As the housing market wrestles with high mortgage rates and affordability pressures, the question of who is steering the ship—federal or state leaders—has become urgent. In 2024, real estate is caught in a push-pull between national policies like interest rate hikes and tax changes, and state-level actions on zoning, rent control, and affordable housing. The result is a market shaped by overlapping forces that do not always move in sync. With a new administration incoming in 2025, the balance of power could shift again. Already, renters and buyers feel the effects of decisions made in both capitols and city halls across the country. Visualizing housing starts, permits, and completions data provides a baseline for understanding how policy shifts translate into construction activity on the ground.
Rising Mortgage Rates Reshape Homebuyer Costs
To combat inflation, the Federal Reserve sharply raised interest rates starting in 2022, which drove up mortgage rates across the country. The average 30-year fixed mortgage rate climbed from historic lows around 3% in early 2021 to about 7% by late 2023. This jump had a dramatic effect on home-buying affordability. By the time mortgage rates peaked near 7.8% in October 2023, the monthly principal-and-interest payment on a typical median-priced home was 78% higher than it had been in 2021. A buyer purchasing the median home with a standard down payment in 2021 would pay roughly $1,360 per month on their mortgage, but by late 2023 that payment exceeded $2,890. How the upper-middle class is driving the housing market recovery looks at which income segments remain active buyers despite these higher costs.
The Lock-in Effect and Sales Slowdown
Such a surge in financing costs priced many families out of the market. Home sales cooled significantly nationwide as a result. Existing-home sales fell to an annual pace under 4 million units in late 2024, the slowest sales rate since 2010. Would-be sellers also stayed put to hold onto their cheap existing mortgages, creating a lock-in effect that kept housing inventory unusually tight. Homeowners who had refinanced at 3% or lower in 2020–2021 had no incentive to sell and buy again at 7%, effectively freezing the supply of existing homes available for purchase. This dynamic means that even as demand softened, prices remained relatively sticky because inventory was simultaneously constrained.
| Period | 30-Year Fixed Mortgage Rate | Median Home Monthly Payment | Annual Existing Home Sales |
|---|---|---|---|
| Early 2021 | ~3.0% | ~$1,360 | ~6.1 million |
| Late 2023 | ~7.8% | ~$2,890 | ~4.0 million |
| Late 2024 | ~6.8% | ~$2,600 | ~3.9 million |
Federal Tax Policy Influence on Housing Demand
Tax policy set in Washington also shapes housing demand, particularly through the mortgage interest and property tax deductions. The 2017 Tax Cuts and Jobs Act capped the state and local tax (SALT) deduction at $10,000 and limited the mortgage interest deduction on new loans. Research indicates these changes had a measurable impact on home values in high-tax, high-cost states. By increasing the after-tax cost of owning an expensive home, the SALT deduction cap specifically cut into price growth in affected markets. One study found that home price appreciation in high-SALT counties slowed by nearly 0.8 percentage points per year due to the new cap—about a quarter reduction in the normal growth rate. Expensive homes in pricey, high-tax areas saw an even larger hit, with annual price growth rates almost 1 percentage point lower than they would have been without the cap. The housing market is crashing but not where you might think examines how these regional tax effects are playing out in specific markets.
Regional Variation in Federal Policy Impact
The SALT deduction cap illustrates how a single federal policy can affect states differently. California, New York, New Jersey, and Illinois—states with high property taxes and state income taxes—saw the largest impacts. Homeowners in these states lost a significant tax benefit that had effectively subsidized the cost of homeownership. In contrast, states with lower taxes experienced minimal disruption. This uneven impact has fueled ongoing political debates about whether to raise or eliminate the SALT cap, with representatives from high-tax states pushing for relief and representatives from low-tax states arguing that the cap promotes tax equity.
High-Cost State Market Adjustments
Markets in high-SALT states adjusted in several ways. Some buyers shifted their price range downward to avoid the tax penalty. Others moved to lower-tax states entirely, contributing to population outflows from California and New York to Texas, Florida, and Tennessee. Builders in high-tax states faced headwinds as demand softened for higher-priced homes, while builders in low-tax states saw relative advantages. These market adjustments demonstrate how federal tax policy can redirect housing demand across state lines.
State and Local Policy Levers
While federal policy sets the macroeconomic conditions, state and local governments control many of the specific rules that directly affect housing supply and affordability. Zoning regulations, building codes, permitting processes, and rent control ordinances all fall under state and municipal authority. These policies can either amplify or counteract federal-level trends. A positive outlook for the state of the housing market reviews the factors builders should watch as state-level policies evolve alongside federal conditions.
Zoning Reform and Affordable Housing Mandates
Several states have enacted zoning reforms aimed at increasing housing supply. California passed laws allowing duplexes and lot splits in single-family zones. Oregon eliminated single-family-only zoning statewide. Minnesota required cities to allow triplexes in residential areas. These reforms represent a significant shift from the post-war era of exclusionary zoning that restricted density in most residential neighborhoods. Early evidence suggests these changes are producing modest increases in housing supply, but implementation faces challenges from local opposition, infrastructure constraints, and construction financing hurdles.
- California: ADU legalization led to over 80,000 accessory dwelling unit permits since 2018
- Oregon: Statewide elimination of single-family-only zoning in 2019
- Minnesota: Triplex legalization in residential zones (2023)
- Montana: Missing-middle housing reforms in larger cities
- Washington: Preemption of local growth limits near transit stations
The Push-Pull Between Federal and State Forces
Federal and state policies do not always work in concert. When the Federal Reserve raises rates to cool inflation, it makes construction financing more expensive, which can undermine state-level efforts to boost housing supply through zoning reform. A builder who gets approval for a new project under relaxed state zoning rules still needs to secure construction loans at rates that may make the project financially unviable. Federal Reserve rate uncertainty affects home builders and the housing market by creating financing conditions that complicate project planning and pricing decisions.
Rent Control as a State-Local Countermeasure
Rent control provides another example of the federal-state policy dynamic. While the federal government has no direct role in rent regulation, several states and cities have implemented or strengthened rent control measures in response to affordability pressures created in part by federal monetary policy. Oregon passed a statewide rent cap law. California enacted the Tenant Protection Act limiting annual rent increases to 5% plus inflation. Cities like St. Paul and Santa Ana adopted local rent control ordinances. These measures aim to protect tenants from rapid rent increases driven by the supply constraints that federal policy has not addressed.
| Policy Type | Federal Level | State Level | Local Level |
|---|---|---|---|
| Mortgage rates | Federal Reserve sets short-term rates | Limited influence | None |
| Property tax deduction | SALT cap ($10,000) | State tax policy sets base | Mill rates set locally |
| Zoning | None (land use is state power) | Broad reform authority | Ordinances and variances |
| Rent control | None | Preemption or authorization | Ordinances where allowed |
| Building codes | Model codes developed federally | Adoption and amendments | Enforcement and inspection |
Policy Shifts on the Horizon
The incoming administration in 2025 could bring significant changes to the federal-state balance in housing policy. Potential shifts include changes to the SALT deduction cap, modifications to FHA and GSE loan limits, deregulation of residential construction, and infrastructure spending that affects housing development. Presidential housing policy positions affect home builders and the housing market by shaping expectations around regulatory costs, tax incentives, and federal housing program funding.
What Builders and Buyers Should Watch
For builders, the interaction between federal monetary policy and state land-use regulation will determine where development makes financial sense. Markets in states that have streamlined permitting and reduced impact fees will be more resilient to high-rate environments. For buyers, understanding which level of government is driving the policies that affect their local market helps in timing purchases and choosing locations. The long-term trend toward greater state involvement in housing supply policy is likely to continue regardless of federal direction, as housing affordability remains a pressing concern in both blue and red states. Smart strategies for builders navigating a housing market normalization provide guidance for operating in this complex multi-level policy environment.