It’s time to fix housing in America: Start with financing and zoning

The belief that reaching the American dream starts with owning a home is at the heart of an idea that emerged with post-World War II prosperity and has remained a standard ever since. But the reality is that millions of Americans in cities and states around the country struggle to afford housing, either to own or to rent.

For nearly a century, homeownership has been the largest source of wealth for most American families. Safe, traditional mortgages have been pivotal to achieving financial security and independence. But as home prices and rents skyrocket — and because outdated policies make small mortgages expensive for lenders and often unavailable for borrowers seeking low-cost homes — many families are struggling to afford reliable housing. 

This is a serious problem for people across all demographics, but Black, Hispanic, rural and Indigenous households are particularly affected. And some have turned to riskier and more costly alternative financing arrangements, such as land contracts, seller-financed mortgages, lease purchases and personal property loans.

Approximately 36 million Americans have used such arrangements to purchase a home. They are pitched to potential homebuyers as a pathway to homeownership when traditional mortgages are not available. But they often result in borrowers not achieving their goal of owning and can hurt their future homeownership and wealth-building opportunities.

To examine the barriers that borrowers face when trying to purchase safe and affordable homes, The Pew Charitable Trusts studied various alternative financing arrangements. One of the most important differences among these arrangements is the question of when the buyer receives full legal ownership of a property. In mortgage transactions, the deed — and therefore, full ownership — is typically given to the buyer at closing. However, in a land contract, for example, the seller keeps the deed and retains legal title to the property for the duration of the financing term, while the borrower typically holds what is called "equitable title." This can create ambiguity about the buyer’s rights and responsibilities, such as who pays for taxes and upkeep, and lead to quick evictions that strip buyers of any potential home equity.

Financing challenges aren’t the only roadblock to homeownership. Many Americans who want to own a home are only able to rent for now. And as rents continue to climb, many of these are finding it difficult to save for a down payment in order to get on the path toward ownership. This comes against the backdrop of a national housing shortage, stemming largely from strict zoning and land-use policies that make it harder and more expensive to build new housing, which results in higher rents and puts homeownership further out of reach.

Pew has examined several jurisdictions that updated their zoning codes to allow more housing and found that this flexibility helped these jurisdictions add new housing stock faster than new households were being formed. And while rent remains detrimentally high in many communities throughout the country, this research shows that communities updating their zoning laws in this manner kept rent growth to less than 7 percent over the most recent six-year period, even as rents rose by 31 percent nationally.

The housing shortage is a major driver of both inflation and homelessness, placing a heavy financial burden on Americans from all walks of life. There is no one solution for U.S. policymakers, but helping people obtain safe and affordable home financing is a good start toward ensuring that households capable of handling a mortgage can obtain one.

Zoning reform that allows more housing to be built is also a necessary step in solving the housing crisis and ensuring that everyone has a roof over their heads.

Alex Horowitz is a project director with The Pew Charitable Trusts’ housing policy initiative.