By MBAKS Content Strategist James Slone

What’s driving up home prices? Supply and Demand.

Pointing out how expensive housing is has become its own genre. How many articles do we really need on hot, hot, hot housing markets? Is there any end in sight for breathless reports on the monthly numbers? Probably not, because even with recent interest rate hikes and some cooling off locally, national home prices are still sky-high.

According to Axios, in 2022, the national median price for existing homes rose above $400,000 for the first time in history. And that’s on the low side for the Puget Sound region. Earlier this year, the median home price neared one million in King County.

As of this writing, a recession lurks on the horizon and a “correction” seems inevitable, but the market is unlikely to crash like it did during the Great Recession. Vast numbers of Americans will remain frozen out of the housing market, and there’s a lot of understandable frustration and blame to go around.

There are a host of interrelated factors that have contributed to these high prices. Let’s take a look at a few.

Shifting Demographic Sands

The story about mass flight from cities to suburbs during COVID lockdowns may have sold online subscriptions, but it wasn’t really true for Seattle. In fact, according to the latest census data, the bulk of our region’s demographic growth over the last few years landed in urbanized King County. Seattle is not dying; it’s running full speed ahead.

Many people are trying to buy homes in popular markets like ours, so demand for limited housing is very high. Robust urban centers remain magnets for young professionals, and families in the millennial cohort have entered the housing market in force. Employers like Amazon mean a high-skilled, high-earning workforce that can afford to buy. It also means a lot of people are priced out.

The Wages of Inequality

Many people were never priced in. Perhaps the biggest barrier to housing in the U.S. is economic inequality. It’s not so much the price of housing itself; it’s that earning power has not kept up. Wages for low- to moderate-income workers have stagnated over the last few decades and now workers have to contend with supply chain disruptions and inflation taking a bite of their paychecks.

With low wages and high costs of living, just making rent means never saving up. As Barron’s reported in February, “full-time workers simply do not earn enough to make a down payment on a home” in many U.S. housing markets—especially after COVID layoffs. On top of this, many historically marginalized people don’t have existing home equity or access to intergenerational wealth, making a down payment on a home insurmountable.

Tales of Investment Capital

The old canard that Wall Street investors are responsible for high prices is wrong, but there is a kernel of truth. As reported by Fortune in June of this year, during the COVID housing boom, investors—tempted by loose capital, low mortgages, and high appreciation— bought up housing at record levels.

In the first quarter of 2022, “investors made up a record 28% of single-family home sales… up from 19% in the first quarter of 2021.” According to a study published by the Harvard Joint Center for Housing Studies earlier this year, this single-family home shopping spree further limited the supply for “potential owner-occupants” like first-time buyers.

In some cases, homes have been taken off the market and turned into rental units. As Forbes has reported, real estate investors and landlords receive large tax breaks for houses that are not available to live-in buyers. This has incentivized taking housing off the market.

Getting High on Supply

It’s not news that COVID led to supply chain disruptions across the entire economy. Perhaps the most notable supply shortage for homebuilders was in the lumber industry. In January, the National Association of Home Builders (NAHB) reported that the rise in lumber prices added $18,000 to the average price of single-family homes. Other materials, such as fixtures and windows, have also been affected by shortages, leading to construction delays and, inevitably, higher prices.

Labor Shortage Shuffle

Ever since the Great Recession, the residential construction industry has had a labor shortage. According to Zonda’s Ali Wolf, writing for MarketWatch, “Many skilled workers left the housing industry permanently as they reskilled and found jobs in other industries perceived to be more stable.”

While the labor market has improved since then, 62% of homebuilders report that they’re still falling short as workers retire or switch careers. The endless search for new employees means spending more money on salaries, recruitment, training, and retention—not to mention costly project delays due to staffing shortages—resulting in higher price tags.

Land and Regulations

Whether you’re a developer or a homebuilder, creating housing is very expensive. In some of the hottest markets—like San Francisco and Seattle—land itself is often in short supply, leading to high land values. As explained by housing developer Benjamin Maritz in “Meeting Great Expectations” in the fall 2021 issue of Master Builder, to break even, developers have to charge more for fewer square feet. And whether you’re buying a house or renting, it means paying more.

Add in regulations like lengthy permitting timelines, expensive tree ordinances, environmental review processes, and other onerous policies, construction becomes a very costly and time-consuming enterprise, reducing supply and passing costs onto homebuyers.

Even policies designed to create affordable housing can produce unintended consequences that stymie it. Seattle’s own inclusionary zoning policy, Mandatory Housing Affordability, slapped fees and floorspace requirements on townhomes, making starter homes ideal for first-time buyers too pricy to build. (See "The High Cost of Regulation" in the summer 2022 issue of Master Builder.)

Supply and Demand

This brings us to the biggest, most general cause of high prices. It’s a stone-cold classic: the law of supply and demand. Simply put, people want homes, and there aren’t enough of them, leading to higher prices. From 2018 to 2020, Bloomberg reports, the U.S. housing shortage increased from 2.5 to nearly 4 million units—and the shortage has only worsened.

According to an analysis by Pew Research published in March, “the number of active housing listings in the U.S. was at its lowest in at least five years in January 2022, with 408,922 active listings on the market,” a 60% drop from 1 million listings in February 2020. Meanwhile, single-family home prices rose from a median of $327,100 in 2019 to $408,100 in late 2021—a 25% leap!

Clearly we need supply. So, where is it?

Twilight Zoning

Along with the aforementioned permitting and environmental review processes, which add time and uncertainty to projects, there is also the dominance of single-family zoning in space-constrained cities like Seattle. You can’t have housing where you can’t build it. Some residents have even used environmental review and public comment to scuttle needed housing.

It’s natural to ask who benefits the most from these policies. In a 2020 report on the housing crisis, Brookings fellow Jenny Schuetz concluded the biggest beneficiaries are not builders, developers, or investors, but existing homeowners who’ve enjoyed a substantial, largely untaxed return on investment and the “political muscle to continue restricting new housing supply.”

The Bottom Line

If there is one takeaway from all this, it’s that there is no one issue to single out. Prices are driven by a complex mix of economic, social, and political factors. But the main driver is lack of supply, and the easiest, most direct way of addressing it is building a lot more housing for all types for all people.

The demand is there; people want housing. It's time to embrace solutions that support increasing supply of homes for current residents, newcomers, and future generations.

The Master Builders Association of King and Snohomish Counties (MBAKS) has proposed several ways to make it easier to build, including streamlining permitting processes, making zoning changes to facilitate more “missing middle” housing choices in our urban areas, and supporting workforce development to encourage people to enter the building trades.

MBAKS also works with policymakers and housing advocates to identify ways to create more affordable housing and offers the Housing Toolkit to help communities pursue policies that create more housing choices. Find out more about what MBAKS is doing.