By Mike Walden
The numbers are jaw-dropping. In 2020, the average house price rose 11%. In 2021, home prices jumped another 19%. And, if the price gains thus far in 2022 continue for the entire year, the price of the average home will have increased 28%. Including compounding, this would mean an astounding 69% rise in home prices over three years.
These are national averages, meaning in some markets the price jumps have been larger, while in others they have been smaller. Also, the methodology for generating the numbers only compares repeat sales for the same homes. This means none of the price gains are due to comparing bigger or better homes to smaller homes or those of lesser quality.
Of course, like many things, the pandemic has had an impact on home prices. Historically low interest rates – complements of the Federal Reserve – plus stimulus checks and other federal financial assistance motivated more home-buying. At the same time, economic shut-downs and slow-downs have increased the cost of many construction materials. For example, lumber prices are more than twice as high today as prior to the pandemic.
Most economists think these impacts of the pandemic on the housing market will dissipate over time. Does this mean house prices will eventually come back to earth?
Not necessarily. Even before the pandemic, home prices were increasing faster than household income, especially in metropolitan areas. The reason is simple. Metro regions have experienced substantial economic expansion during the 21st century. They are home to growing industries like technology, finance, healthcare and professional services. Metro areas also have colleges and universities that train highly-educated graduates to work in these sectors.
As a result, more households have moved to metro areas for work. Over 80% of the nation’s population now lives in metropolitan regions, even though those regions account for only three percent of the nation’s land mass. We can see this shift in North Carolina, where urban areas like Charlotte, the Triad and the Triangle are rapidly growing, while numerous rural counties are losing population.
Housing requires land, and as more people have moved to metro areas, that land becomes more expensive. The higher land costs are then passed on to higher prices for homes and more expansive rents for apartments. Certainly, households can move to the outer edges of metro regions where land is less expensive, but then they often must endure long and congested commutes to access jobs, shopping, schools and entertainment.
So, what can be done? Some communities have imposed controls on housing prices, particularly for apartment rents. While such controls can provide immediate relief, research also shows the controls can result in less maintenance and repairs for units, and can also discourage construction of new units.
Another possibility is public subsidies for housing. For example, rents or mortgage payments paid might be set at some percentage of the household’s income. Costs above that would be paid by a governmental body, like a municipality, county or state. Some communities have these or similar programs, but they are very limited in the number of households assisted.
The reason is these programs can become very expensive, very fast. Each year households spend near $1 trillion on their house payments and rents. Subsidizing even a small part of this amount can quickly create a major expense for the government.
Rather than working on the consumer side to address the problem, an alternative is to approach the issue from the supply side by encouraging more construction of housing units. Tactics include changing zoning to allow more density per land area, meaning more housing units can be built in the existing space of the community.
However, zoning changes are not without controversy. Residents who bought homes in a neighborhood because of its low density might feel cheated from a zoning change allowing higher density. There are also concerns about higher densities reducing open space.
Another supply approach is to alter local regulations to allow lower cost construction methods, such as modular construction. Here, the components of a dwelling are made in a factory and assembled at the dwelling’s site, potentially reducing costs 10 to 20% compared to “stick-built” construction where the entire structure is built on site.
Lastly, some futurists think the high cost of urban housing could be defeated by remote work. For someone working remotely, daily access to a work site in the city will not be a necessity. Plus, as drone delivery of products and online delivery of services such as education and medical care become more widespread, living in rural and small-town areas where housing costs are cheaper will become more plausible and likely.
Housing costs are the biggest single expense for most people, and those expenses have gotten bigger during the 21st century. Can housing costs be moderated, resulting in an increase in the average person’s standard of living? You decide.
Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University.