Why is Housing Inflation So High?

Housing Inflation in Suburban Neighborhood

Housing prices across the country have skyrocketed in many markets since 2011. While it’s tempting to blame this all on the recovery from the global financial crisis, there is no one answer for why this is happening across the board. The reasons for increasing prices in one area of the country are complex. Here are just five reasons that housing prices are going up in the U.S.

1. Companies Don’t Have the Physical Space to Grow

While there are more factors at play beyond simple supply and demand, these are still the primary constituents of price in every market--including the housing market. Some of the most prominent giants in the tech world have chosen to locate large offices in areas with limited room for expansion, such as Seattle and the Bay area. This forms what economists call a knowledge hub, where local employment opportunities drive education focus, leading to a localized concentration of expertise in one particular industry. This concentration can lead to population booms that stress the supply of housing in these communities.

2. Large Companies Opening in New Areas

Many large employers are fleeing high-tax areas. Rifle and shotgun company, Weatherby, has abandoned California completely in favor of Wyoming, while companies like Toby Scammell’s data firm Womply or software giant Adobe are retaining their coastal headquarters but expanding into low-tax states. When big companies like these move to a new area with more favorable tax rates, they naturally attract a new worker pool, and workers need homes. This drives up demand, which leads to -- you guessed it -- inflated home prices.

3. Less Funding for Affordable Housing

The Federal Government has always made the availability of affordable housing a major policy priority. However, the U.S. is currently losing almost 125,000 units of affordable housing per year. The slashing of HUD funding can negatively impact low-income families, who rely on subsidies to pay their rent or mortgage. For individuals and families, the economic impact of lost assistance can be devastating. There is evidence that de-subsidization of highly-subsidized markets may actually alleviate high prices over time, but that’s cold comfort to the couple whose rent just increased by 45 percent.

4. More Renters, Fewer Buyers

Millennials have different priorities than their parents and grandparents did. In the last decade, the U.S. has seen an increase in renters by 9 million, which has been the most significant decade-long gain in U.S. history. With that many renters suddenly flooding the market, it’s sending rental prices way up.

5. Backlash From the Bubble

It is no secret that not long ago, banks were offering loans to people who legitimately could not afford them. When a borrower defaults on a loan, the bank keeps the money that has already been paid, in addition to the property.

This mass default left millions of Americans homeless. While initially home prices went down, since then, lenders have tightened up their lending practices. Lenders probably needed to tighten up their lending prices, but doing so is another lasting inflationary force.

When it comes to inflation, there is almost never one simple, monolithic reason for it. Inflation in some primary regions is also the result of specific factors that affect only that particular area in addition to the elements happening on a national level. While inflation is a reality nationwide, some areas are most definitely being hit harder than others.