Why Are Home Prices So High?

Image source: Upsplash/The Motley Fool

Buying a home today can be absolutely brutal. If you’re not facing stiff competition from other buyers, you’re facing down a high mortgage payment on even the smallest of homes. I’m sure you’re wondering how things have gotten to this point — and maybe even have some of your own theories. The truth is actually pretty simple, when it comes down to it.

But before I hit you with that bombshell, let’s talk about housing affordability, what influences it, and what people currently believe is making it harder and harder to afford a home.

Drivers of housing affordability

Interestingly enough, the Federal Reserve Bank of Atlanta has been tracking housing affordability for a while. Its public-facing dataset goes all the way back to January 2006, well before the Great Recession.

According to its own measures, the most important drivers of housing affordability are the income of the buyer, the mortgage interest rates at which they’re buying, and the price they give for the house. Makes sense, right? The Atlanta Fed uses these figures to determine a more global measure of housing affordability that it compiles into the Federal Reserve Bank of Atlanta National Home Ownership Affordability Monitor Index (HOAM).

On the HOAM, a market that’s considered affordable has a score of 100 or better, while anything below that is wretched and cursed (my words, not theirs). Since about June 2022, when the HOAM dropped to 71.2, we’ve been firmly in the Wretched and Cursed Zone. Since then, we’ve hit even lower lows, with a record-breaking 66.3 clocked in October 2023. According to that month’s figures, the median monthly payment was 45.3% of the median monthly income. Yeesh.

Compared to June 2015, which had a perfect 100.0 on the HOAM, when the median monthly home payment was just 30% of the median monthly income, that October 2023 figure is pretty bleak.

What’s causing this affordability crisis?

If you look at just the drivers of affordability as defined by the HOAM, it seems as if it’s pretty easy to solve the issue of affordability. Houses need to be cheaper, interest rates lower, and income higher. I mean, yes, in a perfect world, all of that taken together would help, but how do we get there?

People have also been quick to blame sustainable federal mortgages, developers who are building more expensive homes (rather than focusing on affordable ones), institutional investors, and even local planning and zoning regulations that restrict affordable housing supply.

But the truth, as the Urban Institute sees it, is that there simply aren’t enough houses to buy, and the people who want them are willing to pay a lot more than they were a few years ago. And there’s plenty of data to support this.

What does the data say?

According to Redfin data, the median home sales price reached a 10% year-over-year gain in August 2020, at $329,030. This was the same summer when home inventory dropped dramatically from an already bleak three months of housing supply to just one month in that same August. By August 2021, the median home sales price topped $381,000, another 16% of gain. You can probably guess where supply was — yep, still at one month (for reference, six months is considered a balanced market).

Supply wouldn’t cross the two-month barrier until July 2022, at which point, the median U.S. home sales price had reached $415,139. Since that time, prices have stopped increasing dramatically on a national scale, but they do continue to spike in regional markets. Some of this is due to less expensive homes coming onto the market, some is attributable to less competition due to slightly increased home supply.

But because home supply hasn’t yet reached four months since the beginning of the pandemic, there are still issues with bidding wars and a general unwillingness of homeowners to put their houses for sale (even if doing so would increase the supply of homes available for them to buy, too).

How do you buy a home right now?

Now that we’ve established the why, let’s talk about the how. How are you going to find a home in this market? It’s actually easier than you might think.

1. Be ready

Have your financing in order. Get pre-approved with a great mortgage lender before you even start shopping. If you’re using first-time home buyer assistance, get as far into that as you can without a house.

2. Know what you want

Don’t buy just any house to say you’ve done so. Make a list of wants and must-haves so you know your house when you see it. Make sure it’s a house worth fighting for.

3. Give your highest and best offer

In the olden days, we often could volley offers back and forth for a week before buyer and seller came together on a price. You don’t have that luxury today. Listen to your real estate agent; if they say it takes full price to buy that house, they know, as they’re in the trenches every day. Give what it takes or walk away. If you won’t, someone else will — and the seller’s agent knows it. This is still solidly a seller’s market.

Prices are high due to a lack of supply

Prices are where they are because there aren’t enough houses to go around. It’s due to a limited number of people willing to sell their homes, and not some other kind of problem. It’s a very simple supply-and-demand situation. But you can still buy today, if you know what you want and are ready to fight for it.

Alert: our top-rated cash back card now has 0% intro APR until 2025

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.