Two things, primarily.
First, the 2007-2008 housing crash and subsequent recession shut down homebuilding for several years, but the U.S. population kept growing, which created a long-term housing shortage. It will take years for new construction to catch up.
Second, the Federal Reserve flooded the economy with cheap credit in response to the 2009 recession and the 2020 pandemic. It’s also buying up $40 billion of mortgage securities every month, which keeps money flowing to mortgage lenders.
Couple a housing shortage with readily available mortgages in a free market and you’ll get bidding wars for what housing there is. In some cities, including Seattle, home prices have jumped over 20% in the last 12 months (story here). In my neighborhood, new listings priced at $1 million sell within days.
Some people will bring up a variety of subplots, often in connection with politically-motivated finger-pointing and blame-laying. These include restrictive zoning regulations, clean energy building codes, and the like. When the pandemic shut down downtown shopping and restaurants, and moved work from offices to homes, some urban apartment dwellers hightailed-it to the suburbs — demand isn’t evenly distributed.
It’s a basic law of economics — like the law of gravity in physics — that housing prices can’t exceed the ability of consumers to pay them. Within a given market, there’s usually a tight correlation between incomes and housing prices. The wage levels in a real estate market largely determine home prices there. People will pay what they can for a home, but no more.
While the monthly payment a given buyer can afford is more or less fixed, when interest rates are low, and more of the monthly payment can go to principal, that allows buyers to buy a more expensive home. Not necessarily a better home; more often than not this just bids up the selling price of the same home. And when mortgages are available to everyone who wants one, you have more bidders, which can have the effect of pushing up prices, too.
Lumber prices have exploded over the last year, but I don’t think that directly and immediately affects housing prices, although it does directly and immediately squeeze builders’ profits. However, if high materials prices persist, construction activity will decline, further restricting housing supply, which will contribute to shortage-induced rising housing prices in the future.
There’s also the matter of matching local supply with local demand — housing isn’t portable — which, in urban areas, is where easing zoning restraints to allow greater density comes into play. In Washington, the Growth Management Act passed in 1990 seeks to prevent or slow urban sprawl by containing housing developments within existing urban boundaries. Increased density — more multifamily buildings, and smaller lots — is a key component of this strategy. In my Seattle-area neighborhood, there’s both “infill” development (putting new houses on existing lots) and “teardown” development (builders buy up old, small homes on large lots, tear them down, and replace them with several large new homes). This hasn’t held down price increases, though, at least not where I live.
In addition to the subplots listed above, there are many other factors of local origin and nature, and they don’t always lead to higher housing prices. Occasionally they lead to drastic lowering of home values (in Detroit, for example). The latter phenomenon can be caused by high property taxes, a dying local economy, or out-migration from an area. My focus in this article is the factors having nationwide impact, and those are primarily the two I mentioned above.
This isn’t a problem with a political origin. Its origins are economic, and have to do with supply and demand. That being the case, there’s no quick fix. Unless someone can drop millions of new housing units in the right places almost overnight, and I sure don’t see how that can happen, the tight housing market and housing inflation are going to be with us for quite some time to come.