It’s local housing regulations, stupid.
The primary explanation for the large housing shortage in the United States is local zoning and building code regulations for new residential construction. Residential housing policy is largely a matter for state and local government, but there is a role for the federal government to play in making housing more affordable.
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Earlier this week, Secretary of the Treasury Scott Bessent said President Donald Trump may declare a national housing emergency in the coming months. Bessent’s comments suggest housing affordability will be a key issue in next year’s midterm elections. If Trump does declare an emergency, it would be the first national housing emergency since the Great Financial Crisis of 2006 through 2009.
The U.S. faces a housing shortage of between 4 million and 5 million units.
In addition, for a household with a median income, the typical home, new or not, is unaffordable. The typical home purchaser needs an annual income of around $117,000 to afford a median-priced home, but the typical household only has an income of $82,000. Most Americans simply cannot afford to buy a house. So what can the president and members of his administration do to make home ownership more affordable?
The first place to start is with the policies of the president. His One Big Beautiful Bill Act increased the federal deficit, which puts upward pressure on interest rates, including mortgage rates. If Trump really wants to make housing more affordable, he should push Congress to take serious first steps to reduce the federal deficit. Lower deficits would lead to lower interest rates. Lower federal deficits would allow more capital to flow to the private sector, including the residential housing market.
Trump’s tariffs raise revenues and reduce pressure on the deficit, but tariffs are a clumsy tax and create inefficiencies in the economy, lowering overall growth and consequently tax revenues. But it would truly be a miracle if Trump reversed course on his deficit spending plans and proposed meaningful budget reforms that would include some combination of higher taxes and comprehensive reform of entitlements, Social Security, Medicare, and Medicaid. In this light, talk of a national housing emergency is largely without substance.
To be clear, Trump’s tariffs also raise the cost of housing. There is already a 35% tariff on Canadian lumber, and Trump is indicating that this tariff will be increased. Higher wood prices directly raise housing prices. Trump’s tariffs on steel and aluminum, as well as goods where steel and aluminum are important inputs, also raise the cost of residential construction. One recent study suggests that Trump’s tariffs could raise the cost of a typical new home by $45,000.
The average price of a new home varies by state. In Florida, the average new home costs $300,000 or more. Clearly, Trump’s tariffs meaningfully raise the cost of buying a new home. Trump’s deportation policies also make home ownership more unaffordable. Illegal immigrants account for up to 30% of the housing construction workforce. That may not mean we should allow illegal immigration, but as a data point, it demands consideration. Fewer workers mean fewer new homes and higher wages for legal construction workers. Home builders will pass through the cost of higher wages to home buyers.
Trump’s attacks on the independence of the Board of Governors of the Federal Reserve also indirectly raise the cost of home ownership. The market controls the yield on longer-dated Treasuries, five years and longer. The typical mortgage in the U.S. is priced off the yield on the benchmark 10-year Treasury. Financial markets know that when politicians control monetary policy, interest rates, including mortgage rates, are higher. If Trump truly wants to make housing more affordable, he should support an independent Fed vocally.
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The administration could make home ownership more affordable by putting pressure on state and local governments to implement zoning reforms and roll back local regulations that make home ownership less affordable. Local housing regulations are a shadow cost on the residential housing market. Local government zoning regulations and building codes can double the cost of home ownership. The administration could use its control over transportation funds and other sources of federal government support for state and local government to compel meaningful local government housing reform.
The Trump administration can make home ownership more affordable, but it must start by being honest about its housing policies.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].