Housing cost and price growth, combined with higher interest rates and lackluster income gains, took a significant toll on housing affordability in 2018. Home sales suffered during the second half of the year as result.

According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), just 56% of new and existing home transactions nationwide were affordable for a typical family during the third quarter of 2018. At the start of last year, the index was at a level of 62, which in turn was down from 78 at the start of 2012. More concerning, according to the HOI data, just one-third of newly built home sales were affordable to a typical family. And NAHB modeling indicates additional declines for affordability ahead as mortgage interest rates continue along a long-term rising trend.

On the supply side of the affordability equation, labor shortages, building material price volatility, and land/lot access issues have contributed to rising costs. But government policy is failing as well, with rising regulatory burdens contributing to severe affordability challenges in many markets. Prior NAHB analysis found that such regulatory burdens increased 29% from 2011 to 2016 alone.

For policymakers and housing stakeholders and advocates, what can be done?

First, local governments can bend the cost curve and improve housing supply by rolling back exclusionary zoning requirements and other land development rules that result in lower housing density than home buyers want. Such rules use land as a tax on home purchases, lower local homeownership rates, and price out households from purchasing a home.

Second, local jurisdictions should stop increasing and look to lower impact fees and other upfront taxes associated with land development and housing construction. Home building is, by definition, a long-term investment in a community. Housing—residential capital—produces long-run economic benefits by expanding the size of a market, generating taxes and fees over many years. Thus, rather than using upfront fees to pay for public sector capital required to serve additional households, local governments should shift to public finance sources that collect revenue over the long run.

Third, the skilled labor shortage increases the cost of remodeling and home construction, among other sectors of the economy. A promising long-term public investment that would yield dividends would be expansion of the nation’s community colleges and trade schools, helping institutions like the Home Builders Institute to train individuals for jobs that currently are in demand. At the same time, the residential construction industry should examine, where practical, additional use of panelized and modular methods. While not a silver bullet, incremental gains in these techniques will result in lower costs for some markets.

Fourth, federal officials need to pursue smart financial policy, including comprehensive housing finance reform that protects consumer access to the 30-year fixed rate mortgage, as well as availability of builder and developer acquisition, development, and construction loans. Recent episodes of mortgage interest rate increases—such as the “taper tantrum” of 2013 and the near-100 basis point jump in 2018—should show how the overall economy suffers when home sales soften. Besides finance reform, costly trade disputes need to be resolved as quickly as possible, focusing on legitimate areas of abuse (i.e., Chinese intellectual property theft). Rising building material costs are a real macroeconomic and inflation risk late in the business cycle, and tariffs move the ball in the wrong direction. A new softwood lumber agreement with Canada would be a great place to start, so when housing demand rises, lumber prices do not increase exponentially again.

Finally, housing markets and the overall economy require some help from the Federal Reserve. In 2019, central bankers need to renew their focus on real-time data, acknowledging that the economy is slowing and inflation risks remain contained.

This is not a comprehensive list. There are other areas of engagement, plus new alliances that need to be formed. For example, housing advocates should work with YIMBYs (Yes In My Backyard) to educate and refute the NIMBYs (Not In My Backyard) and to beat back the BANANAs (Build Absolutely Nothing Anywhere Near Anything). The success of the American dream for future generations will be decided by these efforts.