The nation’s economy is performing well overall, with inflation easing, low unemployment, and strong growth. However, the housing market remains a notable exception. According to the National Association of Realtors, it’s harder for first-time buyers to purchase a home than it has been in two generations. This challenge is stalling the path to homeownership for millions and impacting the broader economy.
Despite the depth of the housing crisis, Congress can help by improving the economics of building entry-level homes, enabling more potential homeowners to enter the market. When the pandemic began, the median price for a starter home was around $234,000. Today, it’s nearly $350,000, meaning buyers must come up with significantly more for down payments and monthly mortgage costs. Compounding the issue, the housing supply is at a record low.
Rising interest rates have exacerbated these problems. Mortgages are now more expensive, making it even harder to build entry-level homes, especially with construction financing in the high single digits. Families ready to upgrade from starter homes are also hesitating, not wanting to trade in lower-rate mortgages for higher-rate ones. As a result, the supply of affordable housing has effectively stalled.
Frustration is mounting. Housing costs are the biggest financial burden for many in their prime home-buying years, and fewer people see it as a good time to buy a home. For many, purchasing a first home represents not just an investment but also a step toward economic security and a middle-class lifestyle. Watching that opportunity slip away adds to their economic anxiety.
While conditions may improve as interest rates drop, this won’t address the structural issues behind the housing shortage. Once rates stabilize, housing affordability will only return to pre-pandemic levels, which were already problematic.
To truly fix the problem, lawmakers need to act. The economics of building affordable homes don’t add up, even with normalized rates. Congress should provide tax incentives to builders of entry-level homes, making it financially viable. One option is reducing federal income taxes on sales of homes priced at or below the median. Another approach could be expanding the successful Low-Income Housing Tax Credit program to include affordable homeownership, not just rental housing.
We estimate that eliminating taxes on such sales could result in over a million new entry-level homes in the next decade, easing prices at the lower end of the market. Along with boosting supply, lawmakers should offer targeted assistance to aspiring homeowners, such as tax-free savings accounts for down payments, similar to Section 529 college savings plans. To help first-generation homeowners, matching funds could further boost savings. A cap of $20,000 in participant deposits and a $10,000 match would enable many first-time buyers to afford nearly a 10% down payment on a median-priced starter home.
Together, these steps would significantly increase the supply of affordable entry-level homes and make homeownership more attainable for millions. While these measures could cost around $90 billion over the next decade, a tax on institutional investors owning large numbers of single-family rentals could help offset some of the costs, reducing competition for entry-level homes.
This aggressive approach is necessary given the depth of the housing crisis. The U.S. has tackled similar challenges before, most notably after World War II when tight lending and limited supply kept many out of homeownership. Government-backed loans and massive infrastructure investments fueled a post-war housing boom that raised homeownership to nearly two-thirds of households.
Despite the political gridlock in Congress, there is hope. A bipartisan plan to expand affordable rental housing is gaining momentum, offering a potential model for addressing the shortage of homes affordable to first-time buyers. The economic and political cost of allowing homeownership to remain out of reach for millions of families will only grow. It’s a pressing issue that deserves to be at the top of Congress’ agenda.
