Why are Real Estate Prices so Persistently High?

From the US to Canada and Australia, home prices are extremely high and they may not fall, according to housing experts.

There is some outrage, but there’s little action about it, because people don’t know what’s causing the problem. So they remain quiet and frustrated.

It’s understandable because of all the factors that play into high housing costs. It’s difficult to weed through them all to uncover the key culprit.

And we saw trillions of stimulus cash ending up in the stock market and housing markets. So it’s assumed to be all about that. But home prices were high before the stimulus bonanza.

It’s not easy to find the core cause, yet it will almost certainly turn out to be political.

Are High Prices Really the End of the World?

High home prices don’t directly end people’s lives of course. But they cause a lot of pain.

Lofty prices can result in a good portion of the population living paycheck to paycheck, with no savings and huge mortgage payments or paying rent they can’t afford without hope of ever gaining financial stability.

After all, real estate is the main way people store wealth. And global investors also see real estate as the route to riches and they’re very interested in North American real estate.

Despite a pandemic and fast rising home mortgage costs, home prices remain just below record all-time highs. In some cities, prices are rising or show few signs of reversing. There’s a surprising number of factors, discussed below, that actually ensure high home prices.

In some states, such as California, there are signs of lower prices. California’s high taxes, business regulations, high real estate prices, oppressive new culture, and business tax is sending companies and residents fleeing to other states. That is reducing demand in Los Angeles, San Diego, San Francisco and the Bay Area.

In the Florida real estate market, continuous demand from immigration and retirees, and a pro-business state government supports higher home prices.

Other states which had the fastest price growth are nearing a scary situation, but likely won’t see a price collapse. Some pundits are forecasting a crash as steep as 20%, yet the economic recovery will send them back up again. Cities with the lowest prices may not be affected because demand from retirees and work from home nomads will support demand there. (See more on the best cities to buy rental homes).

Home Prices are Levelling Off

As this chart of home prices from Zillow reveals, home prices (at record highs) have leveled off which is not quite what buyers were hoping for. Buyers still yearn for a housing market crash, as though that would push prices back down to where they can afford them.

But with 9% mortgage rates in view, how could they possibly buy a home?

US Home Prices Chart.
US Home Prices Chart. Screenshot courtesy of Zillow.
Forecast for housing market to 2026.
Forecast for housing market to 2026. Screenshot courtesy of Goldman Sachs.

$1.6 Million Price on Average!

In my previous town of residence, home prices hit a ridiculous price of $1.6 million on average. It was a nice town, and rich people wanted to live there. That meant the non-rich had to leave.

This scenario is being played out across thousands of cities, as the real estate markets seem plagued by a sadistic disease, unknown in origin with no obvious cure, and masked as progress. Further, the issue is called “affordability” by some, but that vague term only describes a price at the very upper range of what they could buy. It’s not truly affordable.

Even after years of relentless rises, it seems there’s no clarity about the cause of rocketing home prices (and in turn sky high rent prices). The media doesn’t seem to want to touch the matter (unless they can frame their political opponent as somehow responsible for a part of it).

But more credible investigators are researching and assessing the matter.  One villain has appeared as the most significant cause of soaring prices of land, houses, condos and townhomes. And it’s the one that the media won’t report on.

When Will Prices Fall?

Buyers and renters alike are wondering when home prices are going to fall.  They’re pointing to fast rising interest rates as the cure. But financial market people are believing the central banks will give up on raising rates. That would ensure long term inflation, strong wages, renewed bidding on homes, and reduced home construction which means continuous high prices for housing.

When home prices stay high for elevated periods, people must rent, and they may never have sufficient funds to buy, especially if interest rates rise.

One of the biggest harms in ridiculous overvaluation in housing is people give up on dreams of owning. More people rent today, and more of them are aware of how they are not building any personal wealth, in an era of disappearing social support. The housing market forecast is as gloomy as it can be for homebuyers.

National Association of Realtor’s Views

NAR’s Lawrence Yun believes home prices may not fall in 2023, and could even rise further:

“Housing inventory is about a quarter of what it was in 2008,” Yun said. “Distressed property sales are almost non-existent, at just 2%, and nowhere near the 30% mark seen during the housing crash.”

He forecasts home sales will fall by 7%, while the home prices will likely increase by 1%, with some markets seeing rising prices while other markets see declines.

Daryl Fairweather, Redfin’s chief economist believes it “might go down a little bit, but a crash I consider to be a more than 10% decline in home values, and that seems far-fetched right now.

Available inventory is rising slightly but most homeowners don’t want to sell. They either don’t have anywhere to go, or they don’t want to let go of their current cheap mortgage rate. The status quo reigns supreme.

If this is the case, why are people talking about a housing market crash?  That’s more about economic mismanagement by the government leading to a deep recession. That keeps getting kicked down the road, however there still is merit to it. The Republicans want to control spending and the Democrats have hit the spending limit. This battle could determine the forecast for the economy and housing market.

The Long Term Cost of High Real Estate Prices

Rising homelessness from many causes striking many different types of people, warns that this situation may become ingrained in our culture if something isn’t done soon.

In fact, wickedly high prices can create significant social harm far beyond dashed dreams. It’s more than evident across California.  When real estate values soar, wages level off, and inflation begins eroding discretionary spending and savings, people get depressed.

And that state of depression and ensuring behaviors don’t just stop. The drug abuse, crime, social problems, family strife, and dour expectations continue. And most often after a recession, it takes the impoverished much longer to recover. Policing, legal, prison costs, and social spending costs remain elevated.

And taxes generally do not retreat to previous levels. It’s estimated that people are paying above 50% of their income in taxes. With Liberal/Democrat governments planning to spend more and run deeper fiscal deficits, inflation could continue thus interest rates would have to remain elevated.

Although home prices are falling in some cities and states, they’re rising in others. The answer to our question then, is that prices won’t fall soon. And if government spending continues, while high immigration numbers rise, thus increasing demand, then home prices cannot possibly fall much.

It would take some time to bring residential real estate prices down.

What is the Cause of High Home Prices?

Let’s review the 10 major generators of high prices one more time:

  1. high demand for homes from millennials forming families
  2. high immigration bringing new buyers into the market
  3. local government/NIMBY regulations preventing home construction
  4. local government fees and taxes on new construction and land lots (lot levies above $50,000, land transfers taxes at 3% in some cities)
  5. local government regulations causing long delays for building permits (up to 5 years in some locales)
  6. foreign money flooding into the economy often into the real estate market
  7. excessive government spending and printing of money (money supply growth)
  8. materials and land too expensive thus making it hard for builders to build homes
  9. city and state taxation on real estate transactions
  10. economic recovery and low unemployment that has lasted over a decade

Supply chain issues are a factor right now, but should ease in future.  Do speculators and rental income investors cause higher prices too? They may have at one point, but few are speculating on big price rises now. Rental property buyers simply buy houses people couldn’t afford to house those people as renters, otherwise, they’d be homeless.

With more buyers cancelled out of the market, they cease to be a cause of high home prices.

The Number One Cause of High Home Prices is?

Which factor is the single most influential in raising the prices of homes? It’s arguable.

Most would say there’s too much money chasing too few homes, yet home prices have been rising fast for decades, right through recessions.

Some would say local government greed, excessive regulations and the blocking of housing development is the real culprit.

The extra fees and taxes some charge would drop home prices significantly.  Opening up land for housing would cause a huge drop in prices. Yet, NIMBYs don’t want more people in their jurisdictions and local regulations help to keep them out.

Yet, local governments have been given very little scrutiny in this high price debacle. Some were given permission due to the need to discourage foreign money and prevent money laundering. In some cases, state or Federal governments had no power to police the abuses being perpetrated — full control was downloaded to local governments over real estate.

Too many governments see real estate as an easy target for clawing out tax dollars. Given that income tax and other taxes were already excessively high, they needed to claw the money from someone else. Real estate was targeted, and fees and taxes were applied to almost every aspect of the industry.

Those taxes and fees added to the cost of homes being built or renovated.

There is a case to support NIMBYism.  They stop unwise overpopulation, prevent slums from forming, and keep neighborhoods livable.  In some cases, NIMBYs stop an influx of hostile invaders who hope to push them out and take over their neighborhood/city/state.

This threat is most visible in California and Texas where invading masses of illegal immigrants have swarmed communities and threatened them with violence and to supplant them via political routes.

If building more housing just to house millions of immigrants is the goal, you can see how some would question why that is necessary at all.  Both US and Canadian governments are ramping up immigration to record levels even in the midst of a recession and a severe housing shortage. This will only add to increasing home prices and cause taxes to grow as well.

So the case for lower home prices doesn’t have much support.  The shortage of homes is so severe, that few remedies can hope to reduce prices.

A possible solution is to limit immigration, end regulations on supply production (importing lumber and steel from Canada) and open up land use, and provide hundreds of billions of dollars in tax incentives to support builders to take on the risk of building house and multifamily developments.

Now you know the cause of high home prices, so what are you going to do?

See more on the housing market forecast and the Housing Market Outlook for the Next 5 years |

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