“In theory, we can build our way to affordability. In reality, the way we go about financing housing will never let us.”
Continuing TPR’s coverage debunking the conventional wisdom dominating the housing policy debate and degrading local control over planning and land use, TPR excerpts this essay from Strong Towns Founder, Charles Morohn, for its insightful examination of the market dynamics that affect—and require—increasing housing costs beyond simple supply-side economics. Here, Morohn breaks down why even in markets where supply is unconstrained, prices increase, and markets panic when prices drop leading to less housing development. Read the full piece here.
There’s a theory about housing that has taken hold with a kind of religious fervor: If you want to make housing more affordable, just build more of it. Supply and demand. Simple economics.
This narrative is now dominating housing policy discussion across the political spectrum. Deregulate, upzone, speed up approvals, let the market work. And if you build enough homes, the theory goes, prices will come down.
But here’s the question almost no one asks: What happens when prices actually start to fall?
Because that’s not just a hypothetical. It’s already happening in places like Phoenix, Atlanta, Miami, Dallas, and more. And the response hasn’t been to declare victory. It’s been panic. Builders are walking away. Lenders are tightening. Policymakers are rushing to backstop the system.
The theory says we should be celebrating and accelerating home production even more to get prices to levels that would actually be affordable. The reality demonstrates otherwise.
The Moment We’re In
In The Atlantic, Rogé Karma recently pointed out that housing prices are rising fastest in the very cities once seen as escapes from high-cost coasts, places like Phoenix and Dallas, long considered “easy to build in.” These Sun Belt metros were supposed to be immune to the affordability crisis. Now they are the new epicenters.
In Slate, Henry Grabar reports that even in fast-growing Forsyth County, Georgia, just outside Atlanta, local officials are freezing new development. Why? Gridlock, school overcrowding, and resident pushback. In other words: growth fatigue.
Yet, beneath the surface, fragility is spreading. Forbes reports rising mortgage delinquencies, not just in subprime loans, but among overstretched middle-class buyers. AP reveals that nearly 15% of pending home sales fell through in May, the highest cancellation rate for that month on record. And home starts dropped in May by nearly 10%, with permits falling even further. Builder sentiment is the lowest it’s been since 2012.
If “build more” was going to bring prices down and stabilize the system, we wouldn’t be seeing these mixed signals. If the core problem were simply that prices are too high due to a lack of supply, everything would be as simple as theory suggests. It’s not. That’s because the system isn’t designed to survive prices coming down.
In theory, we can build our way to affordability. In reality, the way we go about financing housing will never let us.
Price Drops Don’t Lead to Supply. They Kill It.
There are two conversations happening in housing. They rarely overlap.
In one, housing is shelter. It’s a human need. This is the language of advocates, reformers, and policy experts.
In the other, housing is a financial product. It’s an asset, an investment, a lever for wealth-building. This is the language of lenders, underwriters, and major developers.
When advocates call for lower prices, they’re thinking in terms of shelter. But in the finance world, falling prices are a warning sign, a trigger for pullback, not expansion. This is why a price drop doesn’t lead to more supply. It leads to less.
Case in point: KB Home recently canceled nearly 9,700 optioned lots. CEO Jeffrey Mezger explained:
“We just determined that the market movement in those submarkets wasn’t something that we felt comfortable would hit our returns.”
This is the part of the housing system that few people talk about: More supply depends on rising prices. The financial side of the system is wound so tightly, so overleveraged, that prices must rise not just for profit, but for stability. And, in the housing system we’ve built, it’s the financial side that dominates.
The theory says: build more, prices go down. But that’s not how things work in reality. When prices actually go down, builders get nervous, lenders get cautious, financing dries up, and projects disappear.
New construction has collapsed not because of a lack of land, permits, or even demand but because the financial risk has become unmanageable. High interest rates, shrinking margins, labor shortages, volatile materials costs… none of these are softened by falling home prices.
Fannie Mae’s own data shows housing starts and permits are dropping sharply. This isn’t a supply chain problem. It’s a confidence problem.
And confidence depends on continual home price appreciation.
So when demand softens or prices flatten, the system doesn’t accelerate supply. It slams on the brakes.
Affordability Theater
What do we do when the prices drop and the system starts to wobble? We don’t fix it. We reengineer the financial math.
We stretch mortgage terms. We lower credit standards. We backstop lenders. We find new ways to get buyers into overpriced homes without actually lowering the price. That is the Housing Trap, and it has been our approach to housing affordability since the Great Depression. It continues to be our approach today.
In June, the head of the Federal Housing Finance Agency publicly demanded that Fed Chair Jerome Powell cut interest rates, not because of inflation or unemployment, but to “help more Americans” qualify for mortgages. Translation: lower rates so people can borrow more and housing prices can stay high.
Then came the next innovation: cryptocurrency as collateral. FHFA ordered Fannie Mae and Freddie Mac to accept crypto holdings toward mortgage eligibility without requiring conversion to U.S. dollars. A win for the blockchain crowd, maybe, but also another signal that the only thing we won’t tolerate is price correction.
In July, FHFA rolled out a new credit scoring model—VantageScore 4.0—that allows rent and utility payments to count toward credit history. Again, the story we spin is about inclusion. The reality is that we’re finding more ways to stretch people into homes they still can’t afford.
And in parallel, Congress passed a dramatic expansion of the SALT deduction cap, raising it from $10,000 to $40,000. The stated goal: provide tax relief for homeowners. But the effect is to make it easier for wealthier households to carry high-tax, high-priced properties—including second and third homes—subsidizing ownership without touching the root problem of cost.
Then there’s the latest title insurance experiment. Fannie Mae is piloting a new program to bundle title risk just as Wall Street bundles mortgage risk. It’s being sold as a way to cut closing costs and streamline the buying process, but it accentuates a core fragility that helped spark the 2008 housing crash: treating risk as something that disappears when you pool it.
And finally, we have new survey data suggesting over 72% of 2025 buyers say they’d opt for longer mortgage terms to make their monthly payments manageable. Stretch that mortgage out to 40 or 50 years. Spread the cost across your entire adult life. Government-backed mortgages with a 40- or 50-year timeframe are great products to arbitrage on Wall Street. For buyers, it’s a great deal only if you don’t understand compound interest, if home prices rise for decades at rates higher than inflation, or if you’re just desperate enough to sign.
In each of these moves, we have intricate stories we tell ourselves about our intentions. We say we’re solving for affordability. Yet, if we step back and do an honest assessment, what we’re really doing is helping people borrow more in order to pay more for housing.
The goal is to keep housing prices elevated while offering token affordability for some through financial engineering. That’s what a fully financialized housing market looks like. You’re not the homebuyer; you’re the mortgage payer. The product that matters isn’t the home; it’s the decades of payments you have promised to make.
Read the full piece as published by Strong Towns, here
- Log in to post comments
