American housing has become unaffordable for a significant portion of the population. The standard explanation treats this as a supply problem: not enough homes were built, costs rose, and now housing is expensive. The supply explanation is partially true. But it omits the more important half of the story, which is that housing has been systematically financialized — transformed from a place people live into an asset class that investors extract returns from — and that this transformation was engineered through deliberate policy choices, not market forces.
The Baseline Numbers
In 1970, the median home price in the United States was approximately 2.2 times the median annual household income. By 2020, that ratio had risen to over 5.5 times median income. In major metropolitan areas — San Francisco, New York, Los Angeles, Seattle, Denver — the ratio is 10 to 15 times median income.
Over the same period, mortgage rates, construction costs, and building technology all experienced significant changes, but none that would explain a 150% increase in the price-to-income ratio. The driving factor is not construction cost. It is demand generated by treating housing as an investment vehicle, which inflates prices beyond what residents can pay from earned income.
The Mortgage Interest Deduction Is a Subsidy for Wealthy Homeowners
The mortgage interest deduction allows homeowners to deduct the interest they pay on a home mortgage from their federal taxable income. This deduction is worth approximately $25 billion per year to American homeowners. The distributional effect is straightforward: the deduction provides no benefit to renters, minimal benefit to owners of modest homes, and maximum benefit to owners of expensive homes with large mortgages.
A household earning $50,000 per year and renting receives zero benefit. A household earning $300,000 per year and carrying a $1.2 million mortgage may deduct tens of thousands of dollars annually. The policy transfers wealth from renters and modest homeowners to wealthy homeowners. It also inflates home prices by subsidizing the demand side: when the government reduces the after-tax cost of carrying a mortgage, buyers can afford to bid higher, and prices rise to absorb the subsidy.
The deduction has existed since the federal income tax was created in 1913. It has never been eliminated or meaningfully reformed. The homeowner lobby — including the National Association of Realtors, the National Association of Home Builders, and the Mortgage Bankers Association — spends approximately $100 million per year on lobbying and campaign contributions.
Zoning as Exclusion
Single-family zoning prohibits the construction of multi-family housing — apartments, condominiums, townhomes — in most of the residential land in most American cities. Approximately 75% of residential land in Los Angeles is zoned exclusively for single-family homes. In Seattle, the figure was 75% before partial reform. In Minneapolis — which eliminated single-family zoning in 2019 — housing production increased, and rent growth slowed relative to peer cities.
Single-family zoning was introduced in the 1910s and codified through the 1920s. Its origins are directly tied to racial exclusion: it was designed in part to prevent Black families and immigrants from moving into white neighborhoods by prohibiting the denser, more affordable housing types those populations could afford. The racial intent was explicit in the legal and planning documents of the era.
The racial exclusion intent has been superseded by court rulings and fair housing law. The economic exclusion effect remains. A city that zones 75% of its residential land for single-family homes has made a decision to prevent housing density. That decision limits supply, limits affordability, and preserves the property values of existing homeowners at the expense of everyone who wants to move in.
The Institutional Investor Effect
Beginning in earnest after the 2008 foreclosure crisis, large institutional investors began purchasing single-family homes at scale. Companies like Invitation Homes — backed by Blackstone — and American Homes 4 Rent accumulated portfolios of tens of thousands of single-family homes, converted them to rentals, and raised rents systematically.
The mechanism is straightforward: a large institutional buyer can pay a premium at the foreclosure auction or on the open market because it is buying a revenue-generating asset, not a home to live in. The premium pricing it can afford displaces individual buyers who need to live in the home and cannot service the same debt load. The homes become rental properties at rents that extract maximum return from the rental market rather than occupant-ownership at prices that reflect local wages.
This is not a theoretical concern. Academic studies of housing markets where institutional investors were concentrated found measurable increases in home prices and rents relative to comparable markets without institutional concentration. The effect is not enormous in aggregate at the national level — institutional investors own approximately 5% of single-family rental stock — but in specific markets and specific price ranges, the concentration is much higher and the effect on affordability is material.
Short-Term Rentals Remove Housing Stock
Airbnb and similar platforms allow property owners to rent homes on a nightly basis at returns that are typically higher than long-term residential rents. The financial incentive to convert a long-term rental to short-term is often strong in tourist and business travel markets. The result is that housing stock in high-demand areas is removed from the long-term residential market.
Researchers at the Economic Policy Institute estimated that Airbnb listings in New York City reduced long-term rental housing supply by tens of thousands of units, contributing to measurable rent increases. Similar effects were documented in San Francisco, Los Angeles, Barcelona, Amsterdam, and other cities where short-term rentals are concentrated.
The Airbnb response to this research was to dispute the methodology. The company has also spent heavily lobbying against local ordinances that would restrict short-term rentals. Where restrictions have been imposed — as in New York City, which implemented strict licensing requirements — availability of short-term listings fell sharply while long-term rental supply increased.
What Policy Would Actually Fix Housing
The interventions that would make housing meaningfully more affordable are well-understood and politically difficult:
Eliminate or dramatically reduce the mortgage interest deduction and redirect the revenue to housing vouchers and construction subsidies for low- and moderate-income households.
Reform exclusionary zoning to allow denser housing in high-demand areas. Minneapolis and Oregon have demonstrated this is politically achievable at the state level.
Tax land value rather than improvements. A land value tax creates an incentive for landowners to develop property rather than hold vacant lots for appreciation. It does not tax the building; it taxes the location value created by the surrounding community.
Regulate institutional investors' acquisition of single-family homes in concentrated markets, or impose tax treatment that reduces the financial advantage of large-scale single-family ownership.
Enforce and strengthen tenant protections to prevent displacement of existing residents when property values rise.
None of these interventions will happen without organized political pressure from people who are being priced out of housing. None of them are on the agenda of either major political party at the federal level, because the donor class that funds both parties overwhelmingly consists of existing homeowners and real estate investors whose interests are served by the current system.
The housing crisis is the intended outcome of deliberate choices. The choices can be unmade. But that requires understanding who made them and why.