In Washington, the quest for solutions to housing affordability is intensifying. Federal Housing Finance Agency (FHFA) Director Bill Pulte is contemplating a reduction in the number of credit reports needed for mortgages in order to lower closing costs. Meanwhile, some suggest that lenders should broaden mortgage eligibility criteria. With mortgage rates becoming a heavy burden, politicians frequently urge the Federal Reserve to cut interest rates or to take action in the markets to reduce long-term rates.
While each of these proposals has its appeal, merely increasing purchasing power in a time of limited supply will only drive prices upwards. The real issue in America is not a lack of financing options, but rather an insufficient number of starter homes available at prices that average families can afford.
Take credit-report costs as an example. A standard tri-merge credit report currently ranges from $80 to $100. In response, the FHFA is exploring options for bi-merge or even single-bureau reports to cut costs. Additionally, the agency is working to enhance credit report competition.
However, this approach has its drawbacks. The discrepancies in scores generated by the three credit bureaus and two score providers could lead lenders and borrowers to favor whichever bureau provides the most advantageous scores.
This could create uncertainty for investors, typically resulting in higher yield demands. Ultimately, borrowers might find themselves paying more than they save. For instance, on a $400,000 mortgage, even a one-basis-point increase in the interest rate can lead to about $1,000 in extra costs over 30 years, outweighing any initial savings.
Easier Credit and Lower Rates Propel Demand, Not Supply
The national mortgage eligibility rules are already quite accommodating in areas where housing is affordable. In the least-expensive housing markets, borrowers on the lower end of the credit spectrum can qualify with FICO scores around 620, can secure loans that exceed 100% of the home’s value, and may have debt-to-income ratios surpassing half of their gross income. This hardly constitutes tight credit.
In higher-priced markets, elevated home prices often exclude weaker borrowers. Relaxing underwriting standards risks repeating a familiar cycle where easier credit leads to increased home prices and higher mortgage risk.
Lower interest rates are impactful, but they primarily serve to boost demand rather than supply. The lessons of the pandemic illustrate this well. The introduction of ultra-low interest rates significantly increased purchasing power while housing supply remained limited. Demand surged overnight, yet construction could not keep pace. Consequently, much of the benefit manifested in higher home prices.
Focus on Building More Starter Homes
A more effective strategy would be to increase the availability of starter homes, defined as those priced at less than four times the county’s median household income. A household that struggles to qualify for a $400,000 home might do just fine with one priced at $350,000—closer to what many young families seek: a place to own, grow into, start a family, and secure long-term financial stability.
Our recent research indicates that starter homes haven’t vanished. Builders produced over 800,000 from 2015 to 2024—not enough to meet the demand, but enough to highlight feasibility factors. These homes are predominantly built on less expensive land and smaller lots.
New residential developments hold the greatest potential for generating starter homes in both scale and affordability. Our estimates suggest that slightly smaller lots could have facilitated approximately 3.4 million additional starter homes over the past decade, with prices about 10% to 15% lower.
This reveals a need for policymakers to intensify efforts in strategies that demonstrate effectiveness. While infill and transit-oriented apartments have their place, they do not provide the same combined benefits of lower prices, ownership opportunities, family-sized units, and large-scale production as new subdivisions do.
State-Level Action is Essential for Zoning and Lot-Size Reforms
Equally important is the need for reform at the appropriate governmental level. With approximately 34,000 zoning jurisdictions across the country, altering land-use regulations at the local level is exceedingly challenging. Zoning authority ultimately resides with the states, and the recently enacted federal 21st Century ROAD to Housing Act does not alter this fact. Therefore, state action is critical—especially in regions like Texas, Florida, Arizona, the Carolinas, Georgia, and Colorado, where historical building patterns indicate significant potential for starter-home development.
State legislatures should pre-empt local regulations that unnecessarily hinder progress, particularly excessive minimum-lot-size criteria in new subdivisions that escalate home prices without valid health, safety, or infrastructure rationale. In states with a history of large-scale construction, permitting smaller lots could quickly translate to more affordable owner-occupied homes.
America has not lost the capability to build starter homes. They continue to emerge on lower-cost land and where local regulations permit smaller lots. The reality is that excessive regulations in too many places have made it increasingly difficult to build these homes. States need to ensure that families can legally construct the affordable homes they need.
Tobias Peter and Ed Pinto are Co-Directors at AEI Housing Center.
This column does not necessarily reflect the views of HousingWire’s editorial team or its owners. For editorial inquiries, please contact the editor responsible for this piece: [email protected].
