How the Housing Market Split in Two
New and existing homeowners live in different worlds
In a recent Economist-YouGov poll, a whopping 78 percent of respondents said that it’s difficult to find affordable homes in their community. But while Americans almost universally understand that housing affordability is a problem, it isn’t a problem that they universally experience.
The national housing market in recent years has become increasingly bifurcated. New homeowners are now burdened with some of the highest housing costs in decades, while existing homeowners — those who have owned their homes for longer than a year — are actually spending less on housing than in the past.1
If policymakers want to solve the affordability crisis, they first need to understand who it’s actually hurting. Too many of the proposals with strong political momentum — mortgage rate cuts, property tax breaks for seniors — do nothing to address the root causes and are outright regressive, directing relief toward those least affected by the crisis.
The Problem: A Housing Market That Rewards Incumbency More Than Ever
It has always been true that new homeowners spend a bit more of their income on housing than long-time owners do. New homeowners, after all, tend to be younger and have lower incomes, and their mortgage payments are larger because they bought more recently.
But in roughly the last four years, the difference in housing costs as a share of income between new and existing homeowners has grown well beyond the historical norm, leading to what we might call the new homeowner penalty.2
Historically, monthly housing costs for new and existing homeowners have tended to move in tandem. From 1990 through the aftermath of the Great Recession, both groups saw costs rise during booms and fall during downturns, with the gap between them remaining relatively stable at two to four percentage points, even in periods of volatility like the mid-2000s housing bubble.
That pattern briefly reversed during the Great Recession, when new buyers were able to purchase homes at depressed prices and consequently spent slightly less of their income on housing than existing owners. By 2017, the typical two-point gap had returned.
The current divergence began in earnest in 2022. By 2024, new homeowners were spending 26 percent of their income on housing, compared to 20 percent for existing homeowners — a six-percentage-point gap, the largest in nearly 40 years. Although new homeowners spent a slightly larger share of their income on housing at the peak of the housing bubble in 2007 (28 percent), the gap with existing homeowners was smaller (four percentage points). Even at the height of this century’s other housing affordability crisis, the housing cost burden was less unequal.
Importantly, this imbalance starts even before homeownership begins. Since 2021, prospective buyers have faced historically high down payment costs. Over the past four decades, the real cost of a down payment has significantly outpaced the growth in household income. Adjusted for inflation, the average down payment has nearly doubled since 1980, while average household income has grown by less than half of that, around 42 percent.
Since 2019, the real average downpayment has risen by more than 29 percent, while inflation-adjusted average and median household incomes have flatlined.3 As a result, buyers need to save for significantly longer just to enter the homeownership market.
These pressures spill over into the rental market as well. New renters — those who have moved within the past year — are also paying a record-high share of their income on housing, further underscoring how affordability challenges are concentrated among those with the least tenure in the housing system.
Taken together, these trends help explain the long-term decline in homeownership among younger and lower-income households. According to an Urban Institute analysis, the homeownership rate for 35-to-44-year-olds has fallen by more than 10 percentage points since 1980. Over the same period, all but the highest-income households have experienced similarly large declines in homeownership.
What emerges is a housing market that increasingly allocates costs and protections based on tenure. Existing homeowners are largely buffered by low interest rates locked in before or during the pandemic, growing home equity, and limited exposure to rising prices. New buyers, by contrast, are facing the dual constraint of elevated home prices and higher interest rates. As a result, affordability pressures are falling disproportionately on households that have recently entered the market or are attempting to do so now, while longer-term owners remain far less exposed.
Regressive Policies That Will Continue to Widen the Gap
The bifurcation of the housing market makes several of the prevailing policy proposals for addressing the housing crisis all the more frustrating. Rather than targeting the underlying forces that create these disparities, several of the most prominent suggestions focus on easing costs for those that are the most insulated from affordability pressures, while leaving the primary barriers confronting would-be homebuyers largely unchanged.
In effect, these proposals would further widen the gap between housing haves and have-nots.
Mortgage Rate Cuts
In a January cabinet meeting, President Trump said the best thing for both existing homeowners and people trying to buy is lower interest rates. It’s an intuitive argument: lower rates mean lower monthly payments. But the relationship between rates and affordability is more complicated than that — and the historical evidence is not encouraging.
From 2019 to 2021, mortgage rates experienced the most dramatic and rapid cut in recent history, falling by roughly 25 percent. Yet new homeowners’ real monthly mortgage payments increased, from $1,717 to $1,736.
The rate cut, in other words, was more than offset by the increase in home prices.
From 1980 through 2024, there has been a modest negative correlation between home prices and mortgage rates: when rates fall, real average home prices and down payments have tended to rise. A recent analysis by Cambridge University finds that interest rate shocks that lower borrowing costs have a significant and persistent causal effect on house prices.
Particularly in supply-constrained markets, lower rates will lead buyers to bid up prices faster than housing supply can respond. Rate cuts likely would help recent homeowners to refinance at lower rates, but it’s unlikely that they would do much to lower the barrier to entry for new buyers. President Trump may be aware of this too, as later in the same meeting, he promised to “drive housing prices up for people that own their homes.”
Property Tax Breaks for Seniors
Governor Gretchen Whitmer recently proposed a property tax deduction for senior citizens in Michigan. Amounting to a $90 million cut from the state budget, it would be the state’s largest property tax break in over a decade. Likewise, a ballot initiative is circulating in California that would eliminate property taxes entirely for homeowners over the age of 59.
These proposals aren’t unique. Many states already offer property tax relief for senior homeowners — and the terms are often strikingly generous. Some programs, like Illinois’ Senior Exemption, apply to all senior homeowners regardless of income. Others are nominally means-tested but set the bar absurdly high: New Jersey’s SAVE NJ cuts property tax bills for seniors earning up to $500,000 a year.
Setting aside that many of these programs are available to even the wealthiest seniors, the purported rationale is to address the plight of seniors living on fixed incomes. A fixed income makes seniors uniquely vulnerable to rising property taxes after their mortgages are paid off, so the narrative goes. But this obscures a crucial fact: even after accounting for their fixed incomes, senior homeowners are far less burdened by housing costs than most other groups in America, and particularly young homeowners.
Homeowners who are 65 or older paid only 17 percent of their monthly household income on housing costs in 2024. Among seniors without a mortgage — who make up roughly two-thirds of older homeowners — housing costs consumed only 13 percent of their income.
Meanwhile, young homeowners (those aged 25 to 34 years old) spent 20 percent of their monthly income on housing in 2024. Those who moved within the past year and are paying a mortgage spent 27 percent — a rate surpassed only by the 2007 peak.
Renters are even more strained: young renters spent 28 percent of their income on housing, while senior renters were the most burdened group of all, spending 37 percent.
Cutting property taxes for seniors would offer a benefit to the cohort of people that is most insulated from the housing affordability crisis in the first place.
There’s also a subtler problem worth taking seriously. Rising property tax bills aren’t the result of higher property tax rates, which have stayed largely flat across the country. They’re the direct result of rising home values, which are themselves a result of insufficient housing supply. (This isn’t idle speculation. Research has found that increasing the share of multifamily developments in a community reduces residents’ effective property tax burden.)
The effect of reducing property tax rates would therefore be not only to redistribute money upward but to weaken one of the few feedback mechanisms connecting housing scarcity to political demand for reforms that would slow the rise of home values and overall housing costs.
Seniors are among the most politically active age cohorts. Offering a tax break exclusively to this protected class of homeowners would disincentivize them from agitating for policies that would address the root causes of the affordability crisis.
What Will Actually Help Affordability for Homebuyers
Without addressing the underlying constraint of housing supply, the homeowner divide will keep widening.
Policies that tinker at the margins — subsidizing non-mortgage costs or cutting interest rates — largely benefit existing homeowners. In a supply-constrained market, demand-side interventions tend to inflate prices, transferring wealth to sellers rather than expanding access to ownership.
By contrast, supply-focused reforms target the source of the problem directly. Increasing affordability will require building far more housing, especially in high-demand metro areas where restrictive zoning, lengthy permitting, and high construction costs have produced chronic scarcity.4 Until those constraints loosen, the housing market will continue to reward those who already own and penalize those trying to buy.
New homeowners are defined throughout this analysis as those who purchased their home within the past year, while existing homeowners purchased more than a year ago.
Housing costs include mortgage, utilities, property insurance, and property taxes.
Note that while real median household income has stagnated since 2020, real median wages have increased.
As of this writing, Congress was hotly debating a bill, the 21st Century ROAD to Housing Act, that includes provisions to reduce construction costs by exempting affordable housing developments from onerous permitting requirements; it also modifies federal manufactured housing code to allow this naturally affordable housing type to be purchased by more homeowners in more contexts. But one part of the bill, which would force certain big institutional owners of rental single-family homes to sell within a limited window of time, would likely reduce housing supply if it is not removed. Proposals like our Right to Build Zones would incentivize municipalities to designate areas where housing can be built by-right.