Nothing illustrates the disconnect between the financial economy’s (Wall Street’s) prosperity and the average household’s (Main Street’s) struggles than the increasing unaffordability of home ownership in America.
In the post-war economic boom (around 1960) the average American home cost just over two times median household income. Today, the average American home price is over five times median income. This is higher than the 3.5 times median income a typical home would cost in the housing bubble prior to the Global Financial Crisis (GFC), and 67 percent higher than the average three times historical threshold informally marking “affordability.”
Post-pandemic monetary policy (the “easy money” expansion of global liquidity fed by the central banks) and the permissioned entry of institutional capital into single-family homes following the GFC are two of the culprits that worsened an already challenging situation for home buyers. Easy access to cheap money (if you were a Wall Street institution) and the resulting blitzkrieg of private equity into the competition for single-family homes disrupted the housing market and placed it further out of reach of many Americans. You would “own nothing and be happy,” we were told, but renters lost out on purchasing power while asset prices multiplied. If the data do not lie, the plight of homebuyers seems to have been largely ignored by successive U.S. presidential administrations since at least the GFC.
Since the peak in late 2023, mortgage rates have come down by 163 basis points (1.6 percent). This implies about a $340 savings in average monthly housing costs, a seeming gain for the homeowner. Yet how has this impacted housing prices? Unfortunately, if something costs less to maintain, the upfront cost of that asset tends to rise, not fall. This is what has happened to housing. Lower interest rates didn’t lower prices, they raised them, by an average of $17,600 since October 2023. Over the lifetime of home ownership, the net gain is favorable, but only on the margin.
President Trump in his second term has brought the issue of home affordability to the forefront of his formal and informal policymaking. The question is whether the various initiatives will be enough to matter without breaking the system in a way that hurts everyone.
Since January 2025, mortgage rates have come down by 88 basis points (0.88 percent), and more reductions are expected. In recent days, President Trump has both increased the pressure on the Federal Reserve to further lower interest rates, and launched several initiatives intended to move the market. President Trump has ordered the Government-Sponsored Entities (GSEs), Fannie Mae and Freddie Mac, to buy an additional $200 billion of mortgage-backed securities (MBS), a move intended to stimulate the market by lowering spreads on interest rates. The move is expected to lower all-in mortgage rates by up to 25 basis points (0.25 percent), a marginal benefit that puts the GSEs near their congressionally-mandated balance sheet caps, and yet touches only two percent of the $9 trillion residential MBS market.
President Trump is also seeking to ban private equity and institutional ownership of single family homes. This may reduce competitive demand by about twenty percent in key metro areas, a sizable amount in the Sun Belt, for example, but only two percent nationally. Nonetheless, even this move is likely to be strongly resisted by Congress and its private equity funders.
While many media commentators chirp that housing prices need to come down, the solution necessarily lies elsewhere. Let’s say that housing prices are fifty percent overvalued, and we wanted to correct the market to make homes more affordable. What would cure the ill without killing the patient? If housing prices were to fall by twenty percent, this would wipe out the equity of most current homeowners, whose store of wealth is largely in their homes. A greater than twenty percent reduction, and the mortgages themselves aren’t worth face value, precipitating a balance sheet crisis among the financial institutions and asset managers that hold them. This crisis would almost certainly bleed over into the real economy.
In other words, an event that reset housing prices downward would lead to an economic recession and hurt those the policies sought to help.
The only answer lies in addressing the growing income and wealth inequality plaguing the nation. Productivity (in the real economy) needs to grow. Real wages need to rise. By a lot. Corporate profits, and thus shareholders, have been the primary beneficiary of the financial markets boom since 2020. Profit margins have expanded substantially despite cost inflation. Those who rely on income (rather than assets) for their wealth creation have for years taken a shrinking share of the national economic pie. Nominal prices can’t come down, but real (after inflation) income can grow by deliberate action. This must become a key part of President Trump’s policy initiatives. If he can compel the Defense industry to stop buying back their shares and paying dividends, instead investing their cash into factories and increased production, then surely he can jawbone corporate America into shifting a portion of their profits into improved wages for everyday Americans.