Why are houses so expensive?

In just about every corner of America, it’s a familiar refrain. Housing is too expensive – if it’s even available.

All real estate is local, of course, and there are very specific reasons why a property in any particular community has the price tag it does. Still, there are a few key reasons why America has what many people consider a national housing crisis.

The single most important thing to know: Nationwide, demand has increased and there’s a shortfall estimated to be in the millions of homes.

More:The housing crisis threatens the American dream

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Is there a national housing shortage?

Yes, although there are differences of opinion on how bad it is. Mortgage guarantor Freddie Mac, whose economists have been tracking the shortfall for several years, updated their estimate in late 2024. The U.S. is short 3.7 million units, they reckon.

Most other estimates are either close to Freddie’s, or a bit higher or lower, making a shortfall of “a few million” a reasonable average.

Not enough home construction

There’s a lot more consensus on the reasons for the shortage. The biggest one: After the financial crisis of 2008, homebuilding activity tumbled. That’s understandable. Construction companies overbuilt during the housing bubble, and were left with a glut of homes when credit dried up and unemployment soared.

But construction has never caught up.

In 2019, the Joint Center for Housing Studies at Harvard wrote that in the decade after 2008, for every 100 new households formed, about 100 housing units were added. That sounds logical, but a healthy housing market needs some extra properties to account for old or dilapidated homes that are demolished or taken out of use – not to mention some vacancies so people can move around.

It's also sharply lower than the average since the mid-1970s, of nearly 130 new units for every 100 households formed. 

A report commissioned by the National Association of Realtors in 2021 examined that issue as well. Between 1968 and 2000, it showed, an average of 1.5 million homes were built every year.  Even accounting for the excesses of the early 2000's, that average fell to 1.225 million homes per year from 2001 to 2020. That adds up to a shortfall of 5.5 million units over 20 years.

Not enough homebuilders

With such a glaring deficit, why haven’t builders jumped on the opportunity to sell more homes? One of the biggest reasons is the labor shortage in the construction industry.

As of 2024, there were roughly 1 million fewer workers in construction trades than in 2007, according to the Joint Center for Housing.

Even with the backlog of homes that could be built, builders may not want to employ quite as many people as they did during the last bubble. But as the chart below shows, there's a lot of demand for workers. There are roughly double the number of job openings in the construction industry in recent years compared to before the bubble.  

As the National Association of Homebuilders explains, native-born workers “remain reluctant” to go into construction trades, so much so that the share of immigrants in the industry reached its highest on record in 2023: 25.5%. “Only during the housing boom of 2005-2006 was the industry absorbing a similar number of new foreign-born workers,” NAHB economists wrote.

More:The US is short millions of housing units. Mass deportations could make it worse.

How local restrictions can impact home building 

It’s very hard to quantify how local restrictions hinder the creation of more housing. But experts believe it’s significant. When cities and towns make it illegal to build anything other than detached single-family homes, or when they require certain levels of parking be available for new construction, or impose other regulations, it keeps the supply of homes lower than it should be.

One recent study compares the number of homes built to the number that could have been built, absent any zoning or other regulations. The researchers found a shockingly high number – 20 million homes – that were unbuilt, thanks to what many critics call “NIMBYism” – short for “Not In My Backyard.”

Another recent study reckons that NIMBYism could decrease the number of housing units allowed to be built by as much as 20%.

And as you might expect, the researchers determined that areas with fewer restrictions have a much better balance of supply and demand.

Investors in the housing market

It can be very tempting to blame “investors” for meddling in the market, buying homes to rent out that could be purchased by ordinary Americans instead. In 2024, it was one of the few points of agreement between the two presidential campaigns.

It’s also notoriously hard to track which buyers and sellers are investors and which are not, and it's also important to remember that while there are plenty of mega-corporations in the housing market, the overwhelming majority of real estate “investors” are “mom and pop” operations. Indeed, buying a bit more house than you need – say a duplex – and renting out the excess – is a tried-and-true way to get access to property.

However, it is also true that investors have been buying an increasing share of the homes on the market in recent years. The chart above, from data provider CoreLogic, shows that investors purchased between 15% and 20% of homes on the market in the years before the pandemic. But that share rose steadily until January 2024, when it peaked at an all-time high of 29.8%.

Housing demand has been rising

Many housing experts believe that the lack of supply, as explained above, is the biggest reason for the housing shortage, which in turn drives prices higher. But demand is also a factor, and one of the most important reasons demand is higher is the millennial generation.

There were 72.1 million millennials – people aged 23 to 38, the prime years for buying a home – in 2020, according to a Pew Research analysis. In 2023, millennials bought 38% of all homes, according to a NAR report – comprising the biggest category of buyers by age.

And a recent NAHB analysis shows that young adults formed new households at the fastest rate in a decade during the pandemic.