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"The American dream of owning a house may be vanishing," the U.S. Government Accountability Office said in a research report, "because of higher housing prices and a decline in housing affordability."
"Many young, middle-income, and first-time home buyers can no longer afford to buy an existing house."
The GAO released this dire news on May 11, 1978. The median selling price of a house "hit an all-time high of $44,300" in 1976, the GAO glumly reported.
Fast forward four and a half decades, and the median price of a home is now over $419,000. So, why are house prices so high?
Read more: How much house can I afford? Use our home affordability calculator.
In this article:
Historical housing prices
*At the time of publishing, the U.S. Census Bureau had only released data through October 2024.
This graphic shows the steady rise of median home prices over the years and the dramatic jump beginning in 2020. Prices peaked in the fourth quarter of 2022 and then fell sharply.
Today, home prices remain higher than those pre-pandemic. Interest rates remain higher than those spicy 2%-ish pandemic rates as well. For those looking to buy their first home, this is less-than-optimal news. For those looking to cash out in a high-cost-of-living state and buy a home in one with a lower cost of living, it’s a moot point, as those buyers will likely get more home for their money no matter where interest rates and home prices sit.
Factors contributing to high housing prices
The ongoing rise in home prices can be pegged to two key factors, said Josh Hirt, senior U.S. economist at Vanguard: a lack of supply and what’s called the “rate lock effect.”
Demand outpacing supply
There’s no two ways about it: America has a supply issue regarding affordable homes. By “affordable,” we’re talking about entry-level homes designed for the first-time home buyer.
“These are people starting their careers, getting married, wanting to start a family,” said Hirt. Generally, these buyers would gravitate toward homes sold by those looking to upsize. As previous first-time buyers move up, the supply of starter homes opens up. But today, Hirst said, that’s not happening for a couple of reasons.
First, there’s a longstanding lag in building. “There was a notable slowdown in housing starts in the wake of the financial crisis of the early 2000s,” Hirt said. During this period, the market was flooded with foreclosure properties, and supply far outpaced demand. In reaction, builders were reluctant to forge ahead with new construction projects catering to first-time buyers. “Now, we really need those homes, and they’re not there,” said Hirt.
So, that’s the first part of the reason home prices remain high: There are more buyers in the market than available properties — especially for low-to-moderate-income buyers looking to get a slice of the homeownership pie. This creates a seller’s market, which tends to keep prices high. Sometimes, it creates bidding wars where homes sell for over market value. But historically low new construction starts aren’t the only reason there’s a supply issue in American housing.
Dig deeper: When will the housing market crash again?
The rate-lock effect
Hirt puts it plainly: “If you have a mortgage in the 3% range, there’s little incentive for you to trade up or out of that home when mortgage rates today are more than double that.”
Makes sense. Here’s the data to back that up.
In January 2024, nearly half (47.9%) of homeowners with a mortgage backed by Fannie Mae or Freddie Mac had an interest rate of 3.5% or lower, according to research by the Urban Institute. At the same time, the average interest rate for a new 30-year fixed-rate mortgage was 6.6%. That’s a whopping 3.1% difference. On a $300,000 mortgage loan, this would add $580 per month.
The result? “A lot of homeowners who would be selling their homes just aren’t doing that,” said Hirt. The cost is too high.
Learn more: Strategies to get the lowest mortgage rate
Home prices ahead: What’s the outlook?
So, with fewer homes out there for sale than we need and current homeowners clinging to their existing sub-4% mortgages for dear life, what does that mean for you, dear home buyer? Hirt and his team said that today’s prices and supply-demand imbalance are likely here to stay for a few reasons.
“Over the past two years, the Fed interest rate hikes should have dropped home prices, but that didn’t happen,” said Hirt. With the Fed potentially on track to cut rates later this year, that only brings more buyers into a mortgage market with the same supply issues. More buyers, same number of homes, higher prices.
But what if there’s a recession? “If a recession comes in and rates drop, we could see some softening of prices,” Hirt said. Yet, with this scenario, Hirt and his team still see the same outcome. “Even if rates drop from today’s 6.5% to something like 5%, that continues to feed demand.”
Hirt’s best advice? “If you can’t afford the home you want at today’s prices, consider trading down.” You could consider a condo instead of a single-family home or a home with less square footage and fewer features. A fixer-upper could also be a way to get your foot in the door. Owning something at today’s rates still lets you build equity and refinance if rates take a drop — neither of which are the worst possible outcomes.
Dig deeper: When will housing prices drop?
Buying a house when prices are high
The graphic above attests to the long-term price appreciation of houses in America. When you own a home, that's a very good thing. You're slowly building equity in your house. You don't want that to end.
If you were shopping for a house from mid-2020 through the end of 2022, you may have gotten caught up in an overheated market. If you sold your house during that time, you're probably smiling.
Is this a good time to buy a house? It's important to remember that regional differences in home prices remain an important factor to consider. However, sale prices have reverted to the median prices in Q2 2023, which should make potential home buyers feel better about their prospects of getting a fairer price than they might have a couple of years ago.
Learn more: Which is more important, your home price or mortgage rate?
Why house prices are so high: FAQs
Why are U.S. housing prices so high?
The main reason home prices are so high in the U.S. is the relatively low inventory. Homeowners who locked in super-low mortgage rates in 2020 and 2021 don't want to sell their homes only to buy new ones with higher interest rates.
Why is U.S. housing so unaffordable?
U.S. housing is unaffordable for many right now — especially first-time buyers looking for less expensive homes — due to supply issues and mortgage rates. There simply aren’t enough homes in lower price ranges due to a lack of new home construction in the wake of the early 2000s financial crisis. Mortgage rates also impact the month-to-month cost of homeownership, and rates in the 6.5% to 7% range can make affordable homes unaffordable for low-to-moderate-income buyers on a budget.
Why are homes overpriced right now?
Today, it’s a seller’s market — where the number of buyers by far outnumber the sellers. This allows sellers to command higher sales prices and gives buyers less opportunity to negotiate for price discounts and seller concessions at the closing table.
This article was edited by Laura Grace Tarpley.
