U.S. Department of the Treasury

Laura Feiveson, Deputy Assistant Secretary for Microeconomics

Arik Levinson, Deputy Assistant Secretary for Climate and Energy Economics

Sydney Schreiner Wertz, Economist

For the past two decades, rents and house prices have been rising faster than incomes across most regions of the United States. For some households, increased housing costs means there is less to spend on everything else, including food, health care, clothing, education, and retirement savings.  For others, particularly younger Americans, high costs may be preventing them from living on their own or starting families. 

The affordability challenge is particularly severe for households of color and for low-income communities. Black and Hispanic households tend to spend higher shares of their incomes on housing expenses than white households.[1]  And almost 90 percent of families with annual incomes below $20,000 spend more than 30 percent of their incomes on housing expenses—a threshold used by the Department of Housing and Urban Development (HUD) to indicate unaffordability. Sixty percent of families with incomes between $20,000 and $50,000 face the same challenge. These Americans are on the brink of being priced out of a basic human need. 

For these urgent reasons, the Biden-Harris Administration is taking steps to expand the supply of housing and bring down costs for renters and homebuyers, at the same time as pushing for significant action from Congress and state and local governments. In this blog, we describe some of the root causes of U.S. housing cost growth and the large and slow-moving demographic changes that have led us to where we are today, motivating the need for significant and concerted action.

Our main takeaways are:

• Over the last two decades, housing costs have been rising faster than incomes. More than 90 percent of Americans live in counties where median rents and house prices grew faster than median incomes from 2000 to 2020.
• Since 2000, housing demand has grown more than housing supply. This is largely due to changing demographics: although the construction of housing has kept pace with overall population growth, it has fallen well short of the estimated number of housing units demanded by an aging population.
• This is a longstanding problem, and substantial fixes will require federal legislative and state and local action.  But the Biden Administration is not waiting for Congress to act and has taken many steps across multiple agencies to increase housing supply. Over the past couple of years, Treasury’s actions include strengthening the Low-Income Housing Tax Credit, implementing historic housing investments as part of the American Rescue Plan, supporting community development financial institutions and minority depository institutions, and permanently extending the Federal Financing Bank’s financing support for a HUD risk-sharing initiative. Today, Secretary Yellen will outline additional efforts at Treasury to expand housing supply.

I. Housing cost increases

Since 2000, housing costs have been rising faster than median household income (Figure 1). Inflation-adjusted rents have grown steadily, to more than 20 percent above their 2000 level. Inflation-adjusted prices for single-family homes have grown even faster, with a large boom and bust leading up to the financial crisis of the late 2000s and then a particularly sharp increase in the years following the onset of the pandemic. Over the entire period, inflation-adjusted house prices rose about 65 percent. In contrast, inflation-adjusted median household income barely rose over the whole time period.

Figure 1. Real Housing Price, Rent and Wage Indexes

This point is broadly true across regions. From 2000 to 2020, median rents rose faster than median household income in 88 percent of U.S. counties, home to 97 percent of the U.S. population (Figure 2). And median house prices grew faster than overall inflation in 88 percent of counties, home to 95 percent of the population (Figure 3). And both median rents and house prices grew faster than overall inflation in 77 percent of counties, home to 93 percent of the population. Rents and home prices also rose in rural and urban areas, and for both single-family homes and apartments in multi-family buildings.^[2]  In sum, rising housing costs have been widespread and do not simply reflect a mismatch between locations and sectors in which housing is demanded and supplied. 

Figure 2: Growth in median rents less growth in median income, 2000 to 2020

Figure 3: Growth in median housing values less growth in median income, 2000 to 2020

II. Demographic Trends

Rising prices have resulted from growth in housing demand exceeding growth in housing supply. Over the last two decades, a major contributor to housing demand growth has been the changing demographic characteristics of the U.S. population. Notably, the population has aged. In 2000, people aged 55 and over made up 20 percent of the U.S. population; by 2020, the 55-and-over share was 30 percent. Older people are more likely to be the head of their own household, so as the population ages, demand for homes rises.^[3] 

The three panels of Figure 4 visually demonstrate the changing age distribution of housing demand in our population. The blue bars on the left side of each figure show the size of the population in each age range. The gray bars on the right side show the number of households headed by someone in each age range. As the baby boomers have moved from the youngest age ranges in 1980 to the middle age ranges in 2000 to the older age ranges in 2020, the distribution of housing demand has shifted notably.    

Figure 4: Population and Households by Age

One way to understand the interaction between the aging population and housing demand is by calculating the share of each age group that is a head of household. That is simply the ratio of the gray bars on the right side of Figure 4 to the blue bars on the left. Those ratios are called “headship rates.” 

Figure 5 shows the headship rates for different age ranges over time. Two facts jump out. First, older age groups have higher headship rates. So, as the population ages, there will be upward pressure on the overall headship rate in the population—and, conversely, downward pressure on the number of people per household, all else equal.^[4] Consequently, there will be upward pressure on the number of housing units demanded per person in the population.

Second, age-specific headship rates have been declining for the past few decades for every adult age group.^[5]  One plausible explanation for declining headship rates is the rising housing costs detailed in the previous section. 

Figure 5: Per-Age Headship Rates

The youngest groups have experienced the largest declines in headship rates. In 1980, 50 percent of Americans aged 25 to 34 were heads of their own household (the lowest line on Figure 4). In 2020, that number had fallen to around 40 percent. The headship rate for Americans aged 35 to 44 also fell substantially: from almost 55 percent to less than 50 percent. The decline in headship rates for younger Americans can be seen in the rise of young adults living at home over the same period, as shown in Figure 6. This rise is at least partially attributable to rising rents and house prices.^[6]

Figure 6. Share of Adults Aged 25 to 34 Living with a Parent

III. Housing demand has outpaced supply

Housing demand growth since 2000 can be assessed by calculating the number of homes that would be required to accommodate the current U.S. population if headship rates for each age group had stayed at their 2000 values. The top line of Figure 7 shows that calculation, estimating that housing demand grew by 26 percent between 2000 and 2020. 

By comparison, Figure 7 shows that the actual housing stock—housing supply—grew by only 19 percent. So, the growth in housing demand has outpaced supply—a potentially important cause of rising rents and house prices. Population growth—the bottom line in Figure 7—grew by only 17 percent over this same period. 

In short, housing cost increases have not arisen because population outpaced supply. It has not. Instead, housing cost increases have resulted from housing demand outpacing supply, driven in part by demographic shifts. 

Figure 7: Population, estimated housing demand, and housing stock percent growth since 2000

IV. Why construction hasn’t kept up pace and the role of policy

So why hasn’t housing construction kept pace with the growth of housing demand? One cause of housing undersupply may be local land-use regulations and zoning restrictions.^[7]  Minimum lot sizes and limits on multifamily apartment buildings can increase prices by limiting supply.^[8] Loosening those regulations would remove barriers to new construction, expand housing supply, and lower the rents faced by all households, including those with lower incomes.^[9] 

In many places, and for many low-income households, barriers to construction are not the sole culprit. Many households’ incomes are simply too low to spur growth in the supply of reasonably safe and sanitary housing. The future rents they could afford to pay would be insufficient to cover the construction costs of new apartments or houses.^[10] And new market-rate construction geared towards higher-income households only has limited success in opening affordable vacancies in older buildings.^[11] 

Governments—state, local, and Federal—have good reason to work towards overcoming these barriers to ensure a sufficient supply of affordable housing. Housing is a basic human need. Furthermore, investments in affordable housing support our economy’s medium- and long-run growth. Having an affordable home allows workers to live close to the high-quality jobs where they are most productive, which is particularly important give the ongoing resurgence in American manufacturing.^[12] Moreover, there is an abundance of evidence that stable housing provides benefits to children that increase their future long-term success.^[13] 

Government policy can support housing supply and affordability in numerous ways: by subsidizing housing construction, by subsidizing renters, by subsidizing home buyers, and by incentivizing state and local governments to remove outdated zoning and land use policies.^[14] One of the Federal government’s largest sources of support for affordable housing is administered by Treasury: the Low Income Housing Tax Credit, or LIHTC, which subsidizes the construction and preservation of affordable housing.

V. Biden-Harris and Treasury Policies

The Biden-Harris Administration and Treasury recognize the urgent need to address housing affordability.  In 2022, the Biden-Harris Administration released a Housing Supply Action Plan, which included actions across multiple agencies intended to create more affordable housing. In its latest budget, the Biden Administration has called on Congress to invest more than $175 billion to help grow housing supply, including through the expansion of the Low-Income Housing Tax Credit. The Administration has also encouraged state and local governments to work to reduce barriers to more housing construction.

In the meantime, Treasury is not waiting for Congress to act. Over the past few years, Treasury’s American Rescue Plan programs have enabled state and local governments to deploy billions of dollars to create new and improve existing affordable housing stock. Treasury has also supported the construction of affordable housing through the Low-Income Housing Tax Credit, the largest source of financing for affordable housing in the country, as well as Treasury’s support for community development financial institutions and minority depository institutions, which enable these institutions to make housing loans and investments to communities hit hardest by the pandemic. Earlier this year, in a blog post, Deputy Secretary Wally Adeyemo announced a range of Treasury actions to help expand housing supply. 

Today, Secretary Janet Yellen is announcing several additional key housing initiatives in a speech in Minnesota. First, Treasury will be establishing a new program administered by the CDFI Fund that will provide an additional $100 million over the next three years to support the financing of affordable housing. Second, we are working on a major improvement to bolster the Federal Financing Bank’s financing of affordable housing through its support of HUD’s Section 542 Housing Finance Agency Risk-Sharing Initiative. This builds on the recent indefinite extension of the program, which is estimated to help preserve or create 38,000 affordable units over the next decade. Third, we are engaging with the Federal Home Loan Banks, which play a key role in the housing finance system, to explore ways that they can increase their voluntary commitments to housing programs. And fourth, the CDFI Fund is updating the Capital Magnet Fund rule to provide greater flexibility and reduce administrative burden on recipients, which reflects input that Treasury has received from stakeholders.

There will not be a quick fix to the long-term rise in housing costs. But the Federal and state and local governments play an important role in ensuring that all Americans have affordable and safe homes. The actions taken now are an important start, and the Administration is prioritizing laying the groundwork for larger legislative action when Congress is ready to act.