The state of the housing market

By Deputy Secretary of the Treasury Wally Adeyemo

1. The state of the housing market

Ensuring more Americans have access to affordable housing is critical to creating a pathway to opportunity. Numerous studies have linked access to stable, high-quality, affordable housing to reductions in child poverty, improvements in educational performance and developmental outcomes, and increases in lifetime earnings. Especially for communities and people of color, affordable housing constitutes a critical rung on the ladder of economic prosperity. In total, economists estimate that the nation’s lack of affordable housing costs the US economy roughly 2 percent of GDP each year or more.

The COVID-19 pandemic and ensuing economic crisis upended the personal finances of many American families over the past year and put too many families at risk of losing their homes—with millions of households missing rent and mortgage payments. About 1.7 million loans were more than three months past due in the first quarter of 2021, and roughly 7 million renter households are behind on rent, including about 3 million at risk of eviction. These financial strains have been particularly pronounced in communities of color, where the pandemic’s negative economic effects hit hardest and which have been deprived of an economic cushion by generations of discrimination.

The Biden administration has worked hard to mitigate these pressures. We have put in place a number of programs and policies to keep families in their homes, including an extension of the moratoria on evictions and foreclosures; additional mortgage forbearance; and the American Rescue Plan’s roughly $22 billion Emergency Rental Assistance Program and $10 billion Homeowner Assistance Fund, which provide relief to struggling renters and homeowners, respectively.

But there is more we need to do to fully address the long-term structural problems driving the shortage of affordable housing. Declining construction and lower housing supply, as well as economic shocks and tightening credit conditions due to the pandemic, have made it even harder to find affordable homes to rent or buy. According to one estimate, the annual production of new housing units lags behind new housing demand by 100,000 units each year.

Housing costs are driven by a range of factors, but a particular concern is that a chronic shortfall of available housing units has made it difficult for many low- and moderate-income households and households in communities of color to find affordable rental housing or buy a home. For renters, short supply and rising prices can put families in the impossible position of choosing between the roof over their heads and the food on their table.

Shortages can also force them to move to lower cost areas that put economic opportunities out of geographic reach or to live in unsafe or unhealthy homes. And while homeowners experience rising home prices as an increase in their personal wealth, those locked out of the housing market experience it very differently—as yet another barrier to homeownership and a driver of increased wealth inequality.

As the US economy has rebounded from the pandemic, imbalance between supply and demand has worsened. Demand has surged, and supply has not kept pace. The signs of affordability we saw in mid-2020 have evaporated as gains in measures like the Housing Affordability Index have largely been erased in the intervening year.

Where it is available, access to affordable rental housing alleviates the pressure on working families to make ends meet when costs are too high, allows them to settle in a community without worrying about whether rising rents will force them to uproot their lives, and enables them to save and build a nest egg to get through emergencies or save for retirement. For those who can afford it, owning a home widens opportunities to accumulate wealth, as housing is the most important financial asset for middle-class households.

By contrast, a lack of affordable housing adds to financial stress, especially for the most economically vulnerable households. Housing values doubled from 2000 to 2019, but price appreciation was fastest in the bottom 20 percent of the market. Today, no state in the country has an adequate supply of affordable housing for the lowest income renters. Rising prices create instability for renters and further reinforce financial disparities.

Higher prices that translate into higher rents strain household finances and inhibit saving. Rising monthly mortgage payments also place lower-income homeowners at risk of losing their homes if they cannot afford to make their payments. Black Americans are especially likely to lose homes they own because a history of discriminatory and abusive financial practices has weakened their ability to weather financial shocks like job losses, on top of the generations in which many were locked out of homeownership altogether.

Inadequate affordable housing also cuts off many Americans from labor market opportunities if they cannot afford to live where good-paying jobs are available. This situation forces them to trade wages and job opportunities for housing affordability and often leaves them with little left to save, regardless of their choice. At its most extreme, insufficient affordable housing can result in homelessness.

1. Why supply matters

Inadequate supply is perhaps the greatest problem in the housing market today. And by some measures, the pandemic has made the problem worse.

As many people sought more space to work and study from home, demand for homes surged. This rise in housing demand has led to record-low inventories, with the inventory of existing homes falling to just two months of supply. Similarly, tight inventory conditions exist for new homes, with just over four months of supply – levels last seen on a sustained basis in the early to mid-2000s. In the rental market, the National Low Income Housing Coalition estimates there is a shortage of approximately 7 million affordable and available rental homes for extremely low-income renter households, with just 37 such homes for every 100 of these households.

Tight inventories mean high and rising prices and declining affordability. The Case-Shiller Composite 20 home price index is up 13 percent year-over-year, approaching rates of increase last seen in 2004–2005, with increases ranging from 9 percent in Chicago to 20 percent in Phoenix.

And while housing supply has increased, it is not nearly enough to keep pace with surging demand. Shortages of raw materials and plots of land for construction and scarce skilled construction workers have kept supply from matching the rise in demand. Moreover, when building costs increase, a larger share of construction occurs at the high end of the market, disproportionately driving up costs at the low end of the market, where demand substantially exceeds supply. Housing demand is also uneven across regions, with some smaller metro areas seeing increased housing demand as the labor force adapts to the possibility of remote work continuing beyond the pandemic.

In sum, affordability was already a challenge before 2020, and the pandemic has only worsened the challenge for lower- and middle-income families, whether they are renting or buying.

III. Principles of the Biden-Harris approach to housing

The state of America’s housing market—from pandemic-induced instability to long-run shortages in the housing supply—demonstrates that additional investment is sorely needed. The Biden-Harris Administration is committed to restoring access and fairness to America’s housing market through bold investments to address these issues. Critically, the Biden-Harris administration is undertaking an historic shift in US housing policy by focusing on supply constraints and the availability of affordable housing units, including multifamily rental units.

These initiatives will be guided by a set of six foundational principles to ensure they serve communities most in need and catalyze the structural change our housing market requires. These principles are:

• Affordability. Housing should be made available at a cost that does not exceed 30 percent of household income. This will ensure renters and homeowners can afford to meet other critical needs—from childcare and medicine, to putting food on the table, to saving for retirement. Affordability must also account for the cost of transportation, whether through proximity to economic opportunity or access to high quality public transportation to enable access.
• Stability. Stable housing provides families the consistency they need to maintain employment, put down roots in their communities and form lasting social bonds, and provide their children the foundation needed to perform well in school. Housing should be made available on sustainable terms that facilitate stability if families choose to stay in their homes.
• Safety. Housing must meet high standards for occupant safety and health, protecting children and families from environmental harms, like lead contamination, to social risks, like gun violence.
• Equity. Affordable housing should be made available to groups historically excluded, including communities of color, individuals with disabilities, and others. Housing options should allow disadvantaged groups to participate in their communities on the same terms as other residents and, for those who own their homes, to build wealth and begin to narrow socioeconomic disparities.
• Resiliency. High-quality housing means housing that not only meets today’s standards but that can withstand the test of time. It means housing that is healthy and resilient to the impacts of climate change, meets high standards for energy efficiency, and helps reduce our greenhouse gas emissions.
• Accessibility. Housing must be located near good schools and within a reasonable commuting distance of well-paying jobs and economic opportunity. High-quality schools and short commutes are often drivers of high housing prices, making it even more crucial to ensure affordable housing is available in these communities so that working and middle-class Americans have access to these opportunities.

It is important to expand the housing supply through tax incentives and subsidies, direct investments in high-quality public housing, and changes to exclusionary land use policies that restrict housing construction where it is needed. Moreover, creating additional housing units in line with these principles will create hundreds of thousands of good, union jobs, the majority of which will not require a college degree. These investments will create economic prosperity inclusive of local community members and create new employment opportunities, including for workers of color.

1. The Biden-Harris administration’s housing proposals

To follow through on these principles, expand access to housing, and create good jobs for working Americans, the Biden-Harris Administration has put forward a robust housing agenda. The administration’s proposals fall into four main categories:

• Offering tax credits to incentivize construction and rehabilitation of affordable housing. The American Jobs Plan would expand existing tax credits, like the Low-Income Housing Tax Credit (LIHTC). It would also create new tax credits to make it cost-effective to build new units of affordable housing and to rehabilitate existing homes in poor condition. The Biden-Harris Administration has proposed investing an additional $55 billion in LIHTCs, alongside the creation of new credits based on the Neighborhood Homes Investment Act, which incentivizes development and rehabilitation of owner-occupied housing in distressed neighborhoods.
• Investing in affordable rental housing. The American Jobs Plan would offer additional subsidies to build and preserve rental housing for the lowest-income renters. These investments include a $35 billion investment in the HOME Investment Partnerships program, $45 billion for the Housing Trust Fund, $12 billion for the Capital Magnet Fund, and $2 billion for new project-based rental assistance agreements.
• Revitalizing public housing. To respond to the needs of the nearly 2 million Americans living in public housing, the Biden-Harris Administration has proposed investing $40 billion to rehabilitate and revitalize America’s public housing. These investments will improve the safety and health of these housing facilities and ensure public housing meets the high standards embodied in the Administration’s housing principles.
• Incentivizing removal of exclusionary zoning policies. For far too long, access to affordable housing has been inhibited by exclusionary zoning laws like minimum lot sizes, mandatory parking requirements, and unnecessary prohibitions on multifamily housing. These policies have constrained the housing supply and driven up costs, locking working families out of opportunity. The Biden-Harris Administration has proposed creating a $5 billion incentive program to reward jurisdictions that take action to eliminate these exclusionary policies and reduce barriers to the creation of affordable housing.

We estimate the housing proposals in the American Jobs Plan will generate production or preservation of more than 2 million affordable housing units. These Federal investments will be augmented by private sector capital to further expand the supply of affordable housing, both from traditional real estate developers and from community-focused organizations like Community Development Financial Institutions and minority depository institutions, which are already receiving an influx of $12 billion in capital under the American Rescue Plan.

The AJP will put in place incentives that pair public funds with private investment, side by side, to maximize the impact of these policies and catalyze the new housing developments our country needs. This new housing will offer a pathway to financial stability for millions of families and help address the longstanding economic and racial disparities that for too long have been endemic in America’s housing system.