The Great Housing Reset: Why unwinding the housing bubble could be the best thing for America

For decades, owning a home has been the cornerstone of the American Dream. It meant security, success, and freedom. But today, that dream is slipping out of reach for millions of Americans — not because we don’t build enough homes (though that’s part of it), but because we’ve turned housing into an over-financialized, tax-advantaged investment vehicle.

Housing is no longer just shelter. It’s a highly subsidized asset class — and arguably, the most distorted market in the American economy.

From mortgage interest deductions and capital gains exclusions to restrictive zoning and Federal Reserve asset purchases, U.S. housing policy has privileged homeowners over renters, speculators over families, and asset price growth over affordability.

It’s time for a reset — one that unwinds the monetary premium embedded in home prices and redirects policy toward making shelter accessible again.

A House Is Not Just a Home — It’s a Tax Shelter

Unlike most countries, the U.S. allows mortgage interest on home loans to be deducted from taxable income, excludes up to $500,000 in capital gains from home sales, and has long encouraged housing investment through the tax code. In parallel, the Federal Reserve has supported mortgage-backed securities (MBS) to the tune of nearly $3 trillion — creating demand and suppressing borrowing costs.

The combined effect is a housing market where prices are expected — even engineered — to rise. Since 2000, home prices have grown more than 170%. Inflation is up about 67%, and median income about 70%. That 100-point gap is what we can think of as housing’s monetary premium — the extra Americans pay because they believe housing will always go up in value, and because government policy helps ensure it.

The Fed’s Role in Supporting Housing Prices

The post-2008 monetary regime took housing support to new levels. In an effort to keep credit flowing and the economy stable, the Fed began buying hundreds of billions in mortgage debt. By 2022, it held $2.7 trillion in MBS — a staggering form of market intervention.

As interest rates fell and borrowing became cheaper, home prices surged. Buyers increasingly competed not just with one another, but with institutional investors backed by cheap leverage. The very act of stabilizing the market ended up further entrenching housing as a speculative asset.

Now, the Fed is signaling it wants to unwind these holdings and return to a Treasury-only portfolio. That slow tapering of MBS support may finally allow the monetary premium to shrink — but not without resistance.

Political Capture and the Housing Status Quo

Housing policy in the U.S. is not just economic — it’s political. The current regime benefits several powerful groups:

• Homeowners who rely on home appreciation for retirement security.

• Real estate agents and lenders who earn more from higher prices.

• Institutional landlords who benefit from limited supply and rising rents.

• Local governments that fear voter backlash if property values fall.

And so, despite growing unaffordability, tax advantages for homeowners persist. Zoning laws continue to restrict supply. Investors still enjoy favorable treatment through 1031 exchanges and depreciation loopholes. All while 36% of Americans — renters — receive almost none of these benefits.

What Other Countries Get Right

The U.S. is an outlier. Most peer democracies do not inflate housing in the same way. Germany, for example, has no mortgage interest deduction. Nearly 50% of households rent — with strong tenant protections and long-term leases. As a result, German housing is stable, relatively affordable, and not a speculative vehicle.

In Singapore, 80% of residents live in public housing — not the stigmatized kind, but clean, modern units that are often privately owned through long leases. The government treats housing like infrastructure, not a windfall.

America’s approach is not inevitable. It’s a policy choice.

What a Reset Could Look Like

Unwinding the housing premium doesn’t mean a crash. It means a gradual, policy-driven realignment that reduces the advantages given to housing as an investment and restores it as a form of shelter.

Here’s what that might include:

• Phasing out the mortgage interest deduction and capping capital gains exclusions on primary residences for high-income earners.

• Eliminating 1031 exchanges for residential investment property.

• Tying federal infrastructure dollars to local zoning reform — forcing municipalities to allow multifamily housing.

• Shifting federal support from homeowners to renters through universal housing vouchers and renter equity programs.

These reforms could generate hundreds of billions in federal savings over a decade — money that could be reinvested in affordable housing construction, climate-resilient upgrades, and direct assistance to renters.

We Can Have a Softer Landing

Under a gradual unwind scenario, home prices might stagnate in nominal terms for a decade — meaning a 25–30% correction in real terms as inflation and incomes catch up. This wouldn’t be a collapse. It would be a soft landing.

• Affordability would improve dramatically.

• First-time buyers would face less competition.

• Renters could build wealth through new programs.

• Intergenerational inequality would ease.

Yes, older homeowners would see less appreciation. But younger Americans — many locked out of ownership entirely — would gain access to homes, mobility, and family formation.

A Better American Dream

The American Dream doesn’t have to mean getting rich off your house. It can mean raising a family in a home you can afford. It can mean being able to move for a job without getting crushed by taxes or rent. It can mean wealth built through wages and savings — not through luck and leverage.

We’ve spent decades inflating fortunes through shelter. It’s time to build something more durable: dignity, access, and security — not speculation.

This is the great housing reset. And if we do it right, it won’t just make homes more affordable. It will make America stronger.