How Homeownership Became an American Fantasy

New construction and older apartment buildings in Brooklyn, New York.

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The long tail of the Great Recession and the aftermath of the pandemic have resulted in a major housing affordability crisis in the US — and it’s hitting everyone from homeowners to renters.

Today, Big Take DC host Saleha Mohsin digs into how we got here and whose problem it is to fix. She’s joined by Shaun Donovan, the secretary of Housing and Urban Development during the fallout of the 2008 financial crisis, and by Daryl Fairweather, a chief economist at Redfin.

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Here is a lightly edited transcript of the conversation:

Saleha Mohsin: About eight years ago, Andrew O’Neil achieved the American ideal that so many strive for: He and his wife bought their first home — a condo in Washington, DC.

Andrew O’Neil: They handed us the keys and we were like, ‘what did we just do? [laughs] Was that a good idea or not?’

Mohsin: He says they used a first time buyer grant program to help with the down payment. Their monthly costs were about the same as their monthly rent had been. A few years later, they sold that condo and upgraded to a townhouse.

O’Neil: And because real estate was going up so fast we did make a good profit on our condo after only a couple years.

Mohsin: But in 2021, Andrew and his family had to relocate to Westchester County, just outside of New York City, for work.

Selling the townhouse was no problem. They got an offer that was $75,000 over their asking price before it even hit the market.

Their plan was to rent for a year while they got to know the area, and then reinvest their profits into a new house in Westchester.

O’Neil: Our mortgage in DC was $2,600. I thought our mortgage would certainly be more, but I was thinking more would be like 35, 38, 4,000.

Mohsin: What they did not account for was a major sea change in the housing market.

Within that year they planned to spend renting, the Federal Reserve started increasing interest rates. In January of 2021, the 30-year fixed mortgage rate was 2.65%. Two years later, it had more than doubled.

Andrew O’Neil: Just watching the interest rates go [ch- ch- ch-]  I was looking and I was like, ‘Oh, houses that are okay, like subpar houses, would be 6,000’ and that blows our entire budget.

Mohsin: It’s an election year, and the economy is the top issue for voters. Vulnerabilities in the housing market will be guiding Americans as they choose a president.

And for a growing number of them, like Andrew and his wife, homeownership might not make sense anymore. For now, they’ve gone back to renting. And they’re navigating a tumultuous market that has everybody feeling the squeeze.

Today on the show, we look at why housing in America is SO expensive and how frustrations over rents and mortgages are shaping the 2024 presidential race. I speak with Shaun Donovan, who was the secretary of the Department of Housing and Urban Development in the Obama administration.

Shaun Donovan: I've never seen the affordability crisis this bad.

Mohsin: And with a real estate economist who’s been looking at all the numbers.

From Bloomberg’s Washington bureau, this is the Big Take DC podcast. I’m Saleha Mohsin.

30 years ago, the median US household income was about  $32,000. Census Bureau data also says that the median home cost was $130,000. So in 1994, Americans typically spent about 4 times their household income on buying a home. According to the latest census data, in 2022, it was up to 6 times.

Daryl Fairweather: The main problem with the current housing market is a lack of homes for sale and that lack of homes has made home values higher.

Mohsin: Daryl Fairweather is the chief economist at Redfin, a real estate brokerage that collects data on the housing market.

I asked her how we got here. She says that we need to look back at the 2008 financial crisis.

Fairweather: The 2008 recession started in the housing market. The housing market had a bubble, and then the Federal Reserve started to raise interest rates, which popped that bubble. And everybody who thought that home values were only going to rise ended up in a hard situation. After the great recession, we stopped prioritizing building housing. People were kind of scared off of that industry.

Mohsin: So housing supply was low ten years later, right around when COVID hit. To keep the economy afloat during the pandemic, the Federal Reserve cut interest rates, to make borrowing money cheaper. That meant mortgage rates dropped.

Fairweather: And then that turned into a frenzy where people were really eager to take advantage of low rates. People were moving because of life changes, like remote work allowing them to live in new parts of the country or people re-evaluating what they wanted out of a home because of the pandemic.

Mohsin: Think of all the people who moved out of major cities when they realized they didn’t have to commute into an office everyday. They could live near family, or get space with a backyard. AND they could get a sweet deal on a mortgage.

Fairweather: So there was all this demand and then that caused prices to go up. But then because of all that frenzy, not just in the housing market, but in the economy more broadly, the Fed had to raise interest rates.

Mohsin: The Fed raised interest rates to try and tackle inflation. That meant all the demand for housing, which drove up home prices, was now coupled with high borrowing costs.

Fairweather: High mortgage rates, mortgage rates of around 7% for a 30 year fixed rate mortgage. Whereas back in 2021, mortgage rates were at around 3%.

Mohsin: That can add thousands of dollars to someone’s monthly mortgage payments.

Fairweather: So it lowers the budgets for homebuyers and actually kicks some homebuyers out of the market altogether. If they can't find anything that meets their needs, that also meets their budget.

Mohsin: This year we saw the rate of cash buyers reach the highest level in the last decade. Those are home-buyers who can pay the full price outright. Borrowing costs have made it really hard for people who need to take out mortgages to afford a home. When the Fed’s rates went up…

Fairweather: The housing market abruptly started to slow down. So 2023 was the fewest home sales on record, at least as far as back as we measure things to 2012.

Mohsin: That means more and more people are turning to renting instead. People like Andrew O’Neil and his family. But the rental market is under strain, too.

Donovan: An 18 percent jump in rents year over year during COVID is something we've never seen before in the history of keeping track.

Mohsin: That is Shaun Donovan, former Secretary of Housing and Urban Development, or HUD, under President Obama. He served during the height of the housing crisis in the aftermath of the 2008 financial meltdown. And now he sees what he calls an “affordability crisis.”

Today, he works for Enterprise Community Partners, a nonprofit organization that focuses primarily on improving access to housing through the rental market. He said, high rents are a big hurdle for people hoping to buy.

Donovan: Traditionally the, the pathway, the ladder looks like you rent for a while. You are able to save enough money every month to put together that, that down payment. As rents have increased, that savings is just harder and harder for folks to achieve.

Mohsin: There’s a reason that homeownership, getting on the property ladder, has been held up as this marker of progress toward achieving the “American dream.”

Donovan: We’ve traditionally thought about homeownership as our primary way to build wealth.

Mohsin: That’s worked — so well in fact, that the wealth gap between homeowners and renters has never been higher. In the past three decades, the average wealth of homeowners increased by almost $900,000. For renters, the increase is only by $56,000.

Donovan: There's plenty of data that shows that our economic mobility has slowed down and that moving up the economic ladder is harder and harder in the US. I've never seen the affordability crisis this bad.

Housing has become an issue that elected officials are working on all over the country because they're responding to their constituents who are saying, ‘this is one of the primary challenges I'm facing right now is making my mortgage or paying the rent.’

Mohsin: So where do we go from here? And whose problem is it to fix – the Federal Reserve or elected officials in government? That’s coming up.

There’s a lot that contributes to the housing problem in the US, but you can boil most of it down to two key economic factors: high interest rates driving up mortgages, and low housing supply driving up home costs.

When it comes to the first of those two problems, you’d think it’s up to the Federal Reserve to solve.

Fairweather: The Fed can't do anything to undo those problems, unfortunately. They can't lower rates again because it would risk more inflation of the, in the market. So, the best you can really hope for for them is that they just create stable conditions in the overall economy.

Mohsin: Redfin’s Daryl Fairweather again. Last week, chair Jay Powell announced the Fed’s latest rate decision, and people were hanging on his every word to hear what he had to say on housing and interest rates.

Fairweather: Lower rates would help builders because they have to borrow money for their projects, but would also spur demand and that would accelerate prices as well. So it pushes both ways on prices in the long run when it comes to interest rates. And it's not really something that can be addressed through monetary policy.

Mohsin: Plus, it's partly cyclical. Rent prices factor into the Fed’s inflation numbers, so as long as they stay high, so does inflation, and that means the Fed’s work to tame inflation continues – so it can’t lower rates just yet.

That brings us to the lack of housing supply. After the 2008 housing crisis, Fairweather says, home construction slowed. That became a real problem in cities like San Francisco, where people flocked for jobs during the tech boom.

Fairweather: So a lot of people who were dealing with the recession were going to San Francisco looking for higher paid jobs and that led to an increase in home values, and at the same time, people were really resistant to building more housing for all the people coming into San Francisco.

Mohsin: Many San Francisco residents didn’t want their home prices to fall. It was a classic example of a “not in my backyard” mentality. Some came out against multi-family buildings (and other proposed measures)  to increase housing stock. Keeping housing supply low so that prices stayed high—good for their property values, but not for housing access.

San Francisco’s population struggling with homelessness has grown to over 8,000 people, and the city has some of the highest rents in the country.

Fairweather: And it's only now that California as an entire state is starting to address this lack of housing being built at a more local level.

Donovan: I fundamentally believe that low housing supply is the driving problem.

Mohsin: Former HUD Secretary Donovan again.

Donovan: We have a shortage, depending on whose numbers you're using, of five to seven million units that we’re short around the country. And think about this, we're never going to get to a better path on affordability, even if interest rates come down longer term, unless we can build more.

Mohsin: Donovan said, when it comes to the role of the federal government, its hands are largely tied. Congress can approve tax credits for developers who build more low income housing, but it takes time for those sorts of interventions to have an impact. A lot of the policy decisions really come down to state and local governments, which oversee zoning laws.

Donovan: We've seen this year, more than 30 governors have already mentioned the importance of, of housing in their state of the state addresses. We're seeing states like Montana, Florida, California, Minnesota, Arizona, a very broad range of red and blue states.

Mohsin: This includes a lot of rural places that haven’t traditionally struggled with housing affordability—because so many people relocated during the pandemic.

This is all a problem for Biden, going into an election when the economy looks good on paper, but isn’t feeling good for many Americans. According to a lot of polls, housing costs are among the top issues guiding voters.

And it’s about more than just creating a path to homeownership. Donovan says this lack of housing access could strangle the entire US economy.

Donovan: One of the things that makes the American economy so competitive historically is that people move to where the jobs are, right? Is that we're very flexible. We have a system that allows people to move quite easily, to sell their homes, to get new mortgages, but also a really well developed rental sector across the country. And more and more what's happening is our mobility is being constrained by the inability to find affordable housing in the places where the jobs are.

Mohsin: The answer could be rewriting the whole “American dream” homeownership narrative. Finding ways to make renting a path to wealth, too. As Daryl Fairweather pointed out, the idea that homeownership unlocked this middle class American dream status has always been flawed.

Fairweather: For the most part it was only really available to white Americans so I think the American dream has never really been fully available to everyone and now that home values have gone up so much, it's largely been to families that have had access to homeownership for generations. If your parents were homeowners, you're gonna be more likely to be a homeowner and have the wealth to do that so now I think there's a recognition that it's not really a solution to make everybody a homeowner unless we're building homes for everyone.

Mohsin: What's your advice then? Someone who is thinking in the next 18 months, ‘I want to buy a house.’ So far the Fed is not looking to cut rates anytime soon. What's your advice to homebuyers?

Fairweather: Well, it's really difficult to time interest rates, so I would focus mostly on what can you afford given prevailing interest rates. Don't buy something more expensive than what you feel comfortable with because you're hoping that interest rates will go down later and you can refinance. There's nothing wrong with renting. There are advantages to renting, like being more flexible in terms of your location, if you get a new job, you can take it without worrying about selling your home. And if you do want to buy, I think now is a fine time to buy. I don't think there's really an advantage to waiting because I don't see the affordability picture improving meaningfully in the next five years.

Mohsin: Andrew O’Neil and his family haven't sworn off homeownership altogether. But he says that for now, he’s enjoying some of those benefits of being a renter. Not having to mow the lawn, having someone else to call when something breaks, and…

O’Neil: I know what my fixed expenses are. And that's something I didn't really understand when I had a house, you have to amortize a roof repair that goes every 10 years. That's 20 grand. Your boiler lasts seven to eight years. You should count that into your monthly expenditures.

Mohsin: He says his experience over the last three years has really changed his thinking on the American approach to housing. Where for many people, their biggest investment is real estate.

O’Neil: When everyone's net worth is tied up in their house, they're gonna do everything they can to make sure their house doesn't go down in value. And how you do that is you create scarcity, which means you don't allow other houses to be built. So, you can't have everyone's net worth tied up in their house. That doesn't make sense. And I don't think we ever thought about it because it was just kind of working. But like now it doesn't work, so we should rethink that whole paradigm.

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