Washington’s Housing Fix Isn’t a Fix

The 21st Century ROAD to Housing Act is being billed as the most ambitious federal housing package in decades. Its breadth is undeniable. Spanning hundreds of pages and over 40 provisions, it attempts to tackle everything from zoning reform to rental assistance. Yet ambition should not be confused with effectiveness. A closer look suggests the bill risks deepening the very problems it claims to solve, while steering housing policy further away from market-based solutions and toward federal overreach.

At its core, the legislation reflects a familiar Washington instinct. When housing becomes less affordable, policymakers often look for villains instead of addressing underlying constraints. In this case, institutional investors in single-family housing have become a central political target. Provisions such as “Homes Are for People, Not Corporations” aim to restrict large investors from acquiring additional homes and, in many cases, force them to divest existing holdings over time. The rhetoric is appealing. The economics are not.

Institutional investors are a marginal player in the housing market. They own less than 1 percent of the nation’s single-family housing stock. Yet the legislation treats them as a primary cause of unaffordability. This misdiagnosis matters because it drives policy in the wrong direction. Reducing investor participation does not increase the number of homes. It simply reshuffles who owns them.

More importantly, these investors often play a constructive role. They deploy private capital to renovate aging housing stock and expand rental supply without government subsidies. In many cases, they purchase homes in need of repair, investing tens of thousands per unit to bring them back into livable condition. Others finance the fast-growing build-to-rent sector, which has added tens of thousands of new single-family homes in recent years and now represents a meaningful share of construction in several high-growth markets. Driving this capital out of the market risks reducing supply rather than increasing it.

The unintended consequences could be significant. Forcing large investors to divest would disrupt millions of households who currently live in single-family rentals. These homes serve a critical function, especially for families who need more space than apartments can provide. About three-quarters of single-family homes have three or more bedrooms, compared with a small fraction of apartments. For many working families, renting a house is not a second-best option. It is the only viable one.

If policymakers succeed in pushing investor-owned homes onto the market, they will quickly face a second problem. Many renters are not financially prepared to become homeowners. They may lack sufficient savings for a down payment or have credit profiles that do not meet traditional underwriting standards. The political temptation will be to bridge this gap by loosening credit. That path is familiar. It risks repeating the mistakes that contributed to the housing crash of 2008.

What is largely overlooked is the federal government’s own role in distorting housing markets. Current policies subsidize small-scale investors through government-sponsored enterprises like Fannie Mae and Freddie Mac. These subsidies, which can lower borrowing costs by 100 basis points compared with private financing, giving investors an advantage over FHA-backed first-time buyers. In practice, this allows investors to outbid the very households federal policy is meant to support.

Washington would benefit more from addressing these distortions to level the playing field between small-scale investors and prospective buyers than targeting institutional investors. The risk, however, goes beyond misdiagnosis. When Congress sets out to make things “more affordable,” the results are often the opposite. Americans have seen this pattern in health care and student loans, where federal intervention drove costs higher rather than lower. Housing risks following the same path. Well-intended policies can distort markets, inflate demand, and create the very problems they are meant to solve.

Instead of expanding federal control, policymakers should let states make progress. And they already are. In recent years, many states have advanced bipartisan zoning reforms aimed at increasing supply. Texas offers a clear example. In 2025, it passed SB 15 and SB 840, expanding flexibility for smaller lots and allowing underutilized commercial spaces to be converted into housing. More than 20 states are considering similar reforms in 2026 alone. The most effective approaches share a simple formula: allow by-right construction, enable smaller lots, and keep rules straightforward.

By contrast, the 21st Century ROAD Act would further entrench the federal government’s involvement in state and local housing decisions. Programs such as Elizabeth Warren’s Innovation Fund and federally defined “best practices” expand Washington’s role in zoning and land use. While framed as technical assistance, these efforts risk imposing one-size-fits-all and often counterproductive priorities on diverse housing markets.

Consider HUD’s Pathways to Removing Obstacles to Housing program, which claims to support communities that reduce barriers while offering best practices to others. In fiscal year 2023, it awarded $5 million to Seattle for its inclusionary zoning program, which has been associated with an estimated 80 percent decline in townhome production. HUD also distributed another $80 million to support policies that frequently include similar mandates, many of which have shown limited effectiveness or were outright counterproductive.

Federal efforts tied to preferred planning models could undermine this momentum. Heavy-handed federal involvement risks politicizing state-level reform and often leads policymakers toward the wrong solutions.

This does not mean the federal government has no role. But it should focus on areas where it can support supply without distorting markets. Auctioning even a small fraction of federal land could create space for roughly one million homes over a decade. A federal bounty for states that legalize smaller lot sizes could unlock large numbers of entry-level homes by lowering land costs. These approaches reward outcomes and rely on market incentives rather than federal micromanagement.

Housing affordability is a serious challenge. But solving it requires addressing the root cause: a shortage of homes. The path forward is not more federal control, but fewer barriers. Empower markets over bureaucrats. Allow private capital to flow. And most importantly, let builders build.

Tobias Peter is co-director of the American Enterprise Institute’s Housing Center.