For instance, in places where housing is costly, children leave home at later ages, divorced couples are more likely to cohabitate, and grandmothers are more likely to live with their offspring. As our economy grows wealthier, we spend money on an increasing variety of goods, and one of those is more housing: in essence, we use our affluence to get away from our family.

However, it is hard to look at the post–Great Recession economy and not conclude that something is amiss in the housing market, and that our aggregate output of housing may be suboptimal. In the last dozen years, we have built much less new housing than in the decades before the 2008 housing market collapse. In fact, we have to go back to 1966, when the U.S. population was two‐​thirds what it is today, to find a year when we were adding as little new housing to our economy outside of a recession as has occurred each year since the Great Recession.

The depth and length of the decline in housing construction in the last dozen years cannot merely be attributed to a snap‐​back to conditions prior to the housing investment bubble in the early 2000s or a dissipation of residential construction overhang. In the last decade, the average number of new housing starts has averaged just two‐​thirds of the 1992–2007 average.

In other words, a fundamental change occurred after 2008 that has created a new regime for housing construction. It is worth investigating the factors that have caused this change.

Constraining supply / There are myriad hurdles that have added to the cost and difficulty of building a new home. First, people are increasingly moving to places where it is costly to create new housing. In most cases, local government regulations create barriers to construction, and these locales show little interest in making anything other than cosmetic reforms. Of course, politicians in major metropolitan areas love to talk about reducing economic inequality and improving their low‐​income constituents’ access to affordable housing. But talk is cheap and housing is not.

State governments could remove those local obstacles, but they seldom do. For instance, California’s modest recent attempt to override local zoning rules to allow dense housing near mass transit stops, SB 827, suffered an ignominious political death in committee. Congress has shown little appetite for involving itself in this battle as well.

The regulatory costs of constructing a new home have increased quite a bit over the past decade. The National Association of Home Builders estimates regulatory compliance costs constitute one‐​fourth of the cost of a new home. For instance, the Obama administration increased the energy efficiency requirements for new homes, raising their construction costs, although supporters argue that such mandated investments are cost‐​effective for homeowners in the long run. Attempts to reform a dysfunctional flood insurance program by forcing more homeowners to pay something close to an actuarially fair premium also boosted home construction costs slightly, although Congress quickly rescinded most of those reforms under pressure from (wealthy) constituents

Obtaining financing for new homes became more difficult immediately after the financial crisis. Banks worried that selling their loans could be problematic after the government‐​sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were put in conservatorship and felt compelled to be strict about the loans they obtained. Nonconforming loans (that is, loans that exceed the maximum size the GSEs will purchase) became even more difficult to obtain for a time, although that market eventually returned to normal. Credit standards to obtain conforming loans remain somewhat elevated to this day.

The limbo of Fannie and Freddie has exacerbated the financing issues, and it is unclear whether it will get resolved anytime soon. Their regulator, the Federal Home Financing Agency, has proposed a rule that would end the “net worth sweep” of sending the GSEs’ profits to the U.S. Treasury and instead allow each to accumulate capital to better withstand a downturn. Many believe that this would increase the availability of mortgage financing for more middle‐​class and first‐​time homebuyers.

The federal government does little to encourage homeownership, although it does forgo a lot of tax revenue from a select group of homeowners ostensibly to do so. Deductions for mortgage interest and state and local taxes only confer benefits to those taxpayers who are wealthy enough to itemize, which is now just 10% of the population. Before the Tax Cuts and Jobs Act of 2017 increased the standard deduction, 30% of taxpayers availed themselves of those deductions, but — again — those truly on the cusp of affording a home did not benefit because they were unlikely to itemize. Besides, economists believe that these tax breaks are already capitalized into the prices of homes, resulting in no net incentive for homebuying.

Numerous states operate GSEs of their own that provide modest subsidies targeted to middle‐​income, first‐​time homebuyers. For instance, the Wisconsin Housing and Economic Development authority offers first‐​time homebuyers with an income under about $95,000 (it varies slightly across counties) and a credit score above 610 a rate‐​competitive mortgage with reduced fees.

Democratic presidential nominee Joe Biden has proposed a $15,000 tax credit for first‐​time homebuyers. The Obama administration implemented a $7,500 credit for 2009 as part of its effort to stabilize the housing market following the bubble collapse. The Obama measure’s efficacy remains a matter of debate: the nearly frozen credit markets at the time and the moribund economy confounded its effect.

The cost of building fewer homes / The decline in new housing construction hurts our economy in two ways. For starters, home construction has traditionally been a key source of jobs for semi‐​skilled men. The National Federation of Independent Business estimates that each new home adds roughly three jobs to the economy.

Before the pandemic, there were 7 million men aged 25–54 who were not participating in the labor market despite the low unemployment rate. Few in that cohort were in school, retired, or disabled. The dearth of homebuilding has no doubt contributed to this labor force participation decline.

The lack of home construction further reduces employment in this cohort by limiting the migration of workers to new locales where jobs are available. Before the pandemic, a disproportionate number of new jobs were in major metropolitan areas along the coasts, where housing costs are high mainly because local regulations inhibit construction.

Persistent high housing costs deter some job seekers from moving to those hot job markets. Instead, they pursue lower‐​productivity — and thus lower‐​wage — jobs in cities with more reasonable housing costs or remain unemployed (or underemployed) in their present community. Chang‐​Tai Hsieh and Enrico Morretti have estimated that gross domestic product would be nearly 9% higher if we merely allowed plentiful new housing to be built in New York and San Francisco/​San Jose. (“Housing Constraints and Spatial Misallocation,” American Economic Journal: Macroeconomics 11[2]: 1–39 [2019].)

The National Association of Home Builders found that housing contributed 4.5–5.9% of GDP each year between 1980 and 2007. Since the Great Recession, that proportion has been 2.5–3.4%, or more than 1 percentage point less than at any point during the previous quarter century. If we were to include the displacement effect from reduced home construction, that number would be even higher.

Improving upon the status quo / It is unlikely that the federal government will override these state and local building regulations. And there is no reason to think that places like California, New York City, or San Francisco will pursue serious reform on their own. Federal lawmakers’ desire to repeal the caps for the deductibility of state and local taxes and mortgage interest — making those tax provisions more regressive — as well as continuing transferring GSE profits to the Treasury manifest a disinterest in taking practical steps to incentivize homeownership. Political fights about housing these days often devolve into issues that have little to do with creating new housing.

Some aver that the pandemic may change people’s work habits and preferences in favor of telecommuting and workplace decentralization, and that more skilled workers and young families will be able to find professional success and family stability in smaller, less expensive communities. But it is hard to forecast preferences in a post‐​COVID‐​19 world. People still moved to London after the Great Plague, after all.

The skyrocketing public debt may soon force a future president and Congress to end deductions for mortgage interest and state and local taxes. Were that to happen, it is likely that lawmakers would provide some modest alternative to encourage homeownership, provided it cost a fraction of the revenue lost to the deductions. It would not be hard to create a new incentive that would improve upon the status quo. A modest credit for first‐​time homebuyers would be the likely alternative, perhaps limited to states and localities that do not overly restrict development.

Reform of Fannie Mae and Freddie Mac could also modestly increase homeownership if they do emerge from conservatorship with more freedom. Of course, the GSEs’ determination to please both shareholders and political masters is what forced them into conservatorship in 2008, an occurrence that remains fresh in the minds of many politicians. That memory may preclude serious reform.

Many of the arguments typically trotted out in support of measures to encourage housing — people who own homes are more civic minded, save more money, and invest more in their community — tend to conflate cause and effect. However, a market where a variety of government forces have conspired to significantly inhibit home construction does impose a cost on society.

The ultimate cost of a perpetually reduced level of new home construction is that young families will spend more of their income on a home, wait longer before becoming homeowners — and having children — and a higher proportion will find it financially or practically impossible to move to high‐​productivity, higher‐​cost communities. While there may be an argument for geographically diversifying America’s skilled workforce, doing so by keeping home prices high is undoubtedly not a cost‐​efficient way to achieve that goal.