The government cannot solve America’s housing crisis 

As America’s housing crisis intensifies, the American Housing and Economic Mobility Act of 2024 has emerged as a high-profile yet expensive solution.  

The bill comes with a $500 billion price tag and endorsements from leading Democrats, including Vice President Kamala Harris. Moody’s, a major financial services company, has also blessed the act, predicting it will lower rents and significantly boost the supply of affordable housing. 

But before the country embraces this rosy outlook, it must confront a stark reality: Government interventions in housing have a long history of falling short of their lofty promises. In many cases, they have resulted in outright failures. And the American Housing and Economic Mobility Act is likely destined to meet the same fate.

To address the housing crisis, we need a bold shift toward market-driven solutions that focus on expanding the overall supply of housing, rather than relying on ineffectual and costly subsidies. 

From the urban renewal projects of the mid-20th century to the more recent Low-Income Housing Tax Credit (LIHTC) program, government-subsidized housing programs have consistently led to higher costs, complexity and corruption. They have often worsened the very problems they aimed to solve.

California’s ongoing housing and homelessness crisis, despite its substantial subsidies, provides a glaring example of the limitations of government intervention in addressing housing affordability. 

The American Housing and Economic Mobility Act is particularly concerning because the subsidized units will likely crowd out market-rate housing without actually expanding the overall supply of housing. Studies show that most LIHTC developments merely displace housing that the market would have otherwise built, or else pull investment forward in time rather than creating new opportunities.

This displacement effect, coupled with the inflationary impact that subsidies have on land costs, undermines the effectiveness of these policies in making housing more affordable.

Moody’s projections are flawed for all of these reasons, and also because they significantly underestimate the true cost of building affordable housing. Although their analysis suggests a cost of $225,000 per unit, real-world data indicates that the actual costs could be nearly twice that amount. This underestimation — combined with the fact that nearly half of the units funded are allocated for renovating and preserving existing affordable units, rather than creating new ones — means that the number of affordable units promised by the act will likely fall short, further diminishing its potential impact.

Instead of repeating past mistakes, it’s time for a paradigm shift. The focus should move away from simply making subsidized housing “affordable” and toward making housing affordable overall by addressing the root cause of the problem — the lack of housing supply. 

One of the primary reasons for the limited supply of affordable housing is restrictive zoning and land-use regulations. These regulations make it difficult and costly for developers to build, leaving them with little choice but to focus on high-end projects that offer better returns on investment.

The National Association of Homebuilders estimates that government-imposed regulations account for 24 percent of the current average sales price of a new single-family home and 41 percent of multifamily development costs. Reducing these regulatory barriers would allow the market to naturally increase the supply of housing across all price points. 

The evidence is clear from cities like Houston and Seattle: When housing regulations are relaxed, the supply of housing increases, leading to more affordable options. This process, known as “filtering,” allows older, less expensive housing units to become accessible to lower-income households, thereby increasing overall affordability without the need for costly subsidies. 

To effectively address the housing crisis, federal policymakers should consider market-driven strategies. These include making federal lands available for market-rate housing development, eliminating the mortgage interest deduction for second homes (this would free up existing housing while reducing demand) and implementing reforms that reduce the cost of homebuilding. 

By shifting the focus from expensive housing subsidies to increasing the overall housing supply through market-driven approaches, we can make meaningful progress in addressing America’s housing crisis. It’s time to move beyond the failed policies of the past and embrace solutions that empower the market to respond to demand with increased supply, ultimately making housing more affordable for everyone. 

Tobias Peter and Edward Pinto are co-directors of the American Enterprise Institute’s Housing Center.