Why Housing ‘Efficiency’ Isn’t Making Homes Affordable

We do need innovation, but not in the form of new interest rate manipulations or complex securitization schemes.

After a lecture I gave last fall in Salt Lake City, a university professor who teaches real estate finance challenged my assertion that financialization was driving housing costs higher. She argued that the best way to lower home prices and improve affordability was to make housing finance more liquid — essentially, to pump more top-down money into the housing sector.

As she stated it, her belief was that greater investment would lead to economies of scale, increasing efficiency and ultimately driving down costs. In fact, she asserted that it was the only thing that would drive down costs. She used consumer electronics as an example of where this is occurring. Then, she asked for my reaction.

I responded by acknowledging that efficiency gains can, in theory, lower costs, but only under certain conditions. Housing is different from industries like electronics, where competition and technological advances are driving down prices. I argued that the housing market today functions more like the market for healthcare or university education, where more liquidity has only resulted in costs consistently increasing faster than inflation.

That wasn't a satisfactory answer to this professor, to the point where she has taken some liberties online to suggest that I "clearly [haven't] read the economics and finance literature on the Great Depression," and that my proposed "solutions would exacerbate the problem by vilifying investors and reducing the potential for economies of scale."

It is this last assertion that I want to explore today. Is increased efficiency and economies of scale in the housing market really the key to affordability? I suspect that a lot of people believe that it is. I don't.

Unlike industries such as electronics, where efficiency gains lead to lower prices through competition and innovation, housing behaves more like healthcare or higher education. The more money we pour in, the more bloated, inefficient and expensive it becomes. Instead of lowering costs, increased liquidity in housing generally fuels speculation, consolidates market power, and creates financial instability. The result isn’t affordability — it’s an ever-expanding cycle of booms, busts and bailouts.

But, to give this professor her due, it hasn't always been that way.

The Post-WWII Housing Market: When Efficiency Worked

The professor was partially correct — but only in the context of a very specific historical period. In the two decades following World War II, the U.S. housing market did experience real efficiency gains. Millions of returning veterans, supported by federal programs like the GI Bill, entered the housing market at the same time that the federal government dramatically expanded its role in home financing.

The interventions that began in the 1930s — such as Fannie Mae, the FHA and the Home Owners’ Loan Corporation (HOLC) — allowed for widespread mortgage access, fueling a surge in home construction that created the first generation of what we now think of as suburbanization.

This infusion of capital enabled efficiencies and economies of scale to take hold. Builders developed large-scale production methods, reducing the cost per unit. Supply chains for materials and labor became more sophisticated, making home construction more predictable and efficient. The result was a steady decline in inflation-adjusted home prices, making housing accessible to a growing middle class.

This is seen clearly in the Case Shiller Home Price Index, with a long decline between 1953 and 1968, roughly the last 15 years of the first generation of suburban expansion.

As notable as it might have been, this moment of efficiency was short-lived. The very thing that enabled it — the 30-year mortgage — also led to its unraveling. While this long-term, fixed-rate mortgage made homeownership more accessible, it also introduced a structural weakness that became evident as inflation rose in the late 1960s and throughout the 1970s.

Local banks, which had traditionally financed home loans, could not hold these long-term mortgages on their balance sheets without being exposed to massive interest rate risk. When inflation surged, these banks found themselves locked into low-yielding mortgages while their costs soared. Unable to roll over their portfolios, many bled cash each month, leading to a series of banking crises.

The "solution" to these crises became successive government bailouts, each increasing in scale, as mortgage lending shifted from local banks to national and global financial markets. What began as a well-intentioned mechanism for stability and efficiency instead fueled the financialization of housing, where speculative investments and securitization replaced steady, incremental development.

This shift can also be seen in the Case Shiller Home Price Index.

From the 1970s onward, housing became increasingly financialized. Instead of simply being a place to live, homes became investment vehicles. Wall Street firms, institutional investors and government-backed enterprises took over mortgage lending. This replaced the relationship-based, local banking system with a highly leveraged, globally interconnected one. Mortgage-backed securities became a core financial instrument, not only fueling speculation but also serving as reserves on bank balance sheets, intertwining housing finance with the broader financial system.

Each financial crisis — Savings & Loan in the 1980s, the subprime mortgage crisis in 2008 — led to even greater centralization of housing finance, as short-term fixes reinforced the dominance of national lenders and government-sponsored entities. The repeated cycle of risk, collapse and bailout has made housing a primary vehicle for financial speculation rather than a stable, accessible market for homebuyers.

Today, the product isn’t a home; it’s the promise to pay contained in the mortgage note. The buyer isn’t an individual or a family; it’s a financial institution acquiring that mortgage note and the decades of promised payments.

The innovations and efficiencies of scale we see in the housing market today are innovations in finance, not in home construction. These financial innovations have not been good for homebuyers or for affordability.

A Bottom-Up Approach: Local Housing Finance Solutions

Now, we find ourselves in the fifth housing bubble of the postwar era, this one driven largely by Federal Reserve intervention and Wall Street speculation. The Fed’s prolonged low-interest-rate policies, combined with aggressive quantitative easing and the wholesale purchasing of mortgage-backed securities, have inflated home values beyond what incomes can support, while investors — flush with cheap capital — have snapped up homes as financial assets, pricing out regular homebuyers.

The presence of institutional investors, private equity firms and real estate investment trusts in residential real estate means that homes are no longer priced based on local wages and household demand but instead on their value as tradable financial instruments. The housing market has become less about shelter and more about financial engineering — where mortgages are bundled into securities, traded globally, and used as reserves for financial institutions rather than being tied to the real needs of people and their places.

Ironically, the one-dimensional efficiency of financialization has created a massive gap in the real market for homes. Large financial institutions are eager to fund single-family homes in bulk or large apartment complexes that fit their investment models, but they have no interest in small-scale, entry-level housing. A so-called "efficient" housing finance system has, in reality, left little to no capital available for small, incremental projects — like converting single-family homes into duplexes, adding backyard cottages, or financing small starter homes. This is despite the overwhelming demand for entry-level housing.

At Strong Towns, we have long argued that local governments must step in to fill this gap. One example of a government doing just that is Muskegon, Michigan, where city leaders have leveraged Tax Increment Financing (TIF) to support the development of starter homes on empty lots. By using local funding mechanisms rather than relying on Wall Street capital, Muskegon has found a way to build the kind of housing that meets community needs quickly, at scale and with affordable prices.

All of this is discussed in depth in "Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis," a national bestseller. And, at the end of last month, we released the first of three toolkits to help cities take action. This initial toolkit focuses on the local regulatory reforms necessary to become a Housing-Ready City. More will follow, including one on local housing finance. In the meantime, we’d love to put your city on the map, if it is indeed housing ready.

Let’s be clear: The theoretical efficiencies a college professor might imagine occurring are not evident in the housing market. At least, they are not manifesting in lower prices. We do need innovation, but not in the form of new interest rate manipulations or complex securitization schemes.

The innovation we need is a bottom-up revolution — one where local governments take the lead in deregulating and financing the construction of entry-level housing, fostering an ecosystem of incremental developers, and ensuring that real homes get built for real people. That’s the Strong Towns approach, and there’s nothing preventing your community from aggressively pursuing such a path to housing affordability.