September 23, 2026 A Long-Term View on the Costs of Shelter Governor Michael S. Barr At “Housing Affordability 2026: A Community Development Summit,” hosted by the Federal Reserve Bank of Chicago, Chicago, Illinois Share --> --> --> --> --> --> Watch Live Thank you for the opportunity to speak to you. 1 My interest in access to affordable housing spans several decades. During my career, I have worked on housing and mortgage market reform and promoted access to credit for low- and moderate- income (LMI) households. I've seen firsthand what public–private partnerships in low-income communities can mean for improving affordable housing, from the South Bronx, to the South Side of Chicago, to the Mississippi Delta, to South Central L.A., and places in between. Now at the Federal Reserve Board, I oversee our Division of Consumer and Community Affairs and participate in rate-setting decisions that affect the economy. By pursuing maximum employment and stable prices, the Federal Reserve seeks to create the stable macroeconomic environment necessary for households to maintain purchasing power, earn reliable incomes, access housing, and, ultimately, build capital through homeownership and other forms of investment. The Economic Outlook Before I turn to my thoughts about housing, I want to spend a few moments sharing my views on the broader economy and monetary policy. As you know, the Federal Reserve has what we call a dual mandate, which is to achieve maximum employment and stable prices. Our economy has experienced a series of shocks over the past year and half: the imposition of tariffs, the conflict in the Middle East and continued disruptions from Russia's war on Ukraine, and, more recently, a surge in investment demand to support the artificial intelligence (AI) buildout. These shocks have contributed to upward price pressures. Economic growth is strong and the labor market is solid, but inflation is above our 2 percent target and not clearly trending toward target in a timely way. Moreover, risks to achieving our inflation target have increased, while risks to the labor market have receded. We needed to recalibrate monetary policy to reflect the balance of risks to our mandate goals. The FOMC took important action to that end last week by increasing the policy rate, which I supported. In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction. In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion. We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that. The Costs of Shelter Today Let's return to the main topic. By a variety of measures, high rents and high home prices, relative to income and savings, have made shelter increasingly unaffordable for many Americans for a number of years. I'll begin with homeownership and then turn to renting. The Federal Reserve Bank of Atlanta maintains a Home Ownership Affordability Monitor (Monitor) that includes an affordability index, in which a value below 100 indicates a median-income family would not be able to afford a median-priced home given the current mortgage rate. According to the Monitor, homes were, on average, affordable after the housing price crash of 2006 until the COVID-19 pandemic hit, when the affordability index fell sustainably below the threshold of 100 and kept falling to a value of 68 in July 2026, the lowest in 21 years. 2 Real, constant-quality house prices are at a record high in many places around the country. 3 Another obvious factor that affects the cost of buying a home is mortgage rates. Mortgage rates are high relative to the pre-pandemic level. This combination of high prices and high rates puts homeownership out of reach for many families. Some ask what the role of the Fed is when it comes to mortgage rates. Our short-term policy rates affect longer-term borrowing rates, including those for mortgages, but many other things affect mortgage rates as well. As I noted earlier, the Fed pursues its mandate to foster maximum employment and stable prices. Mortgage rates are generally lower when inflation is lower, and we are working toward that goal. With respect to the rental market, affordability is also a problem for many households. In 1980, 55 percent of rental housing units rented for $1,000 or less. 4 Adjusting for inflation, that $1,000 would be about $3,500 today, but only 20 percent of homes rent for less than that price. 5 Today, about one-half of all renters are cost burdened, meaning they pay 30 percent or more of their income on rent, and about one-fourth of renters dedicate at least half of their income to rent. 6 It's true that, on a quality-adjusted basis, the rent increases track improvements in housing quality and amenities, but that is little comfort for someone who cannot afford the high rent burden that follows. Families need affordable shelter. One side of the affordability challenge is income and savings and to what extent wages and salaries keep pace with housing costs. Over the past two decades, inflation-adjusted household incomes have risen far more slowly than home prices: Between 2000 and 2024, real median household income increased roughly 17 percent, while real U.S. house prices increased approximately 70 percent. 7 Lagging incomes compound the challenge of accumulating enough cash to get through the upfront costs of both buying and renting. According to the Federal Reserve's Report on the Economic Well-Being of U.S. Households, 68 percent of prospective first-time buyers in 2024 said they could not afford a down payment. 8 Renters face a similar cash flow barrier when moving into a new place: Upfront costs can include the first month's rent, security deposit, application fees, and sometimes the last month's rent. Fannie Mae found that affording the upfront costs of renting is a leading financial pain point when renting or moving into a new rental home. 9 Inadequate Supply of Housing Drives Home Prices The other side of the affordability challenge is housing costs. And let me focus for a while on homeownership. A major force driving high home prices is a shortage of supply relative to demand. Housing production has remained below historical rates for many years. It is challenging to arrive at a precise estimate of the housing shortage. But estimates put the U.S. housing supply shortfall at roughly 2 million to 5.5 million units, depending on the methodology used and accounting for regional differences. 10 Against a U.S. housing stock of roughly 150 million units, these estimates imply a shortfall of approximately 1 percent to 4 percent of the total stock. 11 While relatively small as a share of the nation's housing stock, the deficit can have an outsized effect on homeownership affordability because housing markets require a certain level of vacancy and available inventory to function efficiently. Factors Driving the Housing Shortage I would cite four major factors driving the housing shortage. The first is that land is a finite resource, and its development is heavily shaped by state and local government policies. Over several decades, the accumulation of local land use, zoning, permitting, and building regulations has shaped where housing can be built, how densely it can be developed, and what types of housing are permitted. Land use regulations mandating lower density, such as single-family-home-only construction and minimum lot sizes, have become more widespread, especially in suburban areas, with the effect of limiting supply and supporting home price appreciation. 12 This can exacerbate housing shortages and lead to higher prices around urban centers. Other local regulatory barriers, including processes for obtaining construction permits, have become stricter, adding to the time and expense of homebuilding and, at the margin, likely limiting supply. 13 Because many of these rules are applied at the local level, variations in rules have also increased, limiting the economies of scale for developers. Land use regulation is a local issue, and it involves many benefits such as attention to school capacity and infrastructure investments, as well as costs. One of those costs is likely higher home prices that make homeownership less affordable for new buyers. Low construction activity has become more widespread across geographies over time and is not confined to cities where historically it has been difficult to build, such as New York, San Francisco, Boston, and Washington, D.C. Land use and other regulatory restrictions are a factor in the slowdown in home construction in traditionally high-growth Sunbelt markets, such as Atlanta, Phoenix, and Miami. 14 Decades of fast growth and change there have led communities understandably to try to slow things down. The second factor—which is, in part, tied to the first—is the lower rate of productivity growth in the construction sector relative to other sectors of the economy. Bureau of Labor Statistics (BLS) data show that construction productivity, including home construction, has exhibited little long-run growth since 1987. 15 Less strong productivity growth translates to higher costs, all other things being equal. This puts pressure on profit margins and makes it more difficult to build more affordable homes. This lower rate of productivity growth may be related to the labor-intensive nature of construction relative to many other industries. Many of the physical processes such as pouring foundations, framing walls, installing structural systems, and finishing interiors are not replaceable with machines or AI, for example—at least not yet. Construction has adopted technologies such as computer-aided design, building information modeling, and digital project management, but these tools often improve coordination and information management without fundamentally changing how homes are
