What’s causing the shortage?
O’Leary attributes America’s current housing shortage to two primary factors: mortgage interest rates and regulatory barriers.
First, he points out that for years, Americans enjoyed a low-interest-rate environment. Homeowners who locked in these favorable rates are now reluctant to sell, fearing the steep jump in rates they'd face when buying a new home.
“So you’ve got millions of people with mortgages that are 3.7, 3.8[%] that don't want to sell for another three years,” he explained. “They’re not selling because they don't want a 7.2% mortgage. That supply is off the market.”
Mortgage rates surged after 2022 but have eased somewhat in recent months. According to the latest data from Freddie Mac, the average 30-year fixed-rate mortgage now sits at 6.12%.
The second issue, according to O’Leary, is the significant regulatory hurdles that stifle new housing construction.
“The other insidious problem, and California is a good example, the policy on regulation is so punitive to set up a tract of land to build housing that many people don't even do it,” he said, noting that he avoids investing in real estate in California or New York because getting permits is “impossible.”
O’Leary argues that these regulatory barriers are also keeping home prices elevated. “Up to 40 to 50% of the embedded cost of each house is the regulatory cost of getting through the process. How insane is that? So somebody has to deregulate that.”
He’s not the only one to highlight these issues. Federal Reserve Chair Jerome Powell recently acknowledged in a press conference that the housing market is “in part frozen,” as many homeowners are hesitant to sell due to being locked in at lower mortgage rates. Powell also noted the increasing difficulty of finding and zoning land in desirable areas, asking, “Where are we going to get the supply?”
An analysis by Zillow published in June estimated the housing shortage to be 4.5 million homes as of 2022.
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Read MoreBenefiting buyers or sellers?
While many prospective homebuyers in a competitive market might welcome an extra $25,000 to help with their down payment, the actual impact of such a program may not align with its intended goals, according to Carla Krolage, an associate professor of economic data science at the University of Regensburg.
In a 2022 paper, Krolage examined a similar subsidy program in the German state of Bavaria, where eligible households were given 10,000 euros to purchase or build a home. Her analysis found that “the prices of single-family homes increased by approximately 10,000 euros more in Bavarian border regions,” effectively offsetting the subsidy. The result, she noted, was consistent with “a full capitalization of the subsidy.”
Her conclusion is clear: “Instead of making house purchases more affordable for families, the subsidy scheme led to a rise in house prices and mainly benefited sellers of properties.”
Although Harris’s plan targets first-time homebuyers, whereas Bavaria’s subsidy applied to a broader population, Krolage expects similar effects.
“I expect the discussed $25K subsidy to also raise home prices and redistribute part of the benefits to sellers, but to a lesser extent than the Bavarian scheme. Roughly speaking, the smaller the target group of a subsidy, the smaller the effect on aggregate price levels,” Krolage told MarketWatch.
It’s also worth noting that Harris’s housing strategy extends beyond the down payment subsidy. Her plan also includes building 3 million new homes during her first term as president and reducing regulatory hurdles to accelerate housing construction — measures Krolage sees as more effective.
“I think that some other aspects of Harris's proposal are more efficient. For example, incentivizing the construction of new homes through tax incentives and cutting red tape in construction brings down construction costs. This increases housing supply, which can help bring down prices overall,” she remarked.
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