Why Are Houses So Unaffordable? A Breakdown of the Causes

The ability to afford a home has become a growing concern for many individuals and families across the United States. This widespread challenge impacts both aspiring homeowners and those seeking stable rental housing. The issue extends beyond specific regions, affecting communities nationwide.

Insufficient Housing Stock

A fundamental imbalance between the available number of homes and the demand for them significantly contributes to rising housing costs. The United States has been building new homes at a slower pace than needed for over a decade, leading to a substantial deficit. Estimates suggest a current shortage of over 4.5 million homes nationwide. This underbuilding has constrained the quantity of housing available, directly influencing price increases for existing properties.

Restrictive zoning laws often limit the types and density of housing that can be built. Single-family zoning predominates in many areas, preventing the construction of multi-family dwellings or smaller, more affordable housing options. Slow and complex permitting processes at local government levels also contribute to delays in bringing new housing units to market.

Even when land is available, its developable status can be restricted by local regulations, environmental considerations, or existing infrastructure limitations. These factors constrain the creation of new housing units. The cumulative effect of these supply limitations is a market where competition for available homes intensifies, driving up prices.

Surging Demand

An increasing number of potential homebuyers entering the market intensifies competition and drives up prices. Population growth contributes to this rising demand. Demographic shifts, particularly millennials reaching prime homebuying age, represent a substantial cohort seeking homeownership.

The formation of new households further fuels demand, as more individuals or groups seek independent living arrangements. The increased prevalence of remote work has also influenced housing demand, allowing some individuals to seek homes in areas previously considered less accessible due to commute times. This flexibility can concentrate demand in certain regions, leading to localized price increases.

Escalating Development Costs

The rising expenses associated with constructing new homes directly translate into higher sale prices for consumers. The cost of construction materials has experienced significant increases and volatility. For instance, construction costs represented 64.4% of the average new home price in 2024, a record high since 1998.

Labor shortages in the skilled construction trades also lead to rising wages, further increasing overall building expenses. Various fees and charges imposed by local governments during the development process add to the final cost of a home. These “impact fees” are one-time capital charges levied on developers to help fund public services and infrastructure necessitated by new development.

Impact fees can average around $13,627 per single-family unit. These fees are ultimately passed on to the homebuyer, increasing the overall purchase price. The cost of financing for developers, including interest on construction loans, adds another layer of expense that is incorporated into the final sale price of new homes.

Financial Market Dynamics

Broader economic and financial conditions significantly influence housing affordability. Interest rates play a substantial role, as they directly affect mortgage payments and the overall cost of borrowing for homebuyers. Higher mortgage rates reduce a homebuyer’s purchasing power, meaning they can afford less house for the same monthly payment.

The Federal Reserve’s monetary policy, particularly changes to the federal funds rate, indirectly influences mortgage rates. When the Fed raises its benchmark rate to combat inflation, it generally leads to higher borrowing costs across the economy, including for mortgages. The 30-year fixed-rate mortgage has hovered above 6% for most of the last three years.

Another factor is the stagnation of wages relative to the appreciation of housing prices. Home prices have grown significantly faster than incomes over the past decades. Between 1985 and 2023, the median household income grew by 241%, while the median price of houses sold climbed by 408%. As of 2023, the median house price was nearly six times the median household income. Federal Reserve Board staff research indicates that the costs of owning a home relative to median income in 2023 were at their highest level since 1980.

Investment and Speculation

The involvement of non-primary residence buyers in the housing market also contributes to affordability challenges. Institutional investors have increased their presence in the single-family rental market. These entities often purchase large portfolios of homes, frequently for rental purposes, which reduces the inventory available for individual homebuyers.

While institutional investors own a relatively small percentage of the total single-family rental stock nationwide, around 2%, their concentration in specific markets can be substantial. For instance, institutional investors own an estimated 25% of Atlanta’s single-family rental market. This concentrated activity can intensify competition and drive up prices in those areas, especially for lower-cost homes that are often targeted by investors.

Individual investors also contribute to market dynamics by purchasing properties for short-term rentals or as speculative investments. The rise of short-term rental platforms has incentivized some owners to convert residential properties into temporary accommodations, further reducing the available housing stock for long-term residents. Speculative buying, driven by the expectation of rapid price appreciation, can inflate housing values beyond what local economic fundamentals might support. These investment activities can exacerbate supply shortages and contribute to price increases, making it harder for owner-occupants to compete in the market.