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Homeownership is likely to remain out of reach for millions of Americans. What’s ahead for buyers and builders.

Today’s housing market is either a bounty of riches or a landscape of despair, depending on your side of the fence.

You’re probably thrilled if you’re an investor or bought a home in recent years. Home-builder stocks are up 110% since early 2021. Millions of owners are sitting on home-equity gains, thanks to a 38% increase in average prices. If you were fortunate enough to buy or refinance during the pandemic, when 30-year mortgages hit a record low of 2.65%, your loan is so cheap it’s like putting free money in your pocket every month.

The flip side is a housing-cost crisis—fueled by the very same trends. People aiming to buy are getting shut out by high prices, low supply, and mortgage rates too steep for average households. The Atlanta Fed’s affordability index was at 68.5 in June, hovering near its lowest levels since 2006. Ownership costs (including mortgage, taxes, and insurance) are eating up nearly 44% of median household income, well above the 30% level considered a threshold for affordability, last seen in 2021.

Some relief is coming: The 30-year mortgage is down from north of 7% to the low 6% range in tandem with declines in the 10-year Treasury note, in anticipation of Federal Reserve rate cuts. A quarter-point cut probably wouldn’t push mortgage rates down, but if the Fed opts for half a percentage point, it may pull the 30-year mortgage down a bit more.

High housing costs are also a hot topic in the presidential campaign. Vice President Kamala Harris is proposing grants for first-time buyers and incentives for developers. Former President Donald Trump has talked up regulatory cuts, building on federal land, and mass deportations of immigrants in the U.S. illegally as cures.

Yet these measures, even if enacted, will take time. And it’s far from clear whether they will really work. Modest rates cuts are no panacea and may only push up prices by encouraging more home sales. It’s also unclear whether Trump or Harris could get their proposals through a gantlet of hurdles, including Congress and legal challenges.

The one measure that almost everyone agrees would really help is a big increase in new housing units. But that won’t happen fast, either. The country needs up to seven million new houses to alleviate shortages, yet builders are only putting up around 850,000 single-family units a year at their current pace. Nor have they shown much appetite to step up production due to concerns about a slowing economy and cost pressures.

The backdrop does look favorable for home-builder stocks. Falling mortgage rates are usually a tailwind for the sector. And if Washington steps up with more financial incentives, it could provide a lift, especially to builders focused on entry-level homes.

While these forces work through the market, millions of prospective buyers are likely to be shut out. Nadia Evangelou, director of real estate research for the National Realtors Association, doesn’t see 2025 as much of a pivot year for improving affordability. Analyst Alan Ratner of real estate firm Zelman & Associates doesn’t see much relief until 2026. “There’s no quick fix,” he says.

House Rich, Cash Poor

Homeownership had been rising steadily before the pandemic but has since stalled. It now holds at 66%, about the level of the late 1990s and well below the 69% during the 2000s housing boom, according to the U.S. Census Bureau.

Affordability is the big headwind, of course, as mortgage rates and prices have surged while incomes haven’t kept pace. The median existing home is selling for $422,600, up from $266,300 in 2020.

Rising rents are a culprit, too, making it tough to save enough for a down payment. Many first-time buyers are resorting to family, friends, or retirement savings to come up with enough cash for a loan, according to surveys conducted by the National Association of Realtors.

The longer people wait to buy, the more it affects everything from household formation to long-term financial health. By age 60, homeowners who bought between the ages of 25 and 34 had $72,000 more in housing wealth than those who bought a decade later, according to the Urban Institute. “If you don’t get into your starter home, it prolongs your period of rent and hinders your savings in the form of building equity,” says Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School.

The rising costs of shelter reflect a market still being distorted by the pandemic and its aftershocks. The Federal Reserve cut interest rates sharply to avoid a recession, and the 30-year mortgage fell below 2.7% in 2021. That prompted a frenzy of buying, which pushed up prices and dried up inventory.

Then, almost overnight, that cheap financing disappeared as the Fed embarked on a rate-hiking campaign to stamp out inflation. Mortgage rates surged from about 3% at the end of 2021 to nearly 6.5% by the end of 2022 and hit a peak just under 8% in late 2023.

Inventories of homes for sale never recovered. Though they have been climbing lately, they remain well below historic levels, partly because people with low mortgage rates aren’t moving as much. More than half of homeowners with a loan are sitting on mortgages below 4%. While that’s great for their finances and the economy—putting more disposable income in consumers’ pockets—it’s creating deep-rooted incentives to stay put.

“You’d have a hard time going back in history and finding three-year periods where housing became so unaffordable so quickly,” says Mark Calabria, who held top economic and housing policy positions in the Trump administration.

First-time buyers are in a crunch. Starter-home prices would need to fall 32% to a median $244,000, mortgage rates would need to drop to 3.15%, or incomes would need to rise by nearly 50% to make a house affordable for a typical first-time buyer, according to estimates by the NAR’s Evangelou.

Cheaper home loans should help a bit. Rates on 30-year fixed-rate mortgages have dropped a percentage point since May to 6.2%, according to Freddie Mac. That has pushed average monthly payments down to $2,700 from $3,000 early in the year, according to Apollo Global economist Torsten Sløk.

Aside from making payments more affordable, lower rates have the knock-on effect of increasing market inventory by enticing existing homeowners to trade up to a bigger house. That could free up starter homes for first-time buyers.

But shelter costs are still rising, up 5.2% over the past year, according to the latest inflation reading. While shelter inflation has been easing, a return to prepandemic levels of affordability won’t happen over the next few months or even quarters, says Fannie Mae Deputy Chief Economist Mark Palim. “It’s likely to be something that will take multiple years to accomplish,” he says.

One big hurdle is that new housing isn’t coming fast enough. Even if construction ramped up to 1.1 million units a year, it would take until at least 2029 to reduce the country’s housing shortage, says National Association of Home Builders economist Danushka Nanayakkara-Skillington.

Why aren’t builders stepping up? One reason is labor shortages, including skilled tradesmen like electricians and plumbers. Builders also say their margins are getting squeezed by higher labor costs, tariffs on raw materials like lumber, and rising land prices. Concerns about a slowing economy are weighing on builder confidence, and low affordability points to a “coming slowdown” in housing starts, according to Sløk.

“When interest rates were down, a lot of things got hidden even as policies drove up the price of land,” says Carl Harris, a small builder in Wichita, Kan., who chairs the National Association of Home Builders. Even as prices in his area have risen, Harris says his margins have fallen. Also driving up prices, according to the NAHB, are regulatory costs like building codes and zoning issues, which now account for nearly a quarter of the cost of new homes.

A Helping Hand From Washington

No entity affects housing more than the federal government, which influences everything from lending standards to mortgage rates and loan forgiveness. Harris and Trump are promising pro-housing policies, which industry groups applaud. “It’s gratifying to hear, finally, that supply is truly the answer to the affordability crisis, not more demand,” says NAHB President Jim Tobin.

For first-time buyers, Harris wants to provide up to $25,000 for down payments, with the most going to first-generation buyers. She also wants to expand tax credits for developers who build affordable rental housing and create a $40 billion “housing innovation fund.” The Harris campaign says the combined proposals would lead to the construction of three million new units.

“You have to change the economics to get builders to build what we need. It’s a change that would unleash private capital,” says housing consultant Jim Parrott, who advised on the plan.

Whether these incentives would really help is debatable. Critics say the down-payment assistance could push up prices as more buyers enter the market. The developer incentives could be difficult to implement and wouldn’t address more intransigent issues, like higher land and labor costs. A $25,000 down payment would go a long way in most parts of the country and could qualify buyers for an FHA government-backed loan for a home up to $714,000. But it will make less of a difference in high-price parts of the country like California, New York, and suburban Washington, D.C.

Trump’s plans aren’t clear. The GOP platform says that Trump would “promote homeownership through tax incentives and support for first-time buyers,” without giving details on what such support would entail. The former president “has a real plan to defeat inflation, bring down mortgage rates, and make purchasing a home dramatically more affordable,” said campaign spokeswoman Karoline Leavitt in a statement.

Other measures, according to Trump’s campaign, include cuts to environmental regulations, which some builders say would reduce costs. He has also said that mass deportations of illegal immigrants would lower housing costs by reducing demand, though builders lament that it could diminish their labor pool.

Another Trump idea is building on federal land, a concept that has made it into the GOP platform and Republican-sponsored bills in the House and Senate. Calabria, who headed the Federal Housing Finance Agency under Trump, says the proposal could particularly help in Western states like Nevada, where the federal government owns 80% of the land.

“It also puts pressure on localities. If they want to preserve that land, then they need to come up with a real solution” to local housing problems, Calabria says.

Yet while the federal government can incentivize developers, projects are in the hands of state and local governments. California, with some of the highest home prices, has long epitomized the paralysis arising from fights over zoning, roads, and infrastructure, and local homeowners objecting to new development. Regulations are a popular explanation for why it takes longer to build homes in the Northeast and Western U.S. than in the South and Midwest.

Another roadblock is likely to be Washington’s typical paralysis. The next Congress will probably be split, with Republicans controlling the Senate and Democrats holding the House, both with razor-thin margins, according to the latest political forecasts.

It isn’t entirely bleak out there for buyers. Take Austin, Texas, where building boomed during the pandemic. “Right now, we’re seeing a lot of opportunities for buyers,” says Emily Chenevert, CEO of the Austin Board of Realtors. “There’s more inventory than there has ever been.” Prices in Austin in the second quarter were 14% below their pandemic peak in 2022, a rarity among the 100 largest metropolitan areas and one of the steepest declines.

But the pullback in Austin may reflect local factors far more than national trends. Nationally, listings of homes for sale in August were 26% below 2019 levels, according to Realtor.com. The difference is most pronounced in the Northeast, where listings are down an average 57%.

Betting on Home Builders

Builder stocks are trading near 52-week highs, reflecting hopes that the rate cut coming next week will be the first of many. Lower rates could ease pricing pressure on builders, reducing the need to offer mortgage “buy-downs” and other incentives. A buyer of a $400,000 home would save roughly $200 a month in payments, or $2,400 a year, if rates drop from 6% to 5%.

Investors could buy the group through an exchange-traded fund like iShares U.S. Home Construction. Some analysts also favor tilting to builders focused on the entry-level market, given that they are the most economically sensitive and stand to benefit if Harris’ proposals make it through Congress.

D.R. Horton, for one, was a Barron’s stock pick in August. Oppenheimer analyst Tyler Batory favors the stock in the event that Democrats sweep, saying in a recent note that the company “is uniquely positioned to gain share given its scale and focus on entry-level housing.”

BTIG analyst Carl Reichardt Jr. also likes builders geared to affordability, including PulteGroup, D.R. Horton, and Lennar, all rated Buys. “The companies most likely to provide affordable housing in a sea of unaffordability are the companies with the greatest scale and lowest costs,” he says.

Bill Smead, chief investment officer and founder of Smead Capital Management, has trimmed some of his builder stocks because he sees a market downturn in the short term. But he sees a long runway for the stocks and will be ready to step back in if they stumble.

“I want to be in them for the next 10 years,” says Smead, whose $6.1 billion Smead Value fund holds more than 12% in Lennar and D.R. Horton. “If these stocks go down 20% when the market gets slugged hard, that would be a great buying opportunity.”

For prospective home buyers, meanwhile, lower costs can’t come fast enough. Kristine Shanteau, for one, has struggled for years to save for a down payment in Huntington, N.Y., a Long Island suburb of New York City. Homes list for about $900,000, up 43% from 2019. That has put ownership out of reach for Shanteau, 51, who works at a cosmetology school. “I have a very stable job and make a decent living,” she says. “I cannot afford a house.”