Higher Earners Driving Home Prices, Not Supply Shortages, Researchers Say

New research challenges the traditional view that housing supply constraints are the main driver of the affordability crisis in the U.S. Instead, the study finds that rising average income levels are a key factor in house price growth. This suggests that the affordability problem may be more tied to income inequality than to zoning or construction limitations according to the research.

Data from 321 metropolitan statistical areas show that average income growth has a strong positive relationship with house price growth. In contrast, housing supply growth is more closely linked to population increases. Metro areas with high income growth often experience rising house prices, but not necessarily an increase in housing units as the data shows.

The findings indicate that regulatory reforms alone may not solve affordability issues. Places with strong demand for highly skilled labor, such as San Francisco, tend to see higher house prices and less supply growth compared to areas with more middle- or low-income jobs, like Houston according to analysis.

Why Did This Happen?

Housing supply growth has historically kept pace with or exceeded population growth in most metro areas. However, this pattern does not directly correlate with income growth. When households become wealthier, they often prioritize improving the quality of their existing housing—through renovations or relocation—rather than increasing the number of housing units as the research indicates.

In contrast, population growth directly increases demand for new housing units, which in turn drives up both housing supply and prices. This distinction highlights two types of demand: one for housing quality and one for quantity. The former primarily affects prices, while the latter impacts both prices and supply according to the findings.

How Did Markets React?

The current housing market shows little improvement in affordability despite increased supply in some areas. Median household incomes have only risen about 17% over the past 20 years, while mortgage rates have nearly doubled since 2022. To return to 2019 affordability levels, incomes would need to rise by 56% or mortgage rates would have to fall to 2.65%—both unlikely in the near term according to market analysis.

The National Association of Realtors projects a 4% rise in home prices in 2026 as demand outpaces supply. This trend is expected to persist due to ongoing construction bottlenecks and zoning restrictions that limit new development as projections show.

What Are Analysts Watching Next?

Researchers emphasize that understanding the labor market is crucial for addressing the affordability crisis. Economic growth concentrated at the top of the income distribution has contributed to rising house prices, while middle- and lower-income households have seen fewer gains according to research.

Policymakers are exploring ways to increase housing supply through zoning reforms and streamlining permitting processes. However, the impact of these changes varies by region. For example, the South may close the supply gap within three years, while the Midwest could take four decades as data suggests.

Affordability is also being affected by external factors like mortgage rates and economic uncertainty. Consumer confidence remains cautious, with homebuying intentions in the Greater Toronto Area declining compared to previous years according to recent reports.

The research suggests that addressing the affordability crisis requires a broader focus on labor market dynamics and income distribution. Simply increasing housing supply may not be sufficient unless it aligns with the underlying demand patterns shaped by income growth as the analysis concludes.