Housing affordability: Barr on shelter costs and the Fed's role

The news

Federal Reserve Governor Michael Barr devoted a September 23 speech to housing affordability, setting out why shelter costs have become a burden and what could ease them. He also addressed monetary policy, saying the FOMC’s rate increase last week, which he supported, was an adjustment in the right direction and that further policy changes are likely to be needed in his base case.

Key takeaways:

• The Atlanta Fed’s Home Ownership Affordability Monitor stood at 68 in July 2026, the lowest in 21 years; a reading below 100 means a median-income family cannot afford a median-priced home.
• Barr put the national housing supply shortfall at roughly 2 million to 5.5 million units, about 1 to 4 percent of a stock of roughly 150 million.
• Rent of primary residence in the consumer price index was 34 percent higher in August than in December 2019, though shelter inflation has slowed to about 2.75 percent annually.
• He tied lower mortgage rates to lower inflation, which he said the Fed is working toward.

Our analysis

Barr separated the affordability problem into income and cost. On income, he cited Census Bureau and FHFA data showing that real median household income rose roughly 17 percent between 2000 and 2024, while real house prices increased approximately 70 percent. He noted that 68 percent of prospective first-time buyers in 2024 said they could not afford a down payment, and that about half of all renters are cost burdened, meaning they pay 30 percent or more of income on rent. About one-fourth of renters devote at least half of their income to it.

On the cost side, he named four drivers of the shortage. The first is land use rules, including zoning and permitting that limit density and add time and expense. The second is stagnant productivity in construction, which BLS data show has not grown over the long run since 1987. The third is the legacy of the housing bust: the number of new homebuilders fell by half from 98,000 in 2007 to 49,000 in 2012, and more than 30 percent of construction workers left the industry. The fourth is post-pandemic cost inflation, with the constant-quality price index for new single-family homes up roughly 40 percent between 2020 and 2025.

Mortgage rates add a separate drag. About half of outstanding mortgages carry rates of 4 percent or lower and nearly 80 percent are below 6 percent, which discourages owners from selling and, in tight markets, can push prices up. Property taxes and home insurance have also risen.

This is where policy enters. Barr said short-term policy rates influence longer-term borrowing costs, including mortgage rates, though many other things do as well. His conclusion was that mortgage rates are generally lower when inflation is lower, so the Fed’s contribution to affordability is to bring inflation down. The implication for borrowers is uncomfortable, since in his base case further policy adjustments are likely.

He also discussed policies outside the Fed’s rate-setting role. The Community Reinvestment Act, which the Fed administers for the banks it supervises, supported over $430 billion in loans and investments in 2024. The low-income housing tax credit has created on average 110,000 affordable units per year, about 4 million apartments since it began. Barr also pointed to recent bipartisan legislation covering rental assistance, zoning barriers, homeownership counseling, commercial-to-housing conversions and manufactured housing.

Room for disagreement

Barr’s own statistics point to limits on the Fed’s influence. He emphasized that land use regulation is a local matter with both benefits and costs, and that the supply shortfall is a relatively small share of the housing stock whose effects are outsized because markets need vacancy to function. Those are factors the central bank does not control, and a reader could conclude that interest rate policy plays a secondary role in affordability.

The other tension is between near-term and long-term effects. A higher policy rate that the Committee judges necessary for price stability can raise borrowing costs in the short run, while Barr’s argument is that lower inflation eventually brings lower mortgage rates. The speech asks households to accept the first for the second without estimating how long the path might take.

Finally, the estimates of the shortage vary by method. He cited Freddie Mac at 3.7 million units and the National Association of Realtors at 5.5 million, and said a precise figure is hard to pin down.

What to watch

• The next monthly reading of the Atlanta Fed’s affordability index, after July’s 68.
• Rent and shelter components of the consumer price index; Barr put shelter inflation at about 2.75 percent a year.
• Mortgage rates as the Fed adjusts policy, and whether the lock-in effect eases.
• Implementation of the housing legislation Barr cited and any Fed or interagency follow-up on the Community Reinvestment Act.