What happens when housing prices go down?

There’s a theory about housing that has taken hold with a kind of religious fervor: If you want to make housing more affordable, just build more of it. Supply and demand. Simple economics. This narrative is now dominating housing policy discussion across the political spectrum. Deregulate, upzone, speed up approvals, let the market work. And if you build enough homes, the theory goes, prices will come down. But here’s the question almost no one asks: What happens when prices actually start to fall? Because that’s not just a hypothetical. It’s already happening in places like Phoenix, Atlanta, Miami, Dallas, and more. And the response hasn’t been to declare victory. It’s been panic. Builders are walking away. Lenders are tightening. Policymakers are rushing to backstop the system. The theory says we should be celebrating and accelerating home production even more to get prices to levels that would actually be affordable. The reality demonstrates otherwise. The Moment We’re In In The Atlantic, Rogé Karma recently pointed out that housing prices are rising fastest in the very cities once seen as escapes from high-cost coasts, places like Phoenix and Dallas, long considered “easy to build in.” These Sun Belt metros were supposed to be immune to the affordability crisis. Now they are the new epicenters. In Slate, Henry Grabar reports that even in fast-growing Forsyth County, Georgia, just outside Atlanta, local officials are freezing new development. Why? Gridlock, school overcrowding, and resident pushback. In other words: growth fatigue. Yet, beneath the surface, fragility is spreading. Forbes reports rising mortgage delinquencies, not just in subprime loans, but among overstretched middle-class buyers. AP reveals that nearly 15% of pending home sales fell through in May, the highest cancellation rate for that month on record. And home starts dropped in May by nearly 10%, with permits falling even further. Builder sentiment is the lowest it’s been since 2012. If “build more” was going to bring prices down and stabilize the system, we wouldn’t be seeing these mixed signals. If the core problem were simply that prices are too high due to a lack of supply, everything would be as simple as theory suggests. It’s not. That’s because the system isn’t designed to survive prices coming down. In theory, we can build our way to affordability. In reality, the way we go about financing housing will never let us. Price Drops Don’t Lead to Supply. They Kill It. There are two conversations happening in housing. They rarely overlap. In one, housing is shelter. It’s a human need. This is the language of advocates, reformers, and policy experts. In the other, housing is a financial product. It’s an asset, an investment, a lever for wealth-building. This is the language of lenders, underwriters, and major developers. When advocates call for lower prices, they’re thinking in terms of shelter. But in the finance world, falling prices are a warning sign, a trigger for pullback, not expansion. This is why a price drop doesn’t lead to more supply. It leads to less. Case in point: KB Home recently canceled nearly 9,700 optioned lots. CEO Jeffrey Mezger explained: “We just determined that the market movement in those submarkets wasn’t something that we felt comfortable would hit our returns.” This is the part of the housing system that few people talk about: More supply depends on rising prices. The financial side of the system is wound so tightly, so overleveraged, that prices must rise not just for profit, but for stability. And, in the housing system we’ve built, it’s the financial side that dominates. The theory says: build more, prices go down. But that’s not how things work in reality. When prices actually go down, builders get nervous, lenders get cautious, financing dries up, and projects disappear. New construction has collapsed not because of a lack of land, permits, or even demand but because the financial risk has become unmanageable. High interest rates, shrinking margins, labor shortages, volatile materials costs… none of these are softened by falling home prices. Fannie Mae’s own data shows housing starts and permits are dropping sharply. This isn’t a supply chain problem. It’s a confidence problem. And confidence depends on continual home price appreciation. So when demand softens or prices flatten, the system doesn’t accelerate supply. It slams on the brakes. Affordability Theater What do we do when the prices drop and the system starts to wobble? We don’t fix it. We reengineer the financial math. We stretch mortgage terms. We lower credit standards. We backstop lenders. We find new ways to get buyers into overpriced homes without actually lowering the price. That is the Housing Trap, and it has been our approach to housing affordability since the Great Depression. It continues to be our approach today. In June, the head of the Federal Housing Finance Agency publicly demanded that Fed Chair Jerome Powell cut interest rates, not because of inflation or unemployment, but to “help more Americans” qualify for mortgages. Translation: lower rates so people can borrow more and housing prices can stay high. Then came the next innovation: cryptocurrency as collateral. FHFA ordered Fannie Mae and Freddie Mac to accept crypto holdings toward mortgage eligibility without requiring conversion to U.S. dollars. A win for the blockchain crowd, maybe, but also another signal that the only thing we won’t tolerate is price correction. In July, FHFA rolled out a new credit scoring model—VantageScore 4.0—that allows rent and utility payments to count toward credit history. Again, the story we spin is about inclusion. The reality is that we’re finding more ways to stretch people into homes they still can’t afford. And in parallel, Congress passed a dramatic expansion of the SALT deduction cap, raising it from $10,000 to $40,000. The stated goal: provide tax relief for homeowners. But the effect is to make it easier for wealthier households to carry high-tax, high-priced properties—including second and third homes—subsidizing ownership without touching the root problem of cost. Then there’s the latest title insurance experiment. Fannie Mae is piloting a new program to bundle title risk just as Wall Street bundles mortgage risk. It’s being sold as a way to cut closing costs and streamline the buying process, but it accentuates a core fragility that helped spark the 2008 housing crash: treating risk as something that disappears when you pool it. And finally, we have new survey data suggesting over 72% of 2025 buyers say they’d opt for longer mortgage terms to make their monthly payments manageable. Stretch that mortgage out to 40 or 50 years. Spread the cost across your entire adult life. Government-backed mortgages with a 40- or 50-year timeframe are great products to arbitrage on Wall Street. For buyers, it’s a great deal only if you don’t understand compound interest, if home prices rise for decades at rates higher than inflation, or if you’re just desperate enough to sign. In each of these moves, we have intricate stories we tell ourselves about our intentions. We say we’re solving for affordability. Yet, if we step back and do an honest assessment, what we’re really doing is helping people borrow more in order to pay more for housing. The goal is to keep housing prices elevated while offering token affordability for some through financial engineering. That’s what a fully financialized housing market looks like. You’re not the homebuyer; you’re the mortgage payer. The product that matters isn’t the home; it’s the decades of payments you have promised to make. The Missing Conversation Is the Bottom-Up Path What’s missing in today’s housing conversation isn’t a debate over whether we need to build more homes; we do. What’s missing is an understanding of how the scale at which we work directly impacts the way our markets function and, ultimately, the price of housing. The current system operates at the national and global levels. Mortgages are sold into securities. Risks are pooled. Prices are propped up or managed by federal agencies and global finance. But housing isn't built at that scale. It’s built block by block, lot by lot. And the places that are hurting the most are the ones trying to function within a system that doesn't understand or respond to local needs. To create housing people can afford, we don’t need cities to be developers. We don’t need them to borrow and tax to give handouts to people who will build houses on their behalf. And we don’t need local governments to run their own version of Fannie Mae (no city should be handing out 30-year mortgages or underwriting crypto-backed home loans). But cities can—and must—step into the space the national housing system has long abandoned: entry-level housing. This is the core argument of "Escaping the Housing Trap" and the thesis behind our first housing implementation guide, The Housing-Ready Toolkit: A healthy housing ecosystem is built from the bottom up. The market gap is clear. We don’t build starter homes anymore. We don’t build backyard cottages, garage apartments, or other small-scale dwellings. The only products that get built are big, expensive, and debt-dependent because that’s what today’s financing system demands. But cities can change this. They can build a more localized, supply-and-demand-responsive market by focusing on three key steps: Reform regulations to make approvals for small-scale, incremental development ridiculously easy, especially for current homeowners. Support and grow an ecosystem of incremental developers, the people who can build one or two units at a time, affordably and in context. Finance entry-level housing locally by using the city’s position to unlock favorable financing without incurring unprotected financial risk. None of this requires federal permission. None of it demands billion-dollar subsidies. And none of it depends on crypto, rent scores, or 40-year loans. If we can build entry-level housing at scale—and we can—we do more than make housing attainable again. We create a system where people can move up into more traditional products (like a 30-year mortgage) from a position of strength, not desperation. We restore the idea that a starter home is the beginning of stability, not a financial dead end. We ultimately force macro markets to be more responsive to our residents, at least locally. And, as a side benefit, we defuse some of the cultural resistance to new development. Most of today’s NIMBY backlash isn’t ultimately about “housing” in general. That’s true even when their concerns are expressed in terms of parking and traffic. What really ignites resistance is big, expansive projects that feel imposed and out of scale. If cities focus on building starter homes, backyard cottages, and small additions, most new units won’t ever be noticed. And, when they are, the very neighbors who once may have opposed development become its greatest champions for a simple and obvious reason: They now have a stake in its construction. This is the Strong Towns approach to housing: modest, local, scalable, and strong. It’s the conversation we’re having here, but not yet the conversation America is having. That is changing. This moment of instability we are entering can accelerate that shift, but it can also reinforce the simple narratives that sustain existing power structures. We need it to be the former. What Happens When Prices Go Down? This isn’t a rhetorical question anymore. It’s happening. Prices are softening. Delinquencies are rising. Builders are walking. And instead of asking what this reveals about the fragility of our system, we’re preparing to paper over it—again—with liquidity, leverage, and euphemisms. America’s policymakers will do what it takes to restore housing unaffordability. If falling prices are the goal, when will we be willing to build a system that can survive them? Until we are, housing advocates should stop pretending they’re solving for affordability. What we’re building today isn’t a more just, accessible, or resilient housing system. What we’re building is the illusion of affordability, an ever-distant dream propped up by debt, distortion, and denial. Strong Towns is not ever going to be part of that illusion. If you’re done pretending as well, you’re invited to opt out of simplistic theories and performative rhetoric and become part of our bottom-up revolution. We can fix this. One block. One neighborhood. One city at a time.