Biden's top economist says the key to ending the housing crisis is giving cities and developers monetary incentives to build more affordable homes

• Biden's top economist says high housing costs are a big part of economic pessimism in the US.
• Council of Economic Advisers Chair Jared Bernstein says federal incentives are key.

Americans aren't happy about the state of the economy. Consumer sentiment is low and heading even lower.

That's despite a remarkable economic recovery since the pandemic thrust the country into a recession. We've managed to see inflation come down while maintaining low unemployment — something many economic experts warned couldn't happen.

Jared Bernstein, chair of the US Council of Economic Advisers, says the disconnect between the data and Americans' views of the economy likely has a lot to do with persistent sticker shock.

"I think it all comes down to inflation," Bernstein said during a Wednesday policy briefing at the Economic Policy Institute in Washington. "I think it's about prices. I think we're trying to talk to people about disinflation, and what they really want is deflation. They want their old prices back, dammit."

Price growth has slowed in recent months, but broad price levels themselves are unlikely to fall without a deep, massively destructive recession. If people knew how badly the economy would need to be doing to cause deflation, they might think otherwise, Bernstein added.

One cost that doesn't look like it's coming down anytime soon: housing. Rent and home prices are through the roof and housing affordability has reached record lows.

A severe housing shortage is the main culprit for steep housing costs. The US is short anywhere between an estimated 1.5 million and 5.5 million homes. High interest rates are scaring off both potential buyers and sellers and slowing rates of homebuilding. And high mortgage rates haven't brought down home prices as much as they were expected to, creating an "interesting headwind" for the economy, Bernstein said.

Housing policy is largely in the hands of local and state government, but there are ways for the federal government to intervene and push for more homebuilding and lower housing costs, including subsidizing rents, homeownership, and development.

The government needs to step in, Bernstein said, because affordable housing is suffering from market failure.

"Building affordable housing doesn't pencil out in the current economic environment," he said.

Demand-side policies, which focus on subsidizing demand for housing, including rental assistance programs like Section 8 vouchers, are important, Bernstein said, but the administration is "very, very focused on the supply side." That means the government is more concerned with subsidizing an increase in supply to address shortages.

In May, Biden unveiled a "Housing Supply Action Plan," which includes efforts to incentivize denser development and more affordable housing construction. Bernstein said the administration has two main strategies. One is incentivizing local governments to get rid of exclusionary zoning, which often makes it illegal to build anything but single-family homes. Under Biden, cities and towns that reform their land-use regulations to make it legal to build denser, more affordable housing get a leg up in their applications for certain federal grants.

"If you can get extra points in your bid to build a transportation hub under the bipartisan infrastructure law because you are putting affordable housing in that area – well, that seems to us like a pretty good deal. And that's exactly what we're doing," Bernstein said.

The second way Biden is working to lower housing costs is helping developers with costs by expanding tax credits. The low-income housing tax credit subsidizes purchasing, building, and renovating affordable housing — and it's broadly popular among a variety of interests.

"Low-income housing people like it, bankers like it because they buy the credits and use them against their tax liability, and builders like it," he said. "And so that's a nice triumvirate there."

But the administration's efforts aren't enough. Congress has failed to pass larger grants that Biden has proposed to get rid of single-family zoning. Experts say the federal government needs to be much more aggressive in rewarding — and punishing — state and local governments based on their housing efforts.