Home prices vary by location. But the factors driving prices are the same in any market. Demand makes prices rise.
In many parts of the country, jobs are hard to find, and pay is low. Not surprisingly, homes in these areas are relatively inexpensive. Good-paying jobs cluster in certain areas, like Silicon Valley, and home prices soar in those areas.
For those hoping for more affordable homes, there’s some bad news. The chart below shows why home prices will continue rising across the country.
(Source: Federal Reserve)
In February, the latest available data, builders were on track to add 1.32 million new units of housing. This includes apartments and single-family homes.
That’s less than the number of new households created in a year. The Harvard Joint Center for Housing Studies estimates an average of 1.36 million new households form every year. In 2025, the pace will drop to an average of 1.15 million a year.
The dashed line shows the number of new homes needed every year. As the chart shows, there’s a deficit in new homes.
This explains why prices are so high in many parts of the country. In just the past three years, the number of new households exceeded the number of new homes by more than 700,000.
However, there are solutions to this problem.
The shortage of homes is concentrated in areas with the greatest demand. Families could move away from these areas to locations where houses are plentiful.
Now, homes are plentiful in areas where supply exceeds demand. The usual reason for that is low-paying jobs and few employment opportunities in low-cost areas.
For that reason, and for many other reasons, families may not want to relocate to cheap housing areas.
That means the best solution could be to increase supply in high-demand areas. But there are problems with this solution.
Reducing regulations would encourage builders to add inventory. That could lead to problems later as environmental problems are found.
Local governments could even fund construction. But that would lead to higher taxes, which increases the cost of housing again.
None of these solutions are popular, to say the least. That means the problem of too few homes will get worse before it gets better.
Home prices will continue to rise in areas where demand exceeds supply. And, nationally, home prices will remain too high in many areas.
Michael Carr, CMT
Editor, Peak Velocity Trader