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- [00:06]
A
Affordability has become one of the most salient political buzzwords. So what's driving concerns about the cost of living and how likely and how effective might attempts to address these concerns be? I'm Allison Nathan and this is Goldman Sachs Exchanges. Today I'm sitting down with two of my colleagues in Goldman Sachs research. David miracle is chief U.S. economist and Alec Phillips is chief U.S. political economist. David. Alec, welcome back to Exchanges.
- [00:34]
B
Thanks Alison.
- [00:35]
C
Thanks.
- [00:36]
A
So David first just set the stage for us again. We're hearing a lot about affordability these days, but what does the economic data actually say about affordability and how it has evolved?
- [00:48]
B
Yeah, so at first glance it might seem a little bit surprising that this has become a big political theme. For one thing, real income, how much spending power you have adjusted for inflation, is more or less back on its pre pandemic trend, not just in aggregate, but across all of the different income quintiles, at least on average as well. So if in 2019 you had known where we were going to wind up, you wouldn't necessarily have thought that all of the extraordinary things that have happened over the last few years, the pandemic, the inflation surge, has happened. Where we are right now in terms of total spending power, doesn't seem that strange. The other reason that this is a little bit surprising is that the U.S. of course, has a very high level of income, even relative to other advanced economies. Often when I'm traveling abroad talking to our foreign clients, they express a lot of surprise that the US perceives that as an affordability problem because US income, in fact income even in some of the poorer US states is higher than in many other advanced economies. I think the area where it is clear that we have an affordability problem is really housing, especially owner occupied housing in the rental market. It's true that rent is a share of income for the typical family that rents is somewhat higher than it's been on average historically, not drastically higher than last cycle. But it's on the high end of historical norms. But it's really the cost of financing your own single family owner occupied housing that stands out by historical standards. Prices have risen a lot now. Mortgage rates have risen a lot as well. And both the down payment as a share of income and the mortgage financing costs as a share of income are now both quite high by historical standards as a share of the income of a typical young couple, say, that might be buying a home.
- [02:34]
A
But let me just ask what might be just a very basic question, but why does housing affordability really matter? Because it's been A problem for a while now?
- [02:43]
B
No, it's a completely fair question. You could say if people, especially people who rent, can afford to consume what they could afford before and in fact more than that, if their spending power has grown at the normal rate, then why is it a problem that one particular item in your consumption basket is increasingly expensive? If on average overcross all the things you buy, you're just as well off. I think the answer is that housing, especially owner occupied housing, is special in two senses and one, especially for lower income households, housing is the primary, in some cases the only way that they save and build wealth. The second reason is that housing is not just any other consumer good in that housing is often kind of a gateway to social mobility. In many areas with better schools, better job opportunities, the great bulk of the housing stock is single family owner occupied housing, especially if you have a larger family, it's just not realistic oftentimes to rent in those areas. And so lack of access to single family housing can also mean lack of access to good schools, good jobs and social mobility.
- [03:53]
A
So housing might be the exception, but it's an important exception that has real implications.
- [03:56]
B
That's right.
- [03:57]
A
I might ask you more about that, David, but let me turn to you Alec, because obviously affordability has become a key part of the platform for the administration. They're talking about a lot heading into the, the midterms, the main event this year. When you think about how the administration is framing this affordability problem, which as David just said is potentially narrower than a lot of people assume. Are they framing it as a cost of living problem, a wage problem? What's the administration's take on it?
- [04:25]
C
First, I would say the way the administration has reacted to it has been more reactive. Rather than coming up with a comprehensive agenda. We've seen a focus on certain issues. As David mentioned, housing has definitely come into focus. Other prices, there hasn't really been as much of a focus on the income side of things. And I would say backing up and just thinking about why is this a sort of a political issue at the moment? To some extent I think it, it does have to do more with just the level of prices in certain areas rather than the measured inflation rate that we could look at today. And if you go back over the last five years and compare certain high frequency purchases to where they would have been right before COVID I think the challenge that the administration has is there are just certain things. Egg prices were an important issue at one point. Certain food prices, the price of cars, where it takes time for people to get used to higher prices, even if those prices aren't really increasing very much right now. And I think it's difficult to address those through policy changes. But that's, I think more what the administration is trying to do. On the income side, I don't think that there's anything really that we can point to right now in terms of a policy focus. Certainly over the last year we did see tax cuts and what should be tax refunds coming over the next few months, probably about $100 billion in aggregate coming out of last year's fiscal package. And so on the income side, I think it's likely that the administration will focus more on that and the benefit to consumers and taxpayers there than on anything that they can do going forward in terms of wage related or income related policies.
- [06:20]
A
But David, let me follow up on something that ALEC just said because it seems that consumers are having difficulty digesting the actual level of prices. But I guess your point is that yes, the level of prices is higher than it was, but wages have kept up with that. So on average consumers should be having the same purchasing power. But there seems to be a disconnect. What explains that?
- [06:44]
B
That's right. So real income is income adjusted for prices. And you might ask how could real income possibly be back on its pre pandemic trend after this big inflation surge? And the answer is income has also grown more quickly than it would normally grow. Wages in particular grew at a much faster rate during the peak of the inflation boom than they would have grown in a typical year. So there were early moments where prices spiked, wages hadn't yet caught up. At that point on an inflation adjusted basis, people were doing worse than usual. But at this point, faster growth in income and faster growth in prices have roughly balanced each other out. Now you know, an economist might say, well, if you can afford the same goods as you would have expected to be able to afford before, even allowing for normal growth in purchasing power as the economy achieves productivity gains, then you're just as well off before. And I think at this point it's well understood that members of the public don't see it that way, that there's still a lot of frustration that for incumbent politicians who were in power during the inflation surge, they know all too well there's a lot of frustration with the high level of prices, even though incomes have kept up at least on average and on average for each income quintile.
- [07:56]
A
And I think that is key too, on average, because there are certain products, certain prices, and certainly the price of housing has exceeded that income growth. So that's really what consumers are feeling.
- [08:07]
B
I think that's part of it. And part of it is just a sense that this is unfair sometimes. There is an assumption that the income gains I would have achieved anyway even without the inflation surge. The inflation surge is someone else's fault. Prices have risen a lot. I should be able to afford even more. I think realistically, income wages in particular probably would not have risen quite as much as they did without the inflation surge, though.
- [08:31]
A
Alec David talked about housing being the central core of the problem. From the economic perspective, from what we're seeing where affordability has really gotten more stretched. So what is the administration specifically doing to address that and what is it proposing to do?
- [08:47]
C
Late last year there was an expectation following Treasury Secretary Bessant's comments, I think it was in September that they were going to announce a housing emergency. There was an expectation that there was going to be a suite of measures announced to address the issue. What we have seen so far is really just a couple of things coming through executive orders that probably don't quite match expectations a few months ago. The two things so far that we have seen are MBS purchases of mortgage backed security purchases by Fannie Mae and Freddie Mac. $200 billion is what has been announced and that's essentially what Fannie and Freddie have in their existing portfolio capacity. So there are regulatory limits imposed in terms of how much additional MBS they can purchase that would take them up to their limits. Now theoretically the administration could raise those limits, but this was like the first easiest step that they could take there. And our mortgage strategists have estimated that will reduce mortgage spreads and all else equal mortgage rates, like on a 30 year mortgage by 15 to 20 basis points. That was probably already anticipated to some extent before the announcement. And even though those purchases have, you know, mostly yet to happen, that is now kind of in the price. So that part of it is done. And then the other piece that we saw announced is a ban on institutional purchases of single family homes. This is probably not a major factor in terms of pricing or in terms of supply, but nevertheless addressed an issue that was out there politically. From here it is a little bit more difficult to see what else gets done. There have been some other things that have floated around that have not been announced and where it looks like the administration sort of contemplated moves but, you know, is maybe not going to follow through. One was allowing 401k withdrawals to purchase homes and then the other was establishing a 50 year mortgage through Fannie and Freddie rather than the traditional 30 year mortgage, both of those floated, got mixed receptions and it's not clear that anything is going to happen there. I think from here what they could still maybe do would be some additional things through Fannie and Freddie. So possibly providing financing for home building rather than just home purchase, possibly lowering some of the related fees that Fannie and Freddie charge. So guarantee fees, loan level pricing, that sort of thing. And then I think the other thing that's out there, which is probably more incremental, but you know, decent chance that it happens is actually legislative. So there is housing legislation that might pass the House as soon as next week, the week of February 9th, that would take some incremental steps on zoning reforms. So giving states and localities financial incentives, frankly relatively small financial incentives, but nevertheless pushing them a little bit to streamline zoning, reforming, environmental permitting and some other things like that. So from here it looks like it's going to be more incremental. We'll probably see at least a little more activity.
- [12:10]
A
And David, it's interesting though because when you look at the reason why housing is so unaffordable right now, you identify basically we have a big housing shortage, which ALEC talked about. Some of these measures are attempting to address but quantify that problem for us in terms of how much more housing do we actually have to see in order to really fix this problem.
- [12:30]
B
There's a kind of cyclical element to all of this. Housing is expensive at the moment because prices rose a lot. Interest rates have risen a lot since last cycle. Prices didn't really come down to the degree that they normally would. Mortgage financing costs will vary over the course of the business cycle. So we're at a point right now where probably are on the higher end. But there is also more of a long term affordability challenge here and it has a few pieces. One is just that we have all of these regulatory obstacles and zoning restrictions that ALEC talked about that have made it hard to build single family housing in the US for quite a long time. This problem, because these restrictions are at the state and local level, is not a simple one for a new president to come in and try to solve. I think we've seen in recent administrations that that presidents of both parties would like to do something about it, but because the restrictions are local in nature, it takes the sort of incentives that ALEC talked about to do that and hasn't been simple to do so far. So that's been one issue. We've been building too little because of the zoning restrictions and other Regulatory obstacles.
- [13:34]
A
And this is far, far predated the current administration.
- [13:37]
B
Yeah, that's right. The second obstacle is that productivity growth in the construction sector has been quite weak over the last several decades. Now, some of that is connected to the first problem. If you make it more difficult to build, more difficult to build in efficient ways, then you're going to limit productivity growth in the sector. And we find looking at a comparison of advanced economies around the world, at how their regulations have changed, how their productivity has changed, that seems to be part of the issue. But some of it is just you think of a comparison between say a TV and a home. People still want their homes to be individualistic and to have a lot of construction labor that goes into them. These are not things like many other goods in the economy that we've been producing in mass around the world and become massively more efficient at producing through technological innovation. Technological innovation within the construction sector has actually been quite weak over the last several decades. And the construction sector has not benefited as much from technological advances in other sectors like information technology, because it tends to be more distant on the supply chain from the sectors that have experienced the fastest productivity growth. So some of this is bound up again with the regulatory issue, but even beyond that, there has been just a kind of long term weakness in an underperformance of construction sector productivity growth. And then the third issue, and this will sound odd at first for a country as large as the U.S. but there's been a shortage of buildable land close to major urban centers, as well as a shortage of highly skilled construction labor that's also been an obstacle to building housing at the pace that we probably should have been building it to keep up with kind of population driven demand. On the land side, again, this overlaps with the zoning restrictions. You could always build up, but if you're not going to do that, eventually you get to the point where you've kind of built on all of the land that is close enough to urban centers, close enough to where most of the jobs are, that people are not that interested in living ever further away from the downtown. On the labor side, I think the key issue is that there was an exodus of workers from the sector after the housing bubble burst. And in an industry that relies on a bit of an apprenticeship model to train the next generation, that's had a long lasting echo effect. So both land and labor shortages have also been a real constraint on how quickly we can ramp up home building and alleviate that shortage.
- [16:07]
A
Right. So this is not going to be resolved anytime soon. It's going to be a gradual process. Alec, as we hear the administration talking about affordability in this election year, there's been a lot of other initiatives proposed outside of housing. Give us a quick rundown of what else they had put on the table to address broad affordability concerns.
- [16:28]
C
The other places where we've seen some activity, one which started last year, was on prescription drugs. And so there we actually have seen some announcements lowering prices, predominantly in the Medicaid program. So that doesn't affect most consumers. I mean, it does affect some, but then also a few areas outside of that program that are prices available to everybody. The other place that we saw an announcement recently that got a lot of focus was on credit cards, where the president proposed a 10% interest rate cap on credit card interest rates and then also endorsed limits on interchange fees. So essentially the fees that credit cards charge retailers, that presumably get passed through to some extent to consumers. Right now, it doesn't look like either one of those is going to happen, but that was at least something that came out. I would say from here it does seem likely that the Trump administration will tick down the list in the consumer basket and come up with other areas where they can take some action. Food prices inevitably come up in this discussion, and it seems likely that we will probably hear more about that over coming months, even though last year they did take some action on certain things where there were either regulatory or other issues involved. I will point out in this entire affordability discussion, one thing that we haven't talked about so far is gasoline prices, which typically is the number one political issue when it comes to prices. But at least right now, those are not a central focus. To the extent that that changes, that probably will come back into focus. And then I think an interesting question will be, do we see the White House or President Trump go outside of what the federal government might typically get involved with and look at other fees or other prices that would typically not come into this discussion. So subscription fees, some of the tech platforms, the price of air travel, like, things like that. I wouldn't be at all surprised if we see some sort of ostensibly pro consumer announcements over the next several months. It's hard to know whether any of that would actually have any real impact. I think in general, a lot of this sort of thing ends up being more about the announcement and less about actually implementing the change. And then I would say the two big questions on the affordability agenda that are out there. One is, will there be a second fiscal package? Right now, I think the basic answer is no. But President Trump has proposed many times over the Last several months $2,000 per person tariff rebate, which would obviously go to this affordability question. And then the other is, what's the response to a tariff ruling? Will we see a reduction in tariffs and would that be interpreted as helping consumers? We think the Supreme Court probably strikes down many of the tariffs, that the administration basically replaces those and you get a small reduction, like maybe a couple of percentage point reduction in the effective tariff rate. So probably not a big change there. But those are two other questions that are lingering out there and theoretically could have a bigger impact on all of this if we turn out to be wrong.
- [19:52]
A
But Alec, let's just be clear because if you think about the list you just gave, from subscription prices to airline fees to some kind of rebate check, the President or the administration cannot do all of those things unilaterally, at least for some, if not most of them. They need Congress. Correct?
- [20:10]
C
That is the challenge that the administration has is just about everything I mentioned requires congressional approval. The exception we talked before about housing. The reason that they can take a bunch of moves on housing is because Fannie and Freddie are in conservatorship and are essentially being run by the federal government. The reason that we have seen movement on prescription drugs is because, number one, the federal government's footprint there is pretty large anyway. But also number two, there was a negotiation process set up during the Biden administration that allows for negotiations with those companies to take place. And so you know, where there are specific tools in place right now, you can say, yes, something might happen. But in most of these areas, it seems unlikely that Congress will act. And without congressional action, the President's ability to actually implement these things pretty limited.
- [21:05]
A
So my takeaway is there are a lot of proposals, probably relatively little that's actually going to get done. And the core of the housing problem is just going to take a very long time to resolve. Thanks again for joining me, David and Alec.
- [21:18]
B
Thanks very much for having us.
- [21:19]
A
Thanks and thank you for listening to this episode of Goldman Sachs Exchanges which was accorded on Thursday, February 5th, 2026. I'm Allison Nathan.
- [21:32]
D
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