How to Fix Housing: Thoughts On Possible Housing Emergency Declaration

Time to update MADRE with new insights and thoughts

Earlier today, I saw a flurry of activity on RETwit (real estate Twitter) about the possibility of President Trump declaring a “national housing emergency” sometime in the fall. The Washington Examiner broke the story after an interview with Treasury Secretary, Scott Bessent. But a shorter and more concise coverage can be found on Fox:

As Christian Datoc, the reporter who broke the story, says above, the Trump Administration is concerned about supply, demand, closing costs, and is seeking ideas.

Much of the talk in the clip above, as well as social media generally, is about interest rates. We all know how hard Trump is pushing the Fed for significant rate cuts, using housing as the excuse. Except that’s merely an excuse; rate cuts will not make housing more affordable. They are needed to keep the government’s borrowing costs down, which is why the cuts will happen, but lower rates will not make housing more affordable.

Not that anyone in position of power has reached out to me, and not that anyone in such a position would take my suggestions seriously… but I have some suggestions for the Trump Administration if they are actually serious about making housing more affordable.

I have already made most of them in a 2023 post titled Policy Proposal: MADRE, which stands for Make the American Dream Real for Everyone. In light of recent changes and learnings, I am updating MADRE and presenting it again as a set of ideas to be considered if you are serious about making housing affordable anytime soon.

MADRE Revisited

Of course, I’ll encourage you to go check out the original post. But there are three main parts:

Tax Free Transfer of Residential Real Estate

MADRE eliminates all federal taxes on the sale of any residential property. All local and state transfer taxes on the sale of residential real estate as well (Supremacy Clause).

This exclusion from capital gains taxes extends to multifamily properties. As long as the property is residential in nature, it transfers tax-free. That would encourage large apartment operators to consider conversion into condos, which are ideal for young people just starting out in their careers.

Punitive Taxes on Rental Income

MADRE encourages selling residential real estate, but the flip side is that MADRE strongly discourages the renting of residential real estate.

I propose an 80% tax on all income derived from a residential rental property; this will include “fees” that are in fact additional rent.

Yes, this is a ridiculous amount. That’s the point.

Make Purchase Mortgage Income Tax-Free

Under the current tax code, interest income is taxed at the ordinary income tax rate. In addition, some wealthier taxpayers are also subject to Net Investment Income Tax. We wipe them both for interest income from purchase mortgages.

It is important that this tax-free status only attach to purchase mortgages, not HELOCs, refis, or second mortgages. Because what we want to do is to encourage becoming a purchase mortgage funding provider.

It is also important that this tax-free status should apply to all income taxes: federal, state and local. Again, refer to the Supremacy Clause.

The New Proposals

The above three comprised MADRE in its first version.

The idea was to free up supply by incentivizing sales of existing houses, while crushing demand for residential investment properties. By providing a significantly tax-advantaged outlet in purchase mortgages for those who might have invested in residential rental property, the concept was to replace rentals with seller financing at scale.

I went through the math in the original post, but suffice to say that on my calculations, investing in purchase mortgages tax-free is superior to 7% pre-tax net rental yield.

I thought that when you convert landlords to purchase mortgage providers at scale, there should be a surge in mortgage availability as investors flock to the very attractive tax-protected returns coming from that new system. This will become more important with the changes I now propose to MADRE.

Now… these three MADRE proposals do require legislation by Congress. And there is going to be resistance, for sure. But to the extent that any Administration can push for housing affordability, I would start with these.

Updating MADRE

There have been some changes to the economy, the housing market, and how I understand money since I wrote that. The most significant is how I now understand money creation.

First, refer to this post where I discuss Dr. Richard Werner and his money creation theory of banking.

If he is correct, and as yet no one has countered his data-based arguments, then banks are not intermediaries. They actually create new money when they make loans.

Werner distinguishes between productive lending, non-productive lending, and consumption lending. Productive lending is when banks loan money to businesses and people who can then produce more products and services. Consumption lending is things like credit cards and personal loans so people can spend on whatever—food, vacations, TVs and so on. Nonproductive lending, which is our big concern, is when banks loan out money for purchasing financial and real assets.

According to Werner, productive lending is fantastic and adds to a nation’s GDP as more and more businesses hire people, expand operations, pay for supplies, and generally produce more products and services that people want. Consumption lending creates inflation as more money ends up chasing more consumer goods and services. Nonproductive lending ends up with asset bubbles, as more newly created money chases after the same number of assets.

Mortgages are, of course, precisely the kind of nonproductive lending Werner is concerned about. With a mortgage, nothing is produced; it is merely that ownership changes hands.

The United States famously has the 30-year fixed rate mortgage, backed by the government indirectly through GSEs like Fannie Mae and Freddie Mac. FHA, VA, USDA, and other agencies also provide (or cause to be provided) low-cost long-term mortgage loans.

The consequence of such easy and cheap mortgages is obvious: asset inflation. That fact alone explains why home prices have skyrocketed out of reach for most middle-class Americans today.

Given that, MADRE alone will not make housing affordable. It needs new provisions. Here they are.

Guarantee Construction Loans, Not Mortgages

The first policy change is to redirect all government agencies as well as the GSEs to shift from backing mortgages to backing construction loans. (That includes loans for renovations to existing houses, by the way.)

On one level, this is simply shifting incentives from demand side to supply side. If builders find it easier and cheaper to get construction loans, then they’ll build more houses. Since most people agree that housing is in crisis because of supply-demand imbalance, it makes sense to shift financial incentives away from demand and towards supply.

On another level, construction loans (including renovation loans taken out by homeowners) are precisely the kind of productive lending that creates jobs, creates new products, and increases productive services (plumbers, electricians, etc.). Increased business activity in construction naturally leads to increased activity in other areas as well—those workers have to eat, get to work, get new work boots, etc.

Disincentivize Mortgage Lending by Banks

The second change is to make it very unattractive for banks to make mortgage loans. There are different ways to accomplish this, but the most straightforward for the Administration to do this is to use the Office of the Comptroller of the Currency (OCC), which is the bank regulator in the United States.

OCC has the power to change bank reserve requirements. Well, force banks to keep 50% of all mortgage loans on their own balance sheets and you have now effectively discouraged mortgage lending.

Banks will tighten underwriting, make fewer mortgage loans, etc. On its own, that would be a disaster for buyers. However, when combined with the MADRE provisions above that make it very attractive for non-banks to become mortgage providers… getting banks out of mortgage is not as bad as it could be.

True, most mortgages would end up being adjustable and far shorter term. Without government guarantees, it isn’t clear that anyone would make 30 year loans at a fixed rate. However, with lower home prices (from these reforms) and higher wage growth (from more productive lending), the ultimate impact on buyers should be positive. Perhaps an economist can model that out for us, but it seems obvious to me that having a 6% adjustable rate mortgage that changes every 5 years on a $300,000 house is better than having a 3% fixed rate 30 year mortgage on a $600,000 house.

The advantage of these two proposals is that they do not require Congress. The Executive branch already regulates GSEs and commercial banks. These two can be done via executive order, or by agency action.

Expected Outcomes

As with the first post on MADRE, there are some outcomes we can reasonably expect. I am sure there will be outcomes we cannot foresee today, but that’s why policymaking is an ongoing enterprise.

The first few were mentioned in the earlier post:

• Flood of inventory

• Replacing rentals with seller financing

• Surge in mortgage availability

The additional changes mean that the surge in mortgages will be from non-banks, and that the 30-year fixed rate mortgage goes away to be replaced by shorter term adjustable rate mortgages. That is better for investors, and worse for buyers… but the expected drop in prices will ameliorate the negative impact for buyers.

Homeowners will absolutely see home values drop. I spoke about that in the first post:

There is no question whatsoever that unleashing 44 million housing units onto the market will drive prices down. When 35% of the nation’s housing stock comes on the market, prices will go down, period. This is a feature, not a bug.

Those who are homeowners today will see their property values drop. I’m one of those people. I accept it because home values have risen so much over the years (and because I do not view my home as a financial asset, but a place where we live). This is a tradeoff I am willing to make. Others might not. So that’s one downside.

On the other hand, in the tradeoff between buyers and sellers, there truly is no way to make both happy. In our current socio-economic environment, I think it’s time to prioritize buyers and potential buyers.

I stand by that sentiment in 2025, when the socio-economic environment has worsened to the point where Trump is considering declaring a national housing emergency.

Because the focus on productive lending, whether from the growth in construction and renovation loans, or from banks pivoting away from mortgage lending to small business loans, means that we should also see robust job and wage growth across the economy. Even those homeowners whose home has lost value may find their incomes rising faster than ever to make up for it.

We Must Fix Housing

Perhaps it is the over-financialization of everything. But too many of us, especially in real estate, just think of houses as assets and a path to wealth and something to be bought and sold. They are more than that. They are the foundation of living.

As was said by some very wise men… under all is the land. We must fix housing if we are to fix what ails us as a country, as a society, as a civilization. If that takes a declaration of an emergency, so be it. But with that declaration, we owe it to ourselves and to future generations to actually fix housing instead of catering to this special interest or that one… even if that special interest happens to be ours.

Would the Administration do any of the above? Who knows? They haven’t asked me. But would they fix housing if they don’t do any of the above but just mess around with rates and some zoning regs? I don’t think so. At best, they’ll kick the can down the road another few years until the pressure simply cannot be contained anymore.

So here’s to hoping that wisdom and longterm thinking, along with the courage to do what is necessary if painful, come to us all soon.

-rsh