Housing Costs Threaten Democracy

As the State of the Union approaches, the President must speak to a crisis more severe than many know. Here’s how he can address it.

By Caitlin B. Tully

Tagged Biden AdministrationeconomyHousing

In a recent New York Times focus group, Robin, 59, an independent voter from New Hampshire, laid out her main complaint with President Biden: “My daughter,” Robin explained, “has nowhere to go because she needs an income of $3,000, $4,000 a month to get an apartment.” Asked if she blamed Biden personally Robin did not hesitate: “Yes. I attribute it to him.” President Biden remains unpopular with many voters whose turnout was indispensable to his narrow victory in 2020. Myriad explanations are circulating as to why, as are suggestions for what to do about it. One crucial reason for Biden’s stagnation has, however, remained dangerously underdiscussed: the current crisis in the housing market.

Post-pandemic, the inaccessibility of housing has skyrocketed in ways that suggest a fundamental, not temporary, shift. Home prices nationwide have risen almost 45 percent since 2020—more than double the increase during the previous two administrations. Rents are up by an average of 22 percent. These changes have hit key Democratic constituencies the hardest: 18- to 34-year-olds, single women, African Americans, Asian Americans, Hispanics, and urban voters. Several factors driving this transformation—among other things, low housing stock and institutional investors buying up residential real estate—existed before Biden took office. But they collided with others, including inflation, under Biden’s watch. What has emerged as a result is the sense that a stratified rentier economy is coming into being.

Without a fundamental shift in policy priorities, Americans’ suffering will compound. The political effects of failing to change course, meanwhile, may be devastating. Journalists have movingly covered the impact of these changes on Americans’ lives and expectations for the future. Political and policy debates, however, have remained largely unresponsive. Much of the recent punditry focused on Biden’s low ratings on the economy—whether or not Americans’ general economic gloominess is a “vibe”clouds the issue. Some commentators find reason for economic optimism, citing decreasing interest rates, the absence of a market crash, and low unemployment. But they mostly sidestep the housing market, dwelling instead on consumer sentiment.

The Biden campaign is rightly asking voters to turn out to defend American democracy. For many, however, constitutional democracy is indivisible from the American Dream: homeownership and a sustainable, middle-class living. Invoking American democracy while that lodestar implodes in front of voters’ eyes is an unreliable gambit, to say the least. Existing White House proposals and plans concerning housing are either limited (tweaking mortgage qualification thresholds) or prospective (encouraging construction by state and local actors as far out as 2035). Those who will become collateral damage along the way—Biden, voters, and potentially, American democracy itself—can’t wait that long.

Biden needs to credibly make homeownership seem possible to more voters—now. While many assume that only the Federal Reserve or local government can make housing policy, the White House has several tools that it could use to address the housing crisis head on, starting today. Deploying them in the course of this year’s election campaign would mean stepping outside conventional wisdom, which holds that incumbents are supposed to run on their track record alone. To be sure, using these options will not solve the housing crisis immediately. But it would demonstrate to voters that the Administration takes their economic worries seriously, and that it is prepared to take bold action to address them.

For a start—without needing Congress—Biden could issue an executive order instructing agencies to immediately prioritize direct assistance to those entering the housing market. Similar cross-agency mandates have been issued in other policy areas, such as competition policy. Biden could fund this action by simultaneously directing agencies to mobilize reserve funds. The Fair Housing Administration (FHA), for example, holds a significant budgetary surplus: It recently reported capital reserves over five times its congressionally mandated minimum. These funds could be allocated through existing programs, such as the FHA’s currently discretionary down payment assistance program for member banks. Additional assistance might be found within other agency mandates. The Federal Housing Finance Agency (FHFA), for instance, currently serves homeowners by backing mortgages that private lenders will not finance independently. The FHFA should explore what a similar program would look like for renters, such as guaranteeing rental contracts for people who cannot obtain leases on their own—meaning renters who do not make the minimum salary that lenders prefer, but who can pay their rent on time.

The Treasury Department, meanwhile, could revise the guidelines that it issues outlining who and what can receive federal funds under the American Rescue Plan (ARP). In order to alleviate housing insecurity due to the pandemic, the ARP created two funds to help distressed people cover housing expenses. Most parts of the ARP limited this financial assistance to preventing eviction and foreclosure caused by loss of income, not to offsetting rising costs. But there may be scope for a broader understanding of COVID’s harms within the terms of the statute. It is now crystal clear that COVID’s effect on the housing market directly impacts those who need to move or enter the housing market today, not just homeowners and renters with contracts predating 2020. And the Treasury Department has until December to decide on how best to allocate these funds under the law. Treasury should use this year to ensure that its guidance offsets this “time-lag” discrimination as much as possible.

The President could also take bolder action and declare the current housing shortage a national emergency. This would allow the federal government to purchase land with little red tape, potentially providing additional avenues through which to finance housing assistance. Price caps and low-income quotas on rental units entangled with federal funding already exist, but they could be vastly expanded. And rather than using tax credits or tying strings on federal funds to encourage construction, the federal government could build housing itself.

There is precedent for this. Between 1917 and 1919, the United States Housing Corporation not only financed but directly built new homes rapidly—in 27 different states. Surging rents during World War I meant that civilians fulfilling American war materials contracts could not afford to live in the cities that had become manufacturing sites. Tasking architects like Henry Wright and Frederick Olmsted Jr. to come up with a solution, the housing corporation met a general need for increased housing throughout the period. Notably, the income-to-rent ratio that spurred Woodrow Wilson’s Administration into action was a mere quarter of earnings. Today, Americans spend 30 percent of their income or more on rent.

If reelected, Biden should also make it a priority to sponsor two pieces of legislation that would have reciprocal benefits: underwriting homeownership assistance and limiting institutional investment in residential real estate. The White House budget currently contains a proposal for homeownership assistance, but it is ambiguous about who can qualify. For instance, anyone whose parents own a home, regardless of how leveraged, is likely to be precluded from qualifying—excluding many young people whose parents are not in a position to support them. Instead, Biden should make it a capstone of a second term to provide significant down payment assistance in addition to federally backed mortgages for any first-time buyer without outside assistance, and to make this program a legislative entitlement—something that will last.

In order to address high housing prices, the White House should support legislation limiting institutional real estate investment as well. Part of the reason housing prices have soared is that institutional investors and cash-flush individuals searching for stable and high returns have found real estate and debt servicing to be an increasingly desirable asset. Scarce supply—much of which was purchased while rates were low—also means that housing has arguably become a blue-chip asset: Prices will, in the long run, keep going up, even if interest rates go down. This has the effect of pitting investors, pension and investment account holders, and those who already own homes against anyone (at any age) starting out. In doing so, it transforms a “growth” economy—where investors enjoy return based on risk but all share in the pie—into a zero-sum or “rent” economy: “returns” are no longer a reward for competition but instead reflect monopoly gains. Legislative support has been gathering for a bill that would intervene in this phenomenon.

To make these changes, the White House would have to revise core approaches to housing that continue to guide its administrative policy, many of which were forged in and remain tethered to the 1990s. Most importantly, the Administration would need to revisit the default assumption that liquidity (easy credit) rather than affordability (housing prices) is key to homeownership. To his credit, President Biden has lowered existing thresholds to qualify for a federally backed mortgage—decreasing premiums for mortgage insurance, changing how student loan debt affects qualification, and including rental payments toward creditworthiness. But making credit more accessible may not make much of a difference in current conditions.

More leverage alone does not necessarily equal more homeownership. The current rise in housing prices is outpacing rising incomes, making mortgage payments unaffordable. Equally important: Sellers prefer cash or private financing to government-backed loans in a competitive market. Fewer Americans are even trying to take out government loans anymore. FHA loan approvals decreased by almost 20 percent between 2022 and 2023—a change worth tens of billions of dollars, more than total ARP spending on housing. Higher down payments and lower leverage may increasingly be a prerequisite for homeownership today. The federal government needs to take these shifting dynamics into account.

Similarly, the Biden Administration needs to set meaningful and independent goals of its own for successful intervention in the housing market. It is arbitrary and backward-looking to judge the current housing market a victory merely because the immediate aftermath of COVID saw fewer evictions than during the 2008 mortgage crisis. But agencies continue to use this benchmark today. The Administration should develop future-oriented housing goals instead.

To that end, addressing the current housing crisis means accepting that policy that will make a difference is expensive. To create the same homeownership gains the GI Bill offered in today’s market, for instance, would require between $25,000 and $50,000 in down payment assistance per person within affected groups. Funding housing construction, however efficiently, would also be expensive. The sticker shock, however, wears off with a little context. Leverage always looks cheaper, until one remembers the 2008 financial crisis. In any case, housing is chronically—one might say shockingly—underfunded. The American Rescue Plan allocated $90 billion to bail out insolvent pension funds; those same pension funds are now buying up residential housing, raising housing prices in turn. By comparison, the $15 billion allocated to preventing mortgage foreclosure and eviction in the same legislation is paltry. The recent infrastructure bill does not fund housing at all. These costs all exist before any political risk is accounted for.

It would be a potentially catastrophic mistake to assume that American voters who are disillusioned with their economic prospects will feel obliged, let alone inspired, to vote Democratic in order to forestall dictatorship. From the split Northern white vote that led to the end of Reconstruction in the United States in 1877, to the interwar crisis of European democracy, to the allure of authoritarian government sweeping the globe today: Fears of economic decline, along with felt economic difficulties, have long led voters to abandon, rather than rally around, liberal alternatives. Rather than forcing Americans to choose between an economy they don’t like and a political dictatorship that ostensibly offers something new, Biden should realign his platform to show how economic possibility—the promise of a future—is synonymous with democracy and rule of law.

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Caitlin B. Tully is a lawyer and legal scholar. She holds a J.D. from Yale Law School and clerked for the Honorable Guido Calabresi on the Second Circuit Court of Appeals. She is currently the Samuel I. Golieb Fellow at NYU School of Law.

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