borrow the funds needed to own a home. By increasing demand for mortgages, home prices increase, increasing the wealth of those who already own their homes.

However, over the last decade, home prices have increased substantially in relation to average household after-tax income. The power of low interest rates to increase the incomes of lower- and middle-income households is not clear.

In response to rising inflation, the Fed gradually raised interest rates from the near-zero levels it maintained since the pandemic, and more broadly, since the 2008 financial crisis. Now they are beginning to lower rates. As they do so, they should examine the role that low interest rates play in decreasing the affordability of housing. There are good reasons to believe that the extraordinary policy interventions of the Fed have made it harder for average Americans to afford a new home.

Moreover, it is time that communities, governments, institutions, and consumers engage in a wide ranging and deep conversation about the so-called “American Dream” that rests on the ownership of a fixed, detached, single-family home financed with a 30-year taxpayer backed mortgage. Financing the huge cost of a house over 30 years means high up front interest charges, doubling in many cases the final purchase cost of the house. In order for this scheme to work, housing inflation—or appreciation—must be very high, something that ensures many families will never own a home. Worse, the need for appreciation for inflation fuels regulatory subsidy in the form of limiting supply through zoning, and this means limits on rental housing as well, pushing up rents. The NIMBY effect is regrettable, but it is the logical result of the need to fuel appreciation which depends on constrained supply. We should explore other options for creating equity and ownership that don’t depend on the mortgage industry like cooperatives. 

Congressional Action 1: Reform the Housing Voucher Program

The Housing Choice Voucher program—colloquially known as Section 8—is a well-intended but flawed program to help people cover housing costs without the government building or operating housing. The program misses opportunities to be more effective. Specifically, Section 8 suffers from requirements that make vouchers hard to use for both housing providers and tenants.  One report by HUD’s Inspector General called on the department to reduce barriers and disincentives for residents and housing providers. Recently, HUD began to encourage research by local governments and public housing agencies to determine whether cash payments for housing were effective and, if so, whether Congress should grant HUD wider authority to implement a cash-based program.

The next Congress should prioritize the transformation of most federal spending on rental subsidies into direct cash transfers. Subsidies are important when markets fail to provide options for commodities that have no substitutes like housing. When the housing economy experiences price shocks, those who don’t earn enough money to pay rent need fast and efficient help. In these situations, the best option is cash. Reviews of cash-based programs during the COVID pandemic have found that providing cash for housing is more effective than building more housing alone. Indeed, Congress designed Section 8 to act like cash, getting a roof over the heads of people who need housing quickly. Section 8 also limits the need for the government to make big capital outlays, like buying land and constructing housing projects. 

Congress should: 

• Allow vouchers to be used immediately, when a qualified household is already situated and paying rent, rather than forcing families to search for a qualified unit that may not be readily available
• Simplify inspections that now take time, cost money, and discourage participation by housing providers
• Employ the banking system to make rental assistance payments to housing providers more immediately accessible

Critics might suggest that programs that provide rapid cash assistance are susceptible to fraud. It is true that the big dump of relief during the COVID crisis resulted in billions of dollars going to people who didn’t deserve it. Worse, much of the housing relief never made it to people who need it. But the current system is also rife with wasteful spending on consultants, syndicators, lawyers, and contractors. An evaluation of Missouri’s program by that state’s auditor found that “only $0.42 of every tax credit dollar issued actually goes toward the construction of low income housing.” With that in mind, a new congressionally authorized cash benefit housing assistance program should leverage the most sophisticated technological tools available to ensure that funds are spent properly, to maintain proper government oversight, and to prevent improper spending. Congress should reference guidance from the Government Accountability Office to design the program to ensure payment integrity. 

A well-constructed cash-based program needs to be tried and evaluated honestly. Pilot and demonstration programs can establish a tolerable level of loss while providing maximum benefits to people who need help. No program is perfect, but innovation requires risks and aggressive oversight can mitigate some of those risks. Any such program would benefit from corrections and improvements during implementation that will enhance accountability and efficiency.

When renters qualify for assistance, that help should be available as soon as possible. Housing providers have relationships with their own banks, and those lenders could disperse funds immediately ensuring no interruption in rental payments.

Congressional Action 2:  Reform the Low Income Housing Tax Credit to give tax breaks to developers and renters directly

Congress should end the current practice of distributing tax credits to states based on population. Instead, Congress should create a taxpayer-level deduction for cost burden and a direct credit to for-profit developers who include rent restricted units in their projects. Today’s tax credit for housing is very complicated, with Treasury allocating billions of dollars to state housing finance agencies that dole out equity to apartment projects in as many different ways as there are states.

Audits conducted by Treasury’s Inspector General and the GAO found that it is nearly impossible to track the money flushed into state housing finance agencies over the last 37 years. Worse, FREOPP’s own analysis found HUD’s database has thousands of empty cells and inaccurate information. Congress should be demanding answers to the question, “Where did all that money go?”

Congress should reform the tax code to establish the following tax benefits that will meaningfully expand the supply of affordable housing to more people.

An individual housing tax benefit program

While the tax code may not be the best place to solve housing price problems, it is something the federal government controls and therefore a reasonable place to experiment with improved housing policy. Most Americans may not understand the full complexity of the tax code, but most recognize smaller paychecks when taxes are withheld. Americans also understand that they often get some of that money back after they file their taxes.

The tax code should allow for a deduction of the cost burden, or anything a household spends on housing over 30 percent of their gross pre-tax income per month. For example, households that pay $200 a month over the 30 percent threshold could deduct $2,400 from their taxable income when they file. A program that allows households to file their taxes quarterly and get a negative deduction in the amount of their cost burden in each paycheck would be even better.

Such transfers could be conditioned or held in escrow in a revolving loan fund. For example, the tax break, which would often result in a negative tax, could be limited for use in an account that couldn’t be accessed for five years and then only used to pay debt, medical expenses, or a down payment for a house. Meanwhile, those funds could be used to make low-interest loans to building owners to make repairs on rental housing provided they don’t capture the costs with rent increases. The result would be savings and improvements to rental housing with those costs being passed on to renters.

Examples of similar programs include educational savings accounts that allow funds to be set aside for education and HUD’s Family Self-Sufficiency Program, which reduces rents and housing costs, placing savings in an escrow account for use later. The principle is simple: make the subsidy more direct and tie it to an incentive while maintaining government oversight over how funds are used. It’s encouraging that HUD is ready to talk about cash, but they should also be seeking congressional authority to use funds appropriated for vouchers as cash. There is more than enough evidence that the voucher program isn’t working efficiently. That should be enough to convince Congress to greenlight experiments with cash now. 

There is a danger that such direct payments may stoke inflation. But families with lower incomes really need more cash, and the current subsidy system already creates inflation without benefiting the people who need help. Reducing housing costs doesn’t obviate the importance of reducing other essential costs like daycare, nor does it create wage growth for families that earn less. Simply adding more cash to offset housing costs as a tax benefit is the most efficient and compassionate subsidy, and frees up family resources otherwise consumed by housing costs.

Direct tax benefits to developers

Currently, the federal government allocates billions of dollars in deferred taxation for housing via the LIHTC through state housing finance agencies. There is a better way: simplifying the LIHTC as a simple deduction. A housing provider or developer should be able to create rent-restricted housing, then receive a deduction for the difference between market rents and what residents would be paying.

For example, a developer could build 100 units of apartments and keep 50 at a price affordable to households earning 50 percent of area median income. If market rents were $1,500, and the developer charged $1,000, she would get a $500 credit for each unit times 12, or $300,000. Developers have expressed interest in the idea of being able to borrow this money up front, and then also claim the interest so that their projects could get an infusion of capital.

Allocating credits this way would be more responsive to needs in the community and the market without having to go through a lengthy application process to establish that there is disutility and price pain. Developers would have an incentive because they could offer more competitive pricing to people with fewer dollars to spend in housing that is exactly the same as people paying the full price, avoiding the concentration of subsidized housing.

Congressional Action 3: Tie subsidies to local reforms

Two important ideas for policymakers to keep in mind: First, efficiency is compassionate. When money reaches people faster and without much overhead, people suffer less and resources go further. Second, markets and bureaucracies don’t solve housing problems, people do. When empowered to innovate and reinvent, people closest to the problems of implementation can solve those problems if they’re allowed to do so. State and local governments need to reform zoning and land use laws to allow the maximum production of housing, allowing more innovation and for producers to respond to people’s housing needs; this means solutions like smaller apartments, shared housing, using modular construction components, and building on community land trusts. 

The federal government should: 

• Develop a quantitative measure of reform at the local level
• Base that measure on the repeal of restrictive codes
• Measure the impact on supply from removal of rules measured in price
• When the market fails, target subsidies to the areas immune from deregulation

If local governments remove restrictions so supply can keep up with growth, prices and rents would fall. Ideally, using the tax incentives, the private market should be able to house individuals and families with regular employment incomes as low as half the median income. At lower levels, additional cash subsidies could be used, and for those in recovery from mental illness or addiction, funding could be used for construction and comprehensive support services to keep people healthy.

Conclusion 

Solving housing price inflation and making housing more affordable for poorer American families depend on one key thing: more housing. Unfortunately, federal programs have focused on more money with little result over the last 70 years. Using existing resources more efficiently is compassionate. That requires getting subsidies where they need to be faster and with greater impact.

The federal government can also incentivize state and local governments to emphasize fewer rules, regulations, fees, fines, and taxes on housing by tying subsidies to policies that maximize the market’s ability to meet demand and use funding for people and households that can’t pay housing costs. The next president could issue directives immediately to create better data collection and transparency, pilot promising approaches to voucher use, and set the stage for legislation that more efficiently uses the tax code to subsidize people who need housing help more directly.