Housing as a Flow Market: Demand, Not Supply, Drives Prices

The market's core trend is clear: prices are climbing, and they are doing so at a pace that far outstrips the supply of homes. The national median single-family home price reached five times the median household income in 2024, a level not seen since the 1990s. This record-high price-to-income ratio is the central signal, showing that affordability is under severe strain.

The data points directly to demand as the driver, not supply. Research shows that average income growth "relates strongly" to house price growth, while there is almost no connection between income growth and housing supply growth. This disconnect is critical. It means that as incomes rise, they are translating directly into higher home prices, not into more homes being built.

Supply growth is actually outpacing population growth, even in the most expensive markets. The analysis confirms that housing supply grew faster than the population even in expensive markets like San Francisco. This evidence directly contradicts the common narrative that a shortage of homes is the root cause of high prices. The flow of money into housing, driven by income growth, is the dominant force.

The Demand Engine: High Earners and the Affordability Gap

The core affordability metric has deteriorated sharply. The mortgage payment for a median-priced home now consumes more than 30% of median household income, up from about 21% in 2019. This widening gap shows that the flow of demand from higher-income households is outpacing the ability of typical buyers to keep pace.

Closing this gap would require either a massive income surge or a dramatic drop in borrowing costs. Realtor.com calculates that affordability would need to return to 2019 levels, which would require median household income to rise 56% to over $132,000, or mortgage rates to fall to 2.65% from current levels near 6.15%. Neither scenario appears likely in the near term, trapping the market in a high-price equilibrium.

The pressure is most acute for first-time buyers in the least affordable metros. In 2024, the price-to-income ratio for first-time buyers in San Jose was 4.8, the highest among the 60 largest metros analyzed. This extreme barrier highlights how demand from high-earning professionals is capitalizing into prices that push entry-level homes further out of reach for the average buyer.

The Supply Counterpoint: Why Supply Isn't the Issue

The traditional narrative blames a shortage of homes for high prices. Flow data tells a different story. The number of vacant homes has risen by only about 570,000 units over 20 years, a slight increase that reflects a tightening market, not a scarcity. More critically, the stock of homes for sale has actually declined, with the number of homes available for sale dropping by nearly half a million units since 2005.

Supply growth is mechanically tied to population, not to income or regulation. Research shows that housing supply growth has a strong positive relationship with population growth, while there is almost no link to income growth. This means builders are responding to headcount, not to bidding wars. The flow of new units is a function of demographic expansion, not a variable that can be easily manipulated to cool prices.

Even in the most expensive markets, supply is outpacing demand. The analysis confirms that housing supply grew faster than the population even in expensive markets like San Francisco. This is the key contradiction. If supply were the binding constraint, prices in these high-growth areas would be lower. Instead, they are higher, proving that the flow of demand from high earners is the dominant force, not a lack of bricks and mortar.

The Flow Ahead: Future Catalysts and Risks

The demand-driven thesis is clear, but its future hinges on a few key flows. The primary catalyst to watch is whether rising incomes in specific metros continue to outpace local housing supply growth, driving prices higher. The research shows average income growth "relates strongly" to house price growth, while supply is tied to population. If high-income job growth in places like San Francisco or Austin accelerates faster than the local population, it could fuel another round of price pressure, confirming the thesis.

Policy shifts targeting high-income earners or capital gains represent a potential counter-flow. If lawmakers introduce measures that directly tax luxury home purchases or reduce the tax advantage of owning property, it could alter the demand dynamics for high-end homes. This would be a direct intervention into the flow of money from high earners into housing, a risk that could dampen price growth if implemented.

The most significant structural risk is a sustained oversupply of housing, which would contradict the thesis of persistent demand-driven pressure. This scenario is tied to the projected slowdown in household growth. The Center for Housing Policy projects the number of U.S. households will increase by approximately 860,000 per year between 2025 and 2035, a pace far slower than recent decades. If this deceleration leads to a long-term surplus of homes, it could eventually break the link between income growth and price appreciation, shifting the market's fundamental dynamic.