In late 2025, American households faced an extraordinarily unsatisfactory housing environment, marked by record-high prices and rents that outpaced income growth. The flawed policies that produced these conditions are well known to experts, yet they have persisted—in many cases, for decades. In recent years, an energized activist community has achieved some notable housing progress at the state and local levels. A national solution, however, remains doubtful, for complex structural, institutional, and political reasons.
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Produced annually by Harvard University’s Joint Center for Housing Studies (JCHS), The State of the Nation’s Housing report is a standard national reference. It paints a dismal picture. Home prices have spiked since 2019 and are still rising faster than consumer price inflation overall:
[T]he U.S. median existing single-family home price hit a new high of $412,500 in 2024, according to the National Association of Realtors (NAR). This is a shocking five times the median household income and significantly above the price-to-income ratio of 3 that has traditionally been considered affordable.
Since the 1930s, the federal government has promoted homeownership as a central goal of American life. Owning a home has long been seen as a path to building wealth and fostering community attachment. The U.S. homeownership rate peaked at 69.4 percent in 2004, before falling sharply when banks tightened lending standards after the Great Recession. It climbed back to 66.1 percent in 2023 but has since begun to fall again. (The rate saw a brief uptick associated with the pandemic in 2020, as young adult renters moved back in with their home-owning parents.) According to the JCHS, the steepest drop occurred among householders under 35.
They and others are increasingly renters, but renter household growth has far outpaced the supply of available units. The resulting shortage has driven a record level of “cost burden,” defined as paying more than 30 percent of income on rent and utilities. Today, half of all renter households are cost-burdened, and 27 percent are “severely cost-burdened,” spending more than half their income on housing.
The surge in home prices relative to incomes shows that demand for ownership housing continues to exceed supply. In a truly competitive market, rising demand would prompt private developers to build more homes. But the housing sector is anything but competitive. The federal government inflates demand by taxing homeowners less than renters and by providing mortgage subsidies, while local governments constrain supply with restrictive zoning and other regulations.
First, let’s look at demand. A new Urban Institute report by Yonah Freemark and Amanda Hermans outlines the many ways the federal government subsidizes homeownership, including the mortgage-interest tax deduction and the capital-gains exclusion on home sales. These tax breaks make owning a home more appealing than renting and investing savings elsewhere. The result is higher demand—and higher home prices. The July 2025 One Big Beautiful Bill Act (OBBBA) temporarily increases the tax deduction for state and local taxes from $10,000 to $40,000. That likely means that more tax filers will itemize deductions, and many will also deduct mortgage interest. Thus, the value of the mortgage tax break will increase.
The Federal Reserve Bank of New York reported in August 2025 that loans securitized by “government-sponsored enterprises” (GSEs), primarily Fannie Mae and Freddie Mac, make up about 52 percent of the nation’s $13 trillion in outstanding mortgage debt. Loans backed by other federal government agencies, including the Federal Housing Administration and the Department of Veterans Affairs, represent another 19 percent. Mortgage loans in the remaining “other” category are not backed by the federal government. Economists at the New York Fed take some reassurance from the high share of mortgages supported by Washington, which, they say, strengthens the banking system’s stability. Most of these loans are of high credit quality—a sharp contrast with the subprime lending that inflated the mid-2000s housing bubble.
Even if U.S. mortgage loans are not currently at risk of widespread default, government intervention continues to fuel rising home prices and, according to the JCHS, growing “owner cost-burden”—defined, as with renters, as spending more than 30 percent of income on housing and utilities. In 2023, 24 percent of owner households were cost-burdened, still below the peaks reached in the 2000s.
GSE mortgage-loan purchase limits are eye-wateringly high. In 2025, the Federal Housing Finance Agency set the cap at $806,500 for a one-unit home in most of the country and $1,209,750 in designated high-cost areas. Because the federal government readily purchases and securitizes these mortgages with risk-free bonds, banks can extend 30-year fixed-rate loans to more households at lower interest rates.
If this system were not in place, perhaps mortgage-interest rates would be fixed only for five-year intervals, as is common in Canada. Households facing the risk of a large jump in monthly interest costs would likely borrow less or be more inclined to rent. That would help slow, or perhaps reverse, the rise in home prices.
If government involvement is inflating house prices, why isn’t investment pouring in to the housing sector? Privately owned housing starts hit a post–Great Recession peak in 2022 and have been falling since. The U.S. remains well below the glory days of the early 1970s, when monthly housing starts routinely exceeded 2 million—in a nation with a much smaller population.
Historically, the United States had a functional system of local housing regulation in which municipal governments—dependent on property-tax revenue—relied on growth to fund local services. A symbiotic relationship formed between local politicians and the developers and construction unions, whose support and financing sustained their political success. In an influential 1976 journal article, sociologist Harvey Molotch described this arrangement as the urban “growth machine.” Molotch was critical of the arrangement, arguing that the adverse effects of urban growth outweighed its benefits. Presciently, he anticipated the rise of an “antigrowth coalition” and the eventual “death of the growth machine.” The main instrument for curbing growth, he observed, would be “holding capacities” established by local governments. To deter new housing, this led to widespread mapping of single-family-home zoning with large minimum lot sizes.
Several, perhaps complementary, explanations exist for the political backlash against the growth machine and the rise of single-family, large-lot zoning. The “home voter” hypothesis, associated with Dartmouth economist William Fischel, contends that single-family homeowners, out of economic self-interest, seek to maximize the value of their homes—their most important asset—via restrictive zoning. Richard Rothstein, in The Color of Law, emphasizes racially exclusionary motives, tracing them back to the seminal 1926 Supreme Court decision Euclid v. Ambler. That ruling upheld America’s system of locally managed zoning by district, regulating land use and building types. The Court’s majority opinion notoriously described an apartment building in a single-family neighborhood as a “mere parasite.” This reasoning legitimized zoning based on “neighborhood character,” a pretext that facilitated socioeconomic and, given disparities in wealth and income, racial exclusion.
Housing scholar Sonia Hirt, by contrast, argues that single-family detached homes simply reflect what most American households desire. There’s some truth to that: under nearly any regulatory framework, much of the land in U.S. cities and suburbs now occupied by single-family homes would likely remain so. Still, many households that would like a single-family home on a large lot cannot afford one, while others prefer multifamily housing in walkable neighborhoods with nearby services and amenities.
Key to the emergence of the “antigrowth coalition” was the realization in many suburban communities that no-growth policies could address municipal revenue concerns just as effectively as expansion once had. By restricting supply, local governments could sustain rising home values and, with them, steadily increasing property-tax revenues. Limiting affordable housing options—such as multifamily buildings and row houses—ensured that wealthier taxpayers would not have to subsidize services for lower-income residents whose taxes failed to cover the costs they generated. In larger cities, a robust downtown commercial tax base supported local services, meaning that blocking new housing at the neighborhood level had little impact on overall revenue.
Ideally, the United States would have a land-use regulatory system that meets the varied needs and preferences of its households. The YIMBY (Yes in My Backyard) movement coalesced in the wake of the Great Recession and began securing zoning-reform victories at the local and state levels in the late 2010s. Many local governments have since moved to loosen zoning restrictions imposed during the antigrowth-machine backlash era. States, for their part, can set minimum zoning standards through legislation, curbing the most egregious local barriers to new housing. In September 2025, the Pew Charitable Trusts reported on a wave of recent zoning reforms enacted by state legislatures. The Pew report appeared just before one of the year’s most consequential developments: California’s SB 79, which requires local governments to permit new multifamily housing near transit stops. Taken together, these efforts remain too modest, however, to achieve meaningful improvements in the nation’s overall housing situation.
Given the decentralized nature of land-use regulation in the U.S.—and the persistent resistance of many affluent communities to state and local zoning reforms—what could the federal government do to narrow the gap between housing supply and demand?
Washington’s primary tool on the supply side is funding for below-market rental housing, mainly through the Low Income Housing Tax Credit (LIHTC). These tax credits are allocated to states according to a statutory formula, and states then distribute them to housing agencies and local governments. The LIHTC is an inefficient way to deliver low-income housing assistance compared with direct cash subsidies, but it endures thanks to broad bipartisan support. Most recently, the OBBBA permanently boosted each state’s authorized allocation of tax credits.
In the current system, then, federal tax policy and mortgage programs inflate housing demand, even as local zoning restrictions constrain supply—driving home prices ever higher relative to average incomes and extending the cost burden. Washington offers limited relief by funding a small share of below-market housing for low-income households, but aligning housing supply and demand remains largely the responsibility of state and local governments.
Surprisingly, a bipartisan housing bill, the ROAD to Housing Act, recently passed the Senate. The law contains modest pro-housing provisions, including enhanced exemptions from environmental reviews for projects covered by the National Environmental Policy Act (NEPA) and streamlined rules for manufactured housing. It also offers small incentives for local zoning reforms. Writing for the Niskanen Center, Alex Armlovich, Rohan Aras, and Andrew Justus find that “[n]o single piece of legislation can solve a crisis that has been decades in the making, but the ROAD to Housing Act lays the essential groundwork.” More skeptically, Tobias Peter of the American Enterprise Institute characterizes the bill as “entrenching bureaucracy instead of expanding opportunity.” The bill’s cobbled-together compromise provisions reflect the difficulty of truly unleashing market forces without seeing the vast edifice of housing price supports come crashing down.
President Trump has mused about re-privatizing Fannie Mae and Freddie Mac but offered no specifics. Fannie Mae began as a government enterprise and was privatized in 1968. Freddie Mac was established as a private enterprise in 1970. Both were nationalized after becoming insolvent during the 2008 financial crisis.
Re-privatization with implicit government debt guarantees, like those that existed before 2008, raises the problem of “subsidy abuse.” The guarantees, together with unduly low capital requirements, enabled the enterprises to privatize profits while leaving Washington on the hook for their losses.
On the other hand, in a privatization without government guarantees, according to an analysis by Jim Parrott and Mark Zandi for the Urban Institute, bond rating agencies “would downgrade the GSEs meaningfully. . . . The cost of the GSEs’ funding would increase, likely dramatically in times of financial stress. This would force them to raise their guarantee fees and potentially reduce the amount of risk they are willing to take on, all of which would increase the cost of, and reduce access to, mortgage credit.”
That could cause home prices to fall—welcome news for prospective buyers but unwelcome for existing homeowners and potentially destabilizing for the financial system. Such risks make GSE privatization without federal guarantees highly unlikely. As Parrott and Zandi note, the GSEs “are working remarkably well” under government ownership. Any future privatization, they argue, “should only be done in a way that actually improves the system, ideally with legislation that locks in what works and makes explicit the full breadth of government support the GSEs depend on to play the role we need of them.” While pragmatic, this view effectively commits Washington to propping up housing demand indefinitely.
Can federal policy do more to boost housing supply? In a January 2025 paper for the Institute for Progress, Armlovich, Chris Elmendorf, and Sam Jacobson propose that Congress pass legislation making the availability of LIHTC in large expensive cities contingent on pro-housing policies. Such a law would specify a threshold of population size and a level of fair market rent triggering these requirements. The authors write that cities meeting those thresholds would have to agree:
To review housing development projects ministerially and approve them if a reasonable person could conclude that the project complies with applicable zoning and development standards.
To cap impact fees at $10,000 per unit (roughly the national average for impact fees on multifamily housing).
To waive affordability mandates and other exactions insofar as a reasonable person could conclude that they render the project economically infeasible.
To waive height, bulk, and density restrictions insofar as they prevent development of apartment and condo buildings of reasonable size in commercial districts. (The federal government would specify building heights and volumes that big cities must allow.)
While appealing in theory, the proposal raises an immediate concern: the Department of Housing and Urban Development (HUD) lacks the expertise to evaluate local governments’ development restrictions. Even if it did have such expertise—and the ROAD to Housing Act includes some provisions intended to improve HUD’s competence in this area—it’s hard to imagine that decisions to reward or punish cities would be made consistently on a technocratic, rather than a politicized, basis.
Washington may tinker at the margins, then, but won’t rescue America’s beleaguered home-seekers. Federal policy remains constrained by its long-standing commitment to homeownership, the 30-year mortgage, and deference to state and local control over land use. Meaningful reform will have to come from statehouses and city halls, where advocates are gradually making the case that the old growth-machine model once served the public better. Progress will be halting and incomplete—and housing shortages will likely remain a drag on economic growth and opportunity for some time to come.
This article is part of “An Affordability Agenda,” a symposium that appears in City Journal’s Winter 2026 issue.
Photo: Home construction in the United States far lags demand. (Gene J. Puskar/AP Photo)
