Kamala Harris unveiled her economic plans this week, with a focus on addressing the housing crisis. Her strategy aims to boost housing supply by creating 3 million new units over four years. 

‍

Key components include tax incentives for developers to build starter homes and rental units, along with a $40 billion federal fund to support innovative housing projects. Additionally, first-time homebuyers could receive up to $25,000 for down payments. 

‍

Critics like Billionaire Hedge Fund owner Bill Ackman argue her plan will simply drive up short term demand without addressing supply, creating even greater inflation.

‍

The Housing Squeeze Tightens

‍

In July 2024, shelter costs contributed 90% to the monthly rise in the U.S. Consumer Price Index (CPI), with housing expenses increasing by 5.1% year-over-year. 

‍

Simultaneously, U.S. building permits fell by 4% to a four-year low of 1.396 million annually, below expectations. Multi-unit building approvals plummeted by 12.4%, while single-family permits remained mostly unchanged. 

‍

Fewer building permits mean less housing supply, and with reduced supply, there is little relief in sight for the 49% of the 134.9 million households that cannot afford a $250,000 home.

‍

The Fed Has to Fix the Housing Problem it Created

‍

The U.S. Federal Reserve increased interest rates so much that the combination of high housing prices and high mortgage costs has made owning a home very expensive. Likewise, the quick pace of rate hikes following 0% interest rates has crushed incentive to sell your existing home and buy a new home. 

‍

Nearly 80% of home owners have a mortgage rate below 4%, so it makes little financial sense to sell your home and buy a different home with a much more costly mortgage.

‍

As a result, there is very low supply of homes and thus no price wars among sellers that typically cause price drops.

‍

The only short term ways out of this mess are to: 1) lower interest rates, 2) make mortgages portable, meaning you can swap homes but keep the original mortgage rates, and 3) eliminate taxes on selling a home to stimulate supply, especially among Baby Boomers looking to downsize. It doesn't seem like banks are willing to do option 2, and there is zero political leadership pushing for it or option 3. 

‍

That means the Fed has to cut rates to increase housing supply and bring down shelter costs currently propping up inflation levels it so badly aims to cure.