Demand-side solutions are unlikely to improve long-term housing affordability.
R ather than addressing the structural drivers of housing shortages and rising prices, the Biden administration and its California allies are increasingly targeting purported culprits such as rental-pricing algorithms while proposing politically appealing yet fiscally questionable subsidies. Although these measures may resonate with some voters in an election year, they risk diverting attention from the long-term structural issues at the core of the current housing crisis.
As the recent presidential and vice-presidential debates have underscored, inflation and housing affordability remain pressing concerns for U.S. voters. Both home and rental prices have experienced significant real increases in recent years.
For example, between March 2021 and March 2022, the Case-Shiller Home Price Index, which tracks average single-family home prices in major urban areas, rose by 20.6 percent — its steepest annual increase in over 35 years. While the pace of growth has slowed, the index was 53.6 percent higher in July 2024 than in December 2019, just before the pandemic.
Meanwhile, average rents are currently 33.6 percent higher than pre-pandemic levels. Although renters comprise approximately 36 percent of all U.S. households, they tend to have lower incomes than homeowners. Half of all renters spend more than 30 percent of their income on housing — a threshold widely used by academics and policy-makers to measure housing affordability.
The Biden administration has acknowledged the severity of the housing challenges, with Vice President Kamala Harris stating that the United States faces a “serious housing shortage.” In response, Democrats have proposed several measures, including restricting or banning rental-pricing algorithms, creating a $40 billion innovation fund, and offering a $25,000 subsidy for first-time homebuyers.
In relation to rental-pricing algorithms, the Department of Justice, California, and San Francisco have sought to curb their use. Yet none of these entities has presented concrete evidence that these tools — which analyze rental data to offer pricing recommendations to property owners — are responsible for recent rent increases. Targeting supposed culprits such as rental-pricing algorithms or foreign purchasers of U.S. property may be politically expedient. However, banning or restricting such practices without clear evidence of harm is unlikely to address the underlying issues driving low housing supply and rising rental and home prices.
Demand-side solutions are unlikely to improve long-term housing affordability. Measures like Harris’s proposed $25,000 subsidy would drive up demand without addressing the underlying constraints that limit the supply of available homes. These subsidies would also pose significant risks to taxpayers.
Instead, policy-makers should prioritize targeted supply-side reforms. The core issue driving up costs is a persistent imbalance between supply and demand. Since the 2000s, housing construction has consistently lagged behind demand, driven by a burgeoning population and changes in household composition — most notably, the rising share of single-person households, increasing the demand for housing units per capita.
A major factor contributing to this undersupply is local land-use regulations and zoning laws, which restrict housing supply by mandating minimum lot sizes and limiting the construction of high-density apartment buildings. As Harvard University’s Edward L. Glaeser noted in the New York Times, the number of building permits issued per capita is now less than half the levels seen in 1976 or 2003 — even as demographic changes have increased the demand for new housing units.
These restrictions are particularly prevalent in major coastal cities and wealthier districts — precisely the areas that would benefit most from an increased housing supply. The resulting shortages and high rents prevent many Americans from relocating to places with better job opportunities, restricting economic mobility and leading to a measurable loss in the country’s long-term economic output and productivity.
Without regulatory reform to allow for the construction of more single- and multi-family housing, injecting additional funds through subsidies will only worsen the current crisis. However, housing restrictions are typically imposed at the local, municipal, and state levels — rather than at the federal level.
Therefore, while federal policy-makers can help forge a national bipartisan consensus, the necessary reforms must come from local and state governments. A more measured approach from the federal government — one that recognizes the limits of federal intervention — could avoid costly mistakes and prevent further aggravation of the current housing crisis.