Why the National Debt Matters for Housing

The Risks of Growing Public Debt

 Over the past 25 years, the national debt has grown significantly, and it is projected to continue growing faster than the economy far into the future. Debt held by the public—the portion of federal debt held by investors, state and foreign governments, and the Federal Reserve—now surpasses $28 trillion, roughly equivalent to the nation’s entire economic output this year. Over the next 10 years, the Congressional Budget Office projects that, absent action, the federal government will add another $20 trillion of debt. At that rate, by 2050 debt levels will reach 155% of gross domestic product.

Economists have warned that this path poses long-term risks to the economy and to American taxpayers if left unaddressed:

• Elevated interest rates as increasing federal borrowing crowds out private investments that would otherwise support jobs, innovation, and economic growth;
• Inflation from high deficits, which strains budgets by driving up the costs of goods and services for families and businesses; and
• Reduced public investment as rising net interest costs prompt lawmakers to reduce spending on public programs.

How the National Debt Affects Housing

While the national debt may not seem closely related to housing supply and affordability, the two issues are likely to be increasingly connected in the years ahead.

Elevated Interest Rates

When the U.S. government spends more than it takes in through tax revenues, the Treasury Department borrows money from investors to make up the gap by issuing securities—notes, bonds, and bills—in closed and open markets. While many factors influence interest rates, rising debt could push up rates investors demand on U.S. investment products, effectively raising the yield on Treasury securities.

Interest rates set by the Federal Reserve and the yield on Treasury securities both influence mortgage rates. (A higher yield equals higher borrowing costs for the U.S. government.) Using the past quarter-century as an example, mortgage rates have risen and fallen in tandem with 10-year Treasury rates. The Federal Reserve’s interest rate can affect broader financial conditions that indirectly shape mortgage rates, such as investor expectations for inflation, economic growth, and the cost of borrowing.

Inflation

When the federal government runs large annual budget deficits, it can spur higher inflation. For example, Federal Reserve researchers estimate that fiscal stimulus during the COVID-19 pandemic—when annual deficits peaked at more than $3 trillion—contributed to a 2.5 percentage point increase in inflation.

Higher overall inflation often means sharp increases in housing prices, which have outpaced overall inflation significantly in the past 10 years and rose especially rapidly during the pandemic. Since 2000, as overall prices increased 77%, housing prices rose by 174%—more than double the pace.

Many factors beyond fiscal policy have contributed to recent general and housing inflation, including the condition of supply chains, consumer demand for larger housing to accommodate remote work, and monetary policy set by the Federal Reserve. However, the COVID-19 pandemic demonstrated that too much deficit spending can also lead to higher inflation.

Less Private Investment

An additional risk of rising public debt and deficits is the possibility that the increase in government debt purchased by investors “crowds out” financing that would otherwise be available to the private sector. In the housing market, this may lead to fewer investments in one of the key solutions to rising home prices: increasing housing supply.

Despite housing construction improving in recent years, the U.S. remains below the pre-Great Recession (1959-2007) annual average for building housing.

Government debt certainly did not cause today’s challenges in home construction—supply-side constraints, zoning issues, and rising construction costs have played a much greater role. However, failing to address the debt may make it harder for the private sector to finance more housing construction in the future. Increasing our housing supply will require robust private and public investment in the years ahead.

Less Public Investment

As deficits and debt rise, so does the portion of the federal budget devoted to paying interest on the growing debt load. Net interest expenses of the federal government have increased at a rapid pace, and now represent one of the largest categories of federal spending, roughly equaling spending for national defense or Medicare.

While the government spent nearly $900 billion in fiscal year 2024 on net interest, federal programs and tax incentives targeted at housing affordability and housing supply receive a relative pittance—pennies on the dollar compared to net interest expense.

Rising interest spending will make it increasingly difficult for the government to sustain or expand its investments in housing programs. The U.S. spent nearly one of every five federal tax dollars on interest on the debt in FY2024, a figure that is projected to grow to the astonishing level of more than one of every three tax dollars in the 2050s. Every tax dollar going to net interest expense is one that cannot support increasing the supply of and access to quality, affordable housing.

The Path Forward

The national debt hasn’t caused today’s housing problems, but if it continues to grow, it will make solving them more difficult. To improve housing affordability and increase supply, Congress must take action to address the debt.

Stopping the endless tide of government debt could mean:

• Lower Mortgage Rates: Less debt could help keep interest rates—and mortgage rates—relatively lower.
• More Private Investment: Lower debt could improve the cost of capital to incentivize more private investment in housing.
• Sustained Public Investment: With less debt, the government could have more resources to support housing programs.

Owning a home is a fundamental part of the American dream for many workers and families. For policymakers and businesses to devote the resources needed to tackle the nation’s housing challenges, policymakers must work together to address the federal debt and put the country on a more sustainable fiscal path.

The Bipartisan Policy Center is a mission-focused organization helping policymakers work across party lines to craft bipartisan solutions. By connecting Republicans and Democrats, delivering data and context, negotiating public policy, and creating space for bipartisan collaboration, BPC helps turn legislators’ best ideas into durable laws that improve lives. Since 2007, the Bipartisan Policy Center has helped shepherd countless bills across the finish line.