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What’s making houses so expensive?

BACKGROUNDER | Understanding a two-year surge in home prices


Saul Loeb/AFP via Getty Images

What’s making houses so expensive?
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The U.S. housing market has been hot. Sellers this year are getting almost double the usual number of offers, and buyers are signing deeds for homes they’ve never seen. Federal data show the median home price grew from $322,600 in the second quarter of 2020 to $440,300 this year—an increase of about 36 percent. What’s behind the trend?

Why are houses so expensive? Demand has outgrown supply. The pandemic normalized remote and hybrid work, allowing many professionals the flexibility to leave urban apartments in favor of suburban, single-family homes. The Federal Reserve also lowered the federal funds rate (the rate banks pay for government loans) to near zero during COVID-19 lockdowns to stimulate consumer spending, which resulted in low mortgage rates that encouraged more people to buy homes.

OK, but why aren’t there enough homes for buyers? The housing market is short an estimated 3.8 million homes due to a decade of underbuilding. After the Great Recession began in late 2007, about 1.5 million construction workers went into other industries, and home construction lagged. COVID-19 shutdowns later drove even more workers from the industry, and the cost of lumber rose from $350 to $1,300 per thousand board feet in one year. Builders have struggled to obtain materials and appliances such as windows and ovens amid supply chain delays—up to a year in some cases. Local zoning rules on yard size and parking spaces also limit the number of homes that can be built.

Is this another housing bubble? The 2008 housing bubble was fueled by irresponsible loans and mortgages that couldn’t be repaid. Banks approved “no-doc” loans, meaning the borrower wasn’t required to provide any documentation to take out a housing loan. Lending standards today are stricter than they were in 2008, and experts believe that a stable shift in demand is supporting the current housing market, not reckless lending.

Home prices declined in July for the first time in nearly three years. What caused the cool-off? The housing market corrected itself slightly because of rising mortgage rates and a jump in supply. The average 30-year fixed mortgage rate passed 6 percent in June, up from 3 percent at the beginning of the year, making it harder for consumers to justify loans. The number of homes for sale also rose 22 percent in just a few months, helping calm demand. The decline in prices isn’t expected to continue long term, however.

What is President Joe Biden’s Housing Supply Action Plan? Released in May, the plan is designed to increase the housing supply. The plan includes $6 billion to address zoning issues, a $25 billion proposal for grants encouraging housing construction for low- and moderate-income Americans, and tax credits to encourage building new housing units and repairing old ones.

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