Home prices in America are rising at the fastest pace in 15 years, as a massive shortage in inventory collides with soaring demand. The result: bidding wars and housing that’s increasingly out of reach for millions of Americans. The red-hot market shows no signs of slowing down. Without more housing supply to meet demand, prices are likely to keep rising for years to come, deepening wealth and generational divides.
Nearly 90 percent of U.S. metros saw their home prices jump by double digits this past year. And no wonder: the number of homes for sale in America stands at a near-record low 1.07 million, even as demand swells. Homes that once sold in two months now go in two weeks; in fact, half of all homes in America sell within a week of listing. The median sale price for a home in America crested $300,000 last summer and has continued rising. This March, fewer than 500 housing units nationwide sold for less than $150,000.
In Austin, Texas, median listing prices have risen an incredible 40 percent since last year. Buyers in cities like Boise, Denver, Nashville, Phoenix, and Tampa also face an intensely competitive marketplace: home prices in some neighborhoods have soared by double-digit percentages in a single month. San Francisco and New York City are among the only major U.S. cities where housing demand remains flat; stories abound of a small but growing share of coastal migrants bidding against locals for now-scarce housing supply in the Sunbelt.
Home prices are going up for many reasons, including limited housing supply—both historically and recently, due to a pandemic-era construction slowdown—and current owners’ hesitancy to sell, lest they have nowhere else to go. Meantime, low mortgage rates and a thriving stock market are pushing buyers into the market and encouraging institutional investors to search for greater yields. The pandemic also spurred demand for more space for home offices and yards. Covid has even affected new homebuilding: lumber costs have soared 340 percent since last year, adding at least $36,000 to the cost of constructing a typical single-family home.
America’s housing frenzy means that even middle-class households are struggling to buy. In Denver, households need to earn at least $90,000 to afford the typical home, and that’s assuming that they have nearly $100,000 in cash for a down payment. In a third of America’s largest metros, households earning a median income can afford less than 40 percent of homes on the market. Worse still, mortgage credit availability is at its lowest level since 2014. Homeownership rates remain well below their peak of 69 percent during the last housing bubble in the mid-2000s, having recovered only to the long-term average of 65 percent this year.
Yet for well-off buyers, the housing market has in some ways never been better. Interest rates are at historic lows, and “more home loans are being made than almost ever before,” according to an analysis by the Wall Street Journal. “But they are going almost exclusively to borrowers with pristine credit histories and sizable down payments.” While the bottom 50 percent of households have seen their wealth grow faster than the top half for the past decade, they also had more ground to recover following the Great Recession, and in many metros they saw their wealth gains outpaced by rising house prices. During the pandemic, many well-off households had more money than ever for down payments, as well as the ability to move, thanks to remote work.
It’s not just wealthier Americans piling into the housing market but investors, too. Less expensive homes that might have been an attractive buy for young families are instead being purchased by the likes of BlackRock. Their sweet spot is buying up a home costing less than $300,000 in a good school district in boomtowns like Houston, Denver, or Nashville. And it’s not just homes, but entire neighborhoods of single-family dwellings being built or bought to rent. Homebuilder Lennar Corp. is teaming up with investors pouring $4 billion into constructing new rental-home communities from scratch, while California’s teacher-pension system, CalSTRS, is dedicating $1 billion to buying up neighborhoods in the southeast. Roughly one in five homes being sold today (one in four in Houston) go to someone who never moves in.
The intensity of homebuying activity, along with lingering memories of the last financial crisis, is prompting fears of a housing bubble. Some blame “speculators” for jacking up home prices. It’s true that home prices in three-quarters of America’s major metros have surpassed their pre-crash highs—or even doubled in value, as in Denver—since 2012. Unlike the last real estate bubble, however, borrowers today are highly qualified and receiving traditional loans from well-regulated financial institutions. Today’s problem is simpler, if tougher to solve: high housing demand, low supply.
Concerns about financial firms gobbling up properties are overstated: the overall supply of housing doesn’t shrink, after all. Across the economy, subscription models are challenging traditional ideas and norms about ownership. Why not for housing, too, with renting in cities like New York already being the rule rather than the exception? True, a highly leveraged bet on homeownership can be a powerful wealth-building tool, but so can investing in a diversified index fund. In fact, you can now buy stakes in multiple properties through investing platforms like Fundrise and Groundfloor, rather than being shackled to the fortunes of a single home in one city.
But homeownership remains a down payment on the American Dream. We can’t ignore the fact that black Americans and others who have historically faced obstacles to homeownership have been on the wrong end of a growing wealth gap. Renting brings its own financial insecurities; rents are already rising again as America emerges from the pandemic-fueled recession. Young Americans are now facing their second housing crunch in 12 years—a period in which high housing costs acted as an enormous wealth transfer from young to old.
Policymakers need to recognize that the roots of the housing shortage lie not in financial speculation but in government regulation. Localities have made it practically illegal to build enough housing to meet demand, leading to inflated home prices. America is building homes at its slowest rate in 60 years, worsening a supply problem that has been decades in the making. Investors are snapping up homes because of supply restrictions, not in spite of them. The only answer to a housing shortage is to build more housing.
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