From the 1970s onward, housing became increasingly financialized. Instead of simply being a place to live, homes became investment vehicles. Wall Street firms, institutional investors and government-backed enterprises took over mortgage lending. This replaced the relationship-based, local banking system with a highly leveraged, globally interconnected one. Mortgage-backed securities became a core financial instrument, not only fueling speculation but also serving as reserves on bank balance sheets, intertwining housing finance with the broader financial system.
Each financial crisis — Savings & Loan in the 1980s, the subprime mortgage crisis in 2008 — led to even greater centralization of housing finance, as short-term fixes reinforced the dominance of national lenders and government-sponsored entities. The repeated cycle of risk, collapse and bailout has made housing a primary vehicle for financial speculation rather than a stable, accessible market for homebuyers.
Today, the product isn’t a home; it’s the promise to pay contained in the mortgage note. The buyer isn’t an individual or a family; it’s a financial institution acquiring that mortgage note and the decades of promised payments.
The innovations and efficiencies of scale we see in the housing market today are innovations in finance, not in home construction. These financial innovations have not been good for homebuyers or for affordability.
A Bottom-Up Approach: Local Housing Finance Solutions
Now, we find ourselves in the fifth housing bubble of the postwar era, this one driven largely by Federal Reserve intervention and Wall Street speculation. The Fed’s prolonged low-interest-rate policies, combined with aggressive quantitative easing and the wholesale purchasing of mortgage-backed securities, have inflated home values beyond what incomes can support, while investors — flush with cheap capital — have snapped up homes as financial assets, pricing out regular homebuyers.
The presence of institutional investors, private equity firms and real estate investment trusts in residential real estate means that homes are no longer priced based on local wages and household demand but instead on their value as tradable financial instruments. The housing market has become less about shelter and more about financial engineering — where mortgages are bundled into securities, traded globally, and used as reserves for financial institutions rather than being tied to the real needs of people and their places.
Ironically, the one-dimensional efficiency of financialization has created a massive gap in the real market for homes. Large financial institutions are eager to fund single-family homes in bulk or large apartment complexes that fit their investment models, but they have no interest in small-scale, entry-level housing. A so-called “efficient” housing finance system has, in reality, left little to no capital available for small, incremental projects — like converting single-family homes into duplexes, adding backyard cottages, or financing small starter homes. This is despite the overwhelming demand for entry-level housing.
At Strong Towns, we have long argued that local governments must step in to fill this gap. One example of a government doing just that is Muskegon, Michigan, where city leaders have leveraged Tax Increment Financing (TIF) to support the development of starter homes on empty lots. By using local funding mechanisms rather than relying on Wall Street capital, Muskegon has found a way to build the kind of housing that meets community needs quickly, at scale and with affordable prices.
All of this is discussed in depth in “Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis,” a national bestseller. And, at the end of last month, we released the first of three toolkits to help cities take action. This initial toolkit focuses on the local regulatory reforms necessary to become a Housing-Ready City. More will follow, including one on local housing finance. In the meantime, we’d love to put your city on the map, if it is indeed housing ready.
Let’s be clear: The theoretical efficiencies a college professor might imagine occurring are not evident in the housing market. At least, they are not manifesting in lower prices. We do need innovation, but not in the form of new interest rate manipulations or complex securitization schemes.
The innovation we need is a bottom-up revolution — one where local governments take the lead in deregulating and financing the construction of entry-level housing, fostering an ecosystem of incremental developers, and ensuring that real homes get built for real people. That’s the Strong Towns approach, and there’s nothing preventing your community from aggressively pursuing such a path to housing affordability.
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