America has a housing crisis, fueled in part by the pandemic, elevated mortgage rates and inflation. Many homeowners are stuck with their current homes, locked in by low rates and unable to afford better – or comparable – housing. Would-be homebuyers face soaring home prices and steep competition, often from transplants with deep pockets.

With homebuying season in full swing, many Americans are eyeballing the housing market, looking for any signs of improvement. Will unfavorable conditions continue to keep prospective buyers on the sidelines? And will the number of affordable homes continue to dwindle?

Recent data show small improvements in affordable housing inventory¹, but the path to recovery is uncertain, as average home prices remain high and inventory growth differs across the country. With the American Dream of homeownership slipping further out of reach for many lower- and middle-income households, it is more important than ever to evaluate the forces driving America’s housing woes and the policy options that could make homeownership more attainable. 

The Rise in Home Prices

Across the country, prospective homebuyers are experiencing sticker shock. The quarterly median sales price of homes skyrocketed during the COVID-19 pandemic, reaching record highs in late 2022. Even on an inflation-adjusted basis, this rapid acceleration outpaced any other period of growth in the 21^st century, including the housing bubble of the early 2000s. Rate hikes in 2022 eased the price growth, but steady demand and limited supply have prevented a rapid slowdown.

The pandemic precipitated the rise of remote work and scrambled domestic migration patterns, contributing to higher home prices. Willingness to relocate increased among workers of all ages and income groups,² and migration from expensive cities to less expensive communities was especially pronounced.³ Once freed from the physical office, remote workers in high-priced cities like San Francisco and New York City relocated to cheaper areas like Dallas, Boise and Denver, bringing their higher earnings with them.⁴ This demographic shift boosted U.S. home prices 24% between 2019 and 2021, with remote work accounting for over 60% of that growth.⁵

The supply side of America’s housing shortage explains an additional piece of the affordability crisis. High mortgage rates have led to a phenomenon known as the “lock-in effect,” characterized by homeowners with low rates opting to stay put rather than purchase new homes at the current, higher rate, which has reduced the inventory of available homes. The chart below, which illustrates the sizable gap between existing mortgage rates (orange line) and new mortgage rates (blue line), shows why many homeowners feel stuck. While mortgage rates receded slightly in late 2023 and early 2024, the substantial difference between existing and new rates signals that the lock-in effect will persist in the near term. 

The sluggish pace of construction has exacerbated the housing shortage. Construction activity dropped markedly following the Great Recession, and, in recent years, pandemic-related labor shortages and building costs created additional constraints.⁶ Housing permit growth, an indicator of future construction/housing activity, decelerated across many of the country’s 150 largest Extended Metropolitan Areas (EMAs) in 2023. Several EMAs that were popular destinations among high-paid remote workers (e.g., Austin and Tampa) were among those that experienced double-digit drops in permit growth.

Most of 2023 was also characterized by negative listing growth, but inventory growth has followed a more positive trend in early 2024. Realtor.com’s March 2024 Monthly Housing Market Trends Report¹ indicated an 15.5% year-on-year increase in newly listed homes, with considerable growth among homes in the $200,000 to $350,000 range. Still, newly listed inventory growth was uneven across regions, with the highest growth in the South (15.6%) and the lowest in the Northeast (7.9%). The nationwide increase in new listings is promising news for would-be homebuyers, yet this improvement falls short of the new listing growth seen in years leading up to the pandemic, and more homes are needed to meet demand.

Homebuilders may lack incentives to prioritize high-density, affordable housing. The Biden administration has proposed efforts to increase tax credits for builders of affording housing,⁷ yet the demand for luxury homes⁸ remains strong, and the return on investment is oftentimes higher for developers who cater to wealthy buyers. Adding to the imbalances, exclusionary zoning ordinances prohibit the development of affordable housing in certain areas.⁹ Developers must meet criteria related to building type, height and lot size, which often prevent multifamily home construction.

Who Gets Left Behind?

Recent growth in new listings will help boost inventory, but housing affordability remains a pressing concern, especially for low- and middle-income Americans. In 2018, middle-class households could afford approximately half of the homes on the market, but in 2023, they could afford less than a quarter of available homes.¹⁰ Many middle-income workers in sectors like healthcare and education (e.g., nurses and teachers) are priced out of homes near their offices and forced to buy in more remote locations.¹¹

The situation is even worse for low-income households. A recent study estimated that the U.S. would need 7.3 million additional affordable rental homes to accommodate renters with extremely low incomes.¹² Limited supply and elevated costs place additional strain on already burdened households, forcing them to spend an outsized portion of their income on accommodation. Unsurprisingly, the decline in affordable housing has been accompanied by a spike in homelessness in many American cities.¹³ 

The Way Forward

Economists expect mortgage rates to fall and inventory to increase in 2024. Yet given the housing market’s many challenges, it is unlikely that affordability will substantially improve in the near term. Confronting this gauntlet, the solutions that follow could alleviate the national housing shortage and make homeownership more attainable for lower- and middle-income households.

Policymakers and homebuilders need to address the issues exacerbating America’s “missing middle” problem – the lack of medium-density housing options (e.g., townhouses, duplexes and small apartments). Nationwide, local governments have been slow to approve permits for residential construction, hindering the development of these housing types.¹⁴  Cumbersome and outdated permit application processes need to be streamlined and simplified, with online options to submit applications, track progress and speak with customer support. Once completed, some “missing middle” homes could be sold at below-market prices with assistance from state policy. One bill proposed in North Carolina, for example, would allow homebuilders to bypass certain local ordinances – like open space requirements – if they sell at least a fifth of their properties at a more affordable price.¹⁵

Local governments must also promote inclusionary zoning practices. Exclusionary zoning laws are a key driver of suburban expansion, limiting the construction of homes that don’t fit the suburban ideal (e.g., apartments and multifamily homes). The housing market has changed dramatically since these laws were enacted. Inclusionary zoning is now essential to reducing homelessness and making homeownership more accessible to the average American.

Governmental authorities could also strengthen oversight of the Low-income Housing Tax Credit, an instrumental but complex government program that supports affordable housing. The program has facilitated the construction and restoration of about 3 million units,¹⁶ but with its complicated structure, it is often criticized for lacking efficiency and accountability.¹⁷ Portions of credits may be diverted to financial intermediaries (e.g., investors and syndicators) during the home-building process,¹⁸ which eats away at benefits intended for low-income tenants. The Biden administration plans to expand the program⁷, and this much-needed growth should be accompanied by greater oversight and data collection related to the indirect costs associated with development.  

In addition to these policy changes – which would improve, but not solve the affordability crisis – prospective homebuyers will need to modify their expectations. It is highly unlikely that housing prices will decline in high-demand areas or that mortgage rates will return to 2% or 3% anytime soon. Households must therefore plan accordingly. Many would-be buyers will have to consider purchasing pared-down housing options, such as townhomes or manufactured homes. Prospective buyers may also have to come up with creative solutions for affording down payments, such as government home loans (e.g., U.S. Department of Agriculture or Department of Veterans Affairs loans) or down payment assistance grants.

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