Housing Is Stable, But Still Out Of Reach For Many Americans
Source: Knowledge@Wharton, Susan M. Wachter
Photo: Dillon Kydd on Unsplash
As mortgage rates rise and home prices remain elevated, Wharton’s Susan Wachter explains why the U.S. housing market’s core problem is not financial instability, but affordability — and what can be done to address it.
Mortgage rates are over 6% again, house prices are hovering at unaffordable levels, and the spring homebuying season is looking grim. For many — especially younger households — the dream of homeownership feels further out of reach than ever.
Yet the housing outlook isn’t entirely bleak. Beneath the discouraging headlines lie two encouraging sets of facts: First, home sales are up 1.7% month-to-month in the most recent data, prior to the run-up in rates in early March, and inventory is down, which suggest that the underlying market is slowly healing. And second, bellwethers of risk in the important housing finance market — the mortgage spread over 10-year treasuries and the yield on credit risk transfers, which prices default risk — are both down from their highs.
The United States’ housing finance system has proven remarkably resilient. The institutions that underpin mortgage lending helped millions of Americans remain in their homes during COVID-19 and its aftermath, one of the most volatile economic periods in modern history.
Despite an increase in inventory, the real challenge now isn’t financial instability. It’s affordability.
That distinction matters.
During the COVID crisis, policymakers feared a wave of mortgage defaults that could ripple through the financial system. Instead, the opposite happened. Forbearance programs — enabled by the structural strength of the U.S. housing finance system — allowed borrowers to pause mortgage payments without losing their homes. Housing finance provided by the GSEs Fannie Mae and Freddie Mac, and by the government agency Ginnie Mae, played a central role. By purchasing or guaranteeing mortgages, they ensured that lenders had the liquidity to keep making new loans even as the economy shut down in March 2020. That backstop allowed relief to struggling borrowers while enabling the broader mortgage market to continue functioning. The results were striking. Millions of households received temporary payment relief. Foreclosures remained historically low. And lenders continued issuing mortgages even during the most uncertain months of the pandemic.
Despite an increase in inventory, the real challenge now isn’t financial instability. It’s affordability.
Just as important, the structure of American mortgages protected borrowers from another shock: rising interest rates. In many countries, mortgage rates reset every few years. When rates spike, homeowners suddenly face sharply higher monthly payments. In the United States, however, most homeowners hold 30-year fixed-rate mortgages. When inflation surged and interest rates climbed, existing homeowners avoided payment shocks.
That stability helped prevent the kind of cascading housing distress seen in the Global Financial Crisis.
A Supply Shortage for Working Households
But stability does not guarantee affordability. Today’s housing challenge looks very different from the one that triggered the 2008 financial crisis. The mortgage system is working. Credit markets are functioning. Most existing homeowners are financially secure. The problem is that millions of Americans — especially younger ones — cannot afford to enter the market in the first place. Home prices surged during the pandemic as remote work reshaped where people wanted to live. Demand for larger homes, suburban locations, and flexible living arrangements pushed prices upward at a pace far faster than income growth.
New construction has picked up, particularly at the higher end of the market. That added supply has helped slow price appreciation in many areas. But it hasn’t solved the deeper structural issue: a shortage of homes affordable to working households. This shortage has been building for more than a decade. After the 2008 housing crash, home construction collapsed and took years to recover. Many small builders left the market permanently. Local zoning restrictions tightened in many communities. Land costs and construction labor shortages increased. As a result, the United States built millions fewer homes than demographic demand required.
Today’s housing challenge looks very different from the one that triggered the 2008 financial crisis.
At the same time, wage growth for younger households has not kept pace with rising housing costs. For many first-time buyers, the challenge is not just saving for a down payment — it is qualifying for a mortgage large enough to buy a home in their region. In that sense, today’s housing affordability crisis is as much an income problem as it is a supply problem. Its implications reach far beyond the housing market.
For decades, homeownership has been one of the most reliable ways American families build wealth. Monthly mortgage payments gradually turn into equity, creating financial security and intergenerational opportunity. When younger generations cannot access that pathway, wealth gaps widen. Generation Z and younger millennials are increasingly confronting that reality. Many stay renters longer than earlier generations, while others live with family while saving for housing that keeps moving out of reach.
Restoring the Path to Homeownership
From a societal standpoint, the goal should be clear: help the next generation move from their parents’ basements onto the homeownership ladder. The encouraging news is that we do not need to reinvent the housing finance system to make progress. What should be done?
First, the United States must expand housing supply — particularly entry-level homes. Local governments can modernize zoning rules, speed up permitting, and allow more “missing middle” housing types such as townhomes, duplexes, and accessory dwelling units. Second, policymakers should encourage builders to construct homes aimed at first-time buyers. Incentives, tax credits, and streamlined approvals can help tilt construction toward more affordable price points. Third, responsible mortgage access for creditworthy borrowers must remain a priority. Down payment assistance programs, shared-equity models, and first-time buyer initiatives can help bridge affordability gaps without introducing excessive financial risk.
From a societal standpoint, the goal should be clear: help the next generation move from their parents’ basements onto the homeownership ladder.
Business leaders also have a stake in this issue. Housing affordability is increasingly a workforce challenge. When workers cannot afford to live near job centers, companies struggle to recruit and retain talent. Long commutes reduce productivity and quality of life, while regional economic growth slows. In other words, housing affordability is a social issue — and an issue for state and local economies.
The United States demonstrated during the pandemic that its housing finance system can withstand extraordinary shocks. Borrowers remained protected, lending continued, and the market avoided the kind of collapse seen in earlier crises. That resilience is a major achievement. Now the task is to translate that financial stability into broader access to homeownership. Expanding supply, supporting first-time buyers, and aligning housing policy with economic growth can ensure that the next generation has a realistic path to owning a home. If we succeed, the housing market’s current gloom may prove temporary.
If we don’t, the dream of homeownership risks becoming something far fewer Americans can attain.