Affordable Housing Is A Credit Market Problem—For Builders And Buyers.

The Growing Crisis of Housing Affordability in the U.S.

Homes in the United States are becoming increasingly unaffordable, both to purchase and to build. While many might assume this is a demand issue, the reality is far more nuanced. The problem lies squarely in the realm of supply and credit. Millennials, now the largest demographic in the country, are entering their prime home-buying years, aged between 28 and 43. They are forming new households at the fastest rate seen in a decade, creating a surge in demand. However, the supply of available homes is woefully inadequate, with estimates suggesting a shortfall of between 3.7 and 4.5 million units. This shortage is exacerbated by credit market challenges that disproportionately affect affordable housing, making it harder for potential buyers to secure financing and for builders to construct new homes. These credit factors are not just peripheral concerns; they are central to understanding the housing affordability crisis.

The Roots of the Crisis: A Credit Market Problem

The current housing shortage in the U.S. is reminiscent of the post-World War II era, when housing stock was last this low. However, unlike the 1946 housing crunch, which was driven by the massive demand following the return of troops, today’s problem has its roots in the 2008 financial crisis. The collapse of residential mortgage-backed securities (RMBS) and their related collateralized debt obligations (CDOs) triggered a global economic meltdown. Millions lost their homes and jobs, prompting central banks like the Federal Reserve and the European Central Bank to flood the markets with cheap money to stimulate economic recovery. This led to a surge in government borrowing, which in turn precipitated the Eurozone Crisis and sovereign debt downgrades in countries such as Greece, Portugal, Ireland, Italy, and Spain.

By 2012, real estate markets in both the U.S. and Europe were overwhelmed with abandoned properties. American banks resorted to accounting gimmicks to hide the enormity of their mortgage losses, with estimates suggesting up to $1 trillion in undisclosed losses. This toxic mix of bad debt and financial instability set the stage for the current affordability crisis, where credit market distortions continue to play a significant role in limiting both the supply of homes and the ability of prospective buyers to secure mortgages.

How Credit Factors Turned the Housing Market Upside Down

The years following the 2008 crisis saw a series of credit-driven changes that further exacerbated the housing shortage. By 2012, as the mortgage market began to stabilize, individual speculators started buying up distressed properties with the aim of flipping them for profit. Around the same time, several European governments, including those of Spain, Portugal, and Ireland, introduced Golden Visa programs. These programs offered tax incentives to foreign investors willing to purchase distressed homes, with the promise of residency or citizenship in return. While initially seen as a way to inject capital into struggling economies, these programs ultimately drove up housing prices, pushing homeownership out of reach for local residents. Spain, for instance, officially ended its Golden Visa program on January 3, 2025, citing its negative impact on affordability.

The trend of speculative buying intensified in 2013 when private equity firms, in collaboration with the U.S. Federal Housing Finance Agency, developed the REO-to-Rental (buy-to-let) model. This strategy involved using other people’s money to acquire distressed properties at inflated prices, renovate them, and rent them out. Pension funds and other investors were drawn to the promise of steady rental income, which they believed would outweigh the initial purchase costs. However, this practice has only worsened the scarcity of affordable homes for sale. In 2023, private equity firms purchased an estimated 26% of the available affordable housing stock in the U.S., a share projected to rise to 40% by 2030. Meanwhile, many homeowners are holding onto their low-interest mortgages from the QE and pandemic era, further reducing the inventory of available properties.

Supply Chain Challenges and the Construction Industry

The construction industry faces its own set of credit-related challenges, which have hindered efforts to address the housing shortage. The last significant expansion of the U.S. housing stock occurred in the years immediately following World War II, when new home starts skyrocketed from 8.4 to 26.4 per 1,000 households between 1945 and 1946. In stark contrast, the construction of new homes plummeted to just 8.2 per 1,000 households in 2008, a level not seen since 1945. The industry’s ability to ramp up production today is constrained by rising costs of land and construction materials, as well as a shrinking labor force. Since 2007, the construction workforce has shrunk by over a million workers, with immigrants now making up 31% of the industry’s labor pool. Many native-born workers who left the sector during the economic downturn have found employment elsewhere, leaving a void that is difficult to fill.

For prospective homebuyers, especially those in low- to middle-income brackets, the situation is even more dire. Fixed-rate, 30-year mortgages currently hover around 6.94%, nearing the post-Covid peak of 7.5%. While average incomes and employment rates are slightly higher than they were in 2000, median home prices have surged by 160%, and homeowner’s insurance costs have skyrocketed by 265%. These steep increases far outpace the overall rate of inflation, as measured by the Consumer Price Index. For first-time buyers, the burden is even heavier, with private mortgage insurance adding an additional 0.4% to their recurring costs.

Policy Uncertainty and Its Impact on the Housing Market

Compounding these challenges is the issue of policy uncertainty, which has become a significant credit market problem in its own right. Shifts in political leadership often bring changes in policy priorities, creating uncertainty around regulations, laws, and economic strategies. This unpredictability discourages businesses from making long-term investment decisions, as they wait for clearer signals about the direction of the economy. While changes in leadership can sometimes be viewed positively in equity markets, they tend to have a negative impact on credit markets, which rely on stability to function effectively.

The current political climate in the U.S. has only added to these concerns. The Trump administration’s plans to carry out “the largest deportation operation in history” and impose tariffs on imported construction materials, such as lumber from Canada, gypsum from Mexico, and steel and aluminum from China, have created significant uncertainty for the construction industry. These measures threaten to disrupt the already fragile supply chain and drive up costs further. It is little wonder, then, that the National Association of Home Builders-Wells Fargo Housing Market Index (HMI) dropped sharply in January 2025, reaching levels not seen since 2023, when the Federal Reserve raised interest rates by 550%. The HMI, which tracks builder confidence, is influenced by factors such as interest rates, inflationary pressures, employment levels, and material costs—all of which are closely tied to credit market conditions. This decline in confidence underscores the profound impact of policy uncertainty on the housing market and the broader economy.

Conclusion: A Way Forward for Affordable Housing

The coupling of a severe supply shortage and credit market distortions has created a perfect storm that is pricing millions of Americans out of the housing market. While the roots of this crisis are deeply entrenched in the aftermath of the 2008 financial meltdown, there are steps that can be taken to address it. Policymakers must prioritize measures that stabilize the credit markets, reduce speculation-driven demand, and incentivize the construction of affordable housing. At the same time, efforts to address labor shortages, control material costs, and promote policy clarity are essential to reviving the nation’s housing sector.

Ultimately, the resolution of the housing affordability crisis will require a coordinated approach that balances the needs of buyers, builders, and investors. Only by addressing the underlying credit market challenges and supply chain bottlenecks can the U.S. hope to build its way out of this crisis and create a more equitable housing market for future generations.