Last Updated: February 13, 2024
Real estate prices have climbed by a staggering 15% over the past year to the dismay of hopeful buyers. Why are homes so expensive? Many factors play a role, with supply and demand being one of the most influential. Our experts answer frequently asked questions and resolve many ambiguities by looking at economic factors and if home prices will drop in 2022.
Why Are Homes So Expensive?
In the 1940s, house prices increased by 43%—the highest in history. In the 1980s, this rate slowed with an 8% increase. And after the recession of the early 2000s, prices decreased by 12%. These increases have become troublesome to a household who wonders if they should buy a house because their income hasn’t kept pace with the increase of property prices.
The world has been in a financial crisis since the outbreak of the COVID-19 pandemic. Yet, house prices have still been increasing. Why are houses so expensive right now? Many political and economic factors play a role in this consistent increase, including:
- Low-interest rates
- Increase in building costs
- Demographic changes
- Zoning regulations
- Land price augmentations
- COVID-19 pandemic
|NOTE: The average cost to build a house in 2021 is an estimated $298,432. It typically ranges between $154,000 and $477,00 to build a home.
Homes are too expensive due to the impact of the following six economic factors.
A lower interest rate might sound appealing, but when interest is low for too long, the cost of financing a home decreases too. Even those with a low income can purchase a home because of these reduced financial costs.
Consequently, many more prospective buyers turn into homeowners, which ultimately results in fewer properties on the market. As a result, the housing market is nearly drained because there isn’t any supply for the demand. And because there’s a demand, housing prices rise.
Building Costs Increases
Why are houses so expensive? Another major influencer in the rise of housing prices includes the increase in building costs, construction, and building materials. And not all building materials are manufactured in the US, which means they need to be imported. In addition, trade agreements between the US and other countries—and political developments of said countries—influence the cost of importing building materials.
Because of tariffs exacted on imported materials, prices are much higher. Additionally, building companies have also increased their labor prices.
Millennials constantly ask: “Why are homes so expensive right now?” Demographic change within a country refers to the shift in population in terms of average life expectancy, birth rates, family structures, and average age. Consequently, the rising generation of millennials has become avid property purchasers and, because of this demand, housing prices have increased.
Why are new homes so expensive when investors or buyers build on open land? Purchased land and properties fall under strict zoning laws and regulations. Zoning regulations refer to local or municipal laws and regulations regarding properties in various suburbs and regions, including limits on neighborhood capacities, population regulations, and allowance requirements.
- The four major zoning types include:
- Functional Zoning—determined by the function to build industrial, commercial, or residential property
- Intensity Zoning—defined by the number of residential or commercial surfaces used
- Form-based Zoning—defined by their physical characteristics
- Incentive Zoning—typically part of developmental or revitalization plans
Understanding these laws and regulations is one of the most important things to know before you buy a house. So why are housing prices so high in certain areas? It’s probably because there are zoning laws in the area you want to buy, which could be in high demand. And an urban area, for example, doesn’t allow for the development of properties in demand.
Land Price Augmentations
Buying open land has become more expensive as the population grows. So even though there isn’t a shortage of land in the US, it has drastically increased in price. And the average cost of housing is directly linked to this increase in land costs.
Why do houses cost so much now, especially when the world is in financial distress due to the COVID-19 outbreak? Even though the booming increase in house prices has been welcomed by homeowners (65% of American households are owners), it has been devastating to those who want home ownership.
The global coronavirus outbreak has made the US realize a shortage of homes. The lowest number of homes built (since the 1960s) was between 2010 and 2019. And with people working from home, the need for space has become quite a concern. So, ultimately, you wonder, why is real estate so expensive in 2021? It’s because the demand has significantly increased.
On the flip side, with the mortgage rate reaching a record low because of the pandemic, the cost of borrowing money to purchase homes with bad credit has also dropped.
|NOTE: Housing prices rose 9.5% in November 2020 from the same month in 2019 and have climbed a further 15 to 20% over the last year.
|An American’s salary doesn’t increase at the same rate as housing prices.
|Building costs have increased due to higher import tariffs.
|With the increase in home purchasers, the demand for new properties has also increased.
|The demand for properties is much higher than the rate of supply.
|Those with bad credit scores and no credit can borrow money to rent apartments at much lower costs.
Home Prices in 2022
Why are houses so expensive now, and will prices drop in 2022? The current growth in housing prices isn’t sustainable. As the age-old saying reads, ‘what goes up must come down,’ the same applies here. It’s predicted that home buyers will ultimately start pushing back offers on apartments and properties because they cannot afford the sky-high prices.
As potential homebuyers struggle with inflation of home prices, the demand for homes also decreases. And according to Fortune’s predictions, there’s also a likelihood that the Federal Reserve will raise mortgage rates to tamp down property value inflation, which may eliminate some buyers entirely.
|NOTE: At the end of 2019, a single-family home’s estimated value was $245,000; it’s now worth more than $266,000.
Even though many political and economic factors play a role in homes that are too expensive, the main impact of the rise in prices is that demand is much higher than supply. With many financial institutions lending to bad credit holders—providing them with the opportunity to purchase property—the housing market became overflooded with potential buyers and an insufficient number of properties to sell.
House prices are directly linked to the demand for housing. So when there aren’t enough homes available for prospective buyers, the price automatically increases. In addition, with it becoming easier to get financial support from mortgage lenders, buyers with bad credit can also purchase homes. And buyers outbid each other, further increasing prices.
Yes. The asking price and real property value do not correlate in the current situation. Homeowners and realtors can push up their prices because buyers bid against each other to get their hands on limited properties.
Experts have predicted that there will be a drop in home prices because potential buyers are stepping back, ultimately easing the demand for new homes.
So why are homes so expensive? Again, it comes down to supply and demand. And the COVID-19 pandemic has accentuated the shortage of properties in the US for potential buyers.