The current housing market is experiencing a perfect storm of challenges: the highest mortgage rates in two decades, a lack of housing supply, and inflated prices.
Homebuyers hoping to close on a home in 2025 face heightened competition, inflated prices, and mortgage rates that have doubled since 2022, making it far more difficult to afford a home.
Though many housing experts note that lower mortgage rates are the key to spurring buyer demand and motivating sellers to put their homes on the market, rates aren’t projected to dip below 6% before 2027.
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In the absence of mortgage rates dropping substantially, increasing the housing supply is the most direct way to rejuvenate market demand and create more affordable housing options for first-time home buyers.
We spoke with Tia Boatman-Patterson, former Housing Director at the White House Office of Management and Budget and current President and CEO of the California Community Reinvestment Corporation, to discuss the current state of the housing market and the necessary policy solutions to improve affordability and increase supply.
A couple celebrates the purchase of a new house. Mortgage rates and rising home prices have made it difficult for first-time homebuyers to enter the housing market, but increasing affordable housing options may help.
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Targeting smaller, affordable housing is key to sparking buyer demand
2024 was the second least affordable home-buying year in history, eclipsed only by 2023. A household making the median U.S. annual income of $83,782 would need to spend nearly 42% of their salary to cover the monthly housing costs of a median-priced home.
Rising home prices and elevated mortgage rates have severely dampened the average homebuyer’s budget. 78% of Americans who want to buy a home cite affordability as the biggest obstacle preventing them from homeownership.
Freddie Mac predicts more buyers will adapt to the affordability crisis by shopping for smaller, less expensive homes. However, this type of housing inventory is in limited supply.
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Boatman-Patterson highlights why there aren’t enough small, single-family housing units to meet demand and how to address this housing gap to provide relief for homebuyers.
“They didn’t build smaller, affordable homes for a while after the housing crisis – a lot of people left the homebuilding industry,” she said.
“We lost a large part of the labor force, and then we were hit by covid and supply chain issues. Now that mortgage rates have gone up and the cost of housing prices come down, you have less buying power. So there is a huge gap between wages and the cost, creating this affordability crisis.”
While many experts hoped that mortgage rates would fall in 2025, making the homebuying experience cheaper and unlocking buyer demand, Fannie Mae anticipates that it may take several years for rates to fall below 6%.
“Since the housing gap is so substantial, solving it takes an ‘all of the above’ type of approach,” Boatman-Patterson continued. “You must address it from a regulatory, financial, and labor force standpoint.”
“You need land to build the housing, but there are several regulatory barriers that must be overcome. You also need funding to help bridge the gap between the actual cost of construction and what can be paid for it.”
Policy solutions require federal and local government cooperation
When mortgage rates hit record highs of nearly 18.4% in the early 1980s, housing construction pivoted to reflect buyer needs and budgets. However, to build more affordable options for first-time homebuyers, the federal government must work with local jurisdictions to provide funding.
Boatman-Paterson elaborates on why there is not one clear-cut solution to improving the housing market; local jurisdictions will require support at the state and federal levels.
“I do not think there’s a silver bullet solution — it is an all of the above approach and aligning your resources and regulatory relief,” she explained.
“The federal government can only do so much. There’s this issue about using federal lands, but housing and development are approved at the local level. Unless you deal with those regulatory barriers at the local level, there’s going to be a disconnect.”
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The Department of Housing and Urban Development’s (HUD) 2025 budget is $72.6 billion, which includes $85 billion to invest in affordable housing over the next ten years. HUD also manages the HOME Investment program, which allocates $1 billion per year in housing block grants to states and local municipalities.
However, the future of these program budgets remains unclear in light of HUD’s recent commitment to widespread cost-cutting initiatives.
Federal programs that support local housing initiatives may be crucial for housing market recovery.
“Federal resources, whether that’s land or money, need to be brought to the table in a way that will incentivize or create pro-housing jurisdictions,” she continued. “You have to align those resources with those regulatory relief to move things forward, like providing more block grants from the federal government to local government.”
“Local governments know what’s best for their neighborhood, and they know what’s going to happen. If their community plans meet federal policy goals, block grants must be issued to get those jurisdictions funding.”
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