Rebuffing The Doomers And Questioning The Housing Crisis Story

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For the past few weeks, we’ve run a series of blog posts on Cato at Liberty under the heading Questioning the Housing Crisis. It argues that the U.S. housing market has not been experiencing a crisis under any standard definition of the term, and it would be unwise to craft housing policy based on the crisis story.

The series acknowledges that the housing market still has problems, but there’s a huge difference between a market imperfection and a crisis.

Politicians, of course, love blurring the lines between imperfections and crises. And they’ve done it for many years with housing, long before the recent spike in home prices. Some give the impression America has been in perpetual crisis since at least the 1970s.

We used the series to describe some of the many good reasons to reject the housing crisis story.

First, for nearly the entire post-World War II period, people have bought increasingly more housing. That is, they’ve bought increasingly larger houses (as well as apartments and mobile homes) and crammed fewer people into those larger homes, loading them up with more rooms (of all kinds) and more amenities.

Holding both the average home size and household size constant, homes have become slightly more affordable, with the share of household income spent on new homes displaying a slightly decreasing trend since 1975. Additionally, work hours needed to afford rent remained stable from 2007 to 2019 before prices spiked in the aftermath of the COVID-19 pandemic.

Middle Class Not Hollowed Out

These facts might seem surprising, given all the talk about income stagnation for all but the richest Americans. But this stagnation story is wrong.

Most Americans—not just the richest—experienced solid income growth over the past five decades. From 1967 to 2023, the share of households earning (in real terms) less than $35,000 fell from 31 percent to 21 percent, and the share earning between $35,000 and $100,000 fell from more than 53 percent to 38 percent. The share of households earning more than $100,000 essentially tripled, from 14 percent to 41 percent. Most consumer goods and services became more affordable over time, and interest rates steadily declined until after the COVID-19 pandemic.

Combined, these facts suggest that Americans could afford more housing than they did in the 1960s and 1970s. So, it’s unsurprising that they bought more housing, and it’s very difficult to argue that most Americans face a housing crisis.

Of course, U.S. housing markets are not perfect, and some people would surely benefit from lower-cost housing. But we can say the same for every category of goods in the economy. The fact that people want to pay less for the items they buy does not equate to a crisis, much less one that requires the type of massive federal intervention that many policymakers have been promoting.

In fact, we’ve argued that there is too much regulation and federal involvement in housing markets already. Without so much government interference, it’s very likely that the slightly decreasing trend we’ve witnessed in the share of household income spent on new homes would have decreased more.

Affordable Housing Focus is Misplaced

But many federal policymakers want to double down with more housing subsidies, grants, tax credits, vouchers, etc. Members of Congress should reject this approach. It would move housing further away from a smoothly functioning free market, making Americans worse off.

Many politicians don’t see it this way partly because promoting “affordable housing” has too much political appeal. Who wouldn’t want housing prices to go down, after all?

Well, existing homeowners, for starters, don’t want to lose their equity. And the people who build homes, and landlords. In other words, holding everything else constant, falling prices incentivize the people who supply housing to provide less.

So, it’s a mistake to think that focusing only on pushing home prices (or rents) down will help everyone—or even most people—in the economy. The focus on lower prices ignores the relationship between demand and supply. (Incidentally, most state and local policies restrict supply, and most federal policies boost demand, pushing up prices from both sides.)

While making housing more affordable for everyone is a great slogan, it stinks as a policy prescription. In any market, for any given demand, the only way to ensure that everyone can afford the house that they want is to drive the market price so low that it drops to effectively zero.

Congress Should Question Effects of Federal Assistance

Still, some policymakers narrowly target their affordability policies to the very lowest income earners. And it’s laudable to want to help the Americans struggling the most, but their plight is a broader economic problem, not a housing problem per se.

Yet, many affordable housing advocates also ignore the many types of federal assistance already available to the lowest-earning Americans. They ignore assistance from, for instance, the Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, the Special Supplemental Nutrition Program for Women, Infants and Children, public housing subsidies, housing vouchers, Medicaid, Supplemental Security Income, the Earned Income Tax Credit, the Child’s Health Insurance Program, the child tax credit, the Low-Income Home Energy Assistance Program, Head Start, Pell Grants, the Affordable Connectivity Program, and the Lifeline program.

Federal budget figures show that (in 2022) the federal government spent $784 billion on just five of these means-tested programs (Medicaid, SNAP, SSI, TANF and WIC) and states kicked in another $255 billion. It makes no sense to talk about the plight of a family of four earning $25,100 per year, for example, without considering the effects of federal assistance programs.

It’s also senseless to ignore that some federal housing subsidies go to people earning well above the poverty level.

Housing vouchers, for instance, are tied to the recipient’s total annual gross income and family size. In general, income cannot exceed 50 percent of the median income for a family’s metro area. (Federal law requires that local housing authorities provide 75 percent of its vouchers to people with incomes no greater than 30 percent of the area median income.)

This arrangement means that a family of four living in Northern Virginia can earn up to $77,350 and still be eligible for federal housing assistance. (A two-person family can earn up to $61,900.)

Aside from whether these income cutoffs are appropriate, policymakers should ask whether such subsidies help keep rents artificially high. They should also directly address why some of the lowest-earning Americans have difficulty consistently earning higher incomes.

This approach would be much better than simply calling for expanding housing subsidies, grants, tax credits for developers, vouchers, etc. Either way, it’s long past the time for Congress to start paring back federal involvement in housing markets.