December 17, 2019
Although the US has recovered from the Great Recession, housing affordability continues to be a problem for many Americans, especially low-income households. This paper discusses key trends in housing affordability and analyzes the effects of policy interventions designed to increase homeownership and make housing more affordable.
Author Aaron Hedlund finds that spending on housing has risen to meet or exceed pre-recession levels. High housing prices and increasing rents make it difficult for renters to transition into ownership. Costly housing also distorts where people choose to live, decreases economic growth, and constrains liquidity for individual households with larger mortgages.
Many government policies have been enacted in an effort to address the problem of housing affordability, with varying levels of success. In this paper, Hedlund investigates the impact of various government policies on housing affordability, finding that:
- The Mortgage Interest Deduction skews tax benefits towards higher-income households, with no effect on homeownership rates.
- Down-payment assistance programs may temporarily stimulate homeownership but have little effect on long-term ownership rates.
- Rent control causes housing misallocation and creates shortages that outweigh any potential benefits.
- Reforms that target specific geographies, such as the Low-Income Housing Tax Credit (LIHTC), are likely to be less effective than policies that subsidize low-income households regardless of where they live.
- Tenant-based subsidies like vouchers show more promise to assist low-income families in finding affordable housing than place-based policies or rent control.
- Reforming restrictive zoning laws will be a crucial factor in alleviating high housing costs.
Taken as a whole, research on housing affordability indicates that successful reforms will include both demand-side interventions (such as vouchers) as well as supply-side changes (such as making zoning less restrictive). Providing flexible financial support to those in need, in combination with the removal of regulatory hurdles, can promote both economic growth and affordable housing. If successful, these reforms will allow all Americans to live and work where they can be most productive and fulfilled.