As U.S. home prices soar at a record pace, the American dream is becoming out of reach.
Ethan Carpe made more than two dozen offers on homes in Phoenix, Arizona, after starting his search in 2020. But as competition intensified, prices in the sprawling desert city rose 14 percent in 2020 and then another 32 percent last year, eventually pushing him out of the market.
“It’s insane,” said the 29-year-old statistician, who has been repeatedly beaten out by buyers offering cash.
“At this point, unless something drastic happens, there’s no plan to get back into the market,” he added. “If you don’t get in now, it’s going to be hard to get in.”
Home prices across the U.S. have risen nearly 30 percent since 2019 as supply has hit record lows, according to the National Association of Realtors.
Meanwhile, household incomes have remained virtually unchanged.
This disconnect has created a rapidly escalating crisis, as affordability problems, once concentrated in large coastal centers like New York and San Francisco, have spread across the country, touching midsize cities, small towns – and even rural counties.
“You’re seeing increasing affordability pressures,” said Alexander Herman, senior research analyst at Harvard University’s Joint Center for Housing Studies. “And the price increases are not only unprecedented nationally. We’re also seeing unprecedented price growth in most markets across the country.”
A typical single-family home in the U.S. now sells for a new record of about $350,000, more than five times the median household income.
The rental market – which saw asking prices soar 14 percent last year – has seen little relief.
The pressure is particularly acute in Phoenix, known for its sunshine and large suburbs.
The city of 1.6 million has long been a hotspot for retirees and a major destination in the so-called “Sun Belt” of the United States, which is booming as people head south and southwest for jobs and relatively low costs.
It’s in the heart of Maricopa County, which last year – for at least the seventh year in a row – added more people than any other county in the country, most of them from more expensive places like Los Angeles.
The influx has pushed up prices and led to a supply crunch, making the area the fastest-rising real estate price in the country.
“It’s crazy, and it doesn’t seem to be getting better anytime soon,” said Butch Lieber, a real estate broker and president-elect of the Realtors Business Association in Phoenix.
Ethan, originally from California, first moved to the desert town after graduating from a nearby university to join his brother in the area. He returns in 2019 after graduate school, in part because of his relative affordability.
He was looking to purchase a three-bedroom, two-bath property for about $325,000.
But the market – up 6.5 percent in 2019 – has changed amid bidding wars and a frenzy of cash buyers, at least some of whom plan to convert their homes to rentals.
Right now, he says, homes like the one Ethan is considering are going for $500,000 – which leaves him short on savings.
Ethan says he doesn’t want to rent forever, but at the current rate of price increases, “it’s going to be tough.” Rents are also rising – up more than 20 percent in Phoenix last year – which makes inventory even more difficult.
“It’s just frustrating,” says Ethan, whose landlord raised the monthly rent on the two-bedroom property he shares with his girlfriend last fall by $400 – nearly 30 percent – to $1 ,750. “You get a raise, and it goes directly to the apartment company.”
Driving prices higher
Analysts say rising home prices reflect a severe supply shortage, rather than a bubble fueled by risky loans like the 2008 financial crisis.
But the situation is not unique to the United States.
Since 2015, real estate prices have grown faster than incomes in most major economies, including Canada, Germany and the United Kingdom. This disconnect has intensified since the outbreak of the 2020 pandemic, when policymakers around the world cut interest rates sharply to stabilize economies, unleashing unusually low borrowing costs.
“We are in a unique period where rising home prices are disconnected from household incomes, in part because of the staggering amount of money involved in housing,” says Suzanne Lany Charles, professor of urban and regional planning At Cornell University.
As pressures divide the U.S. into a nation of homeowners and non-homeowners, they raise the question of how long such growth can continue.
At about 65.5 percent, the U.S. homeownership rate is still more than three percentage points below its pre-crisis peak – and homeownership rates are still lower among young people and people of color.
Meanwhile, big investors accounted for one-fifth of purchases as of the end of last year, according to Redfin. in Phoenix, Mr. Lieber said, first-time homebuyers make up just 64 percent of the market.
“People want to know if one is creating a permanently independent America: homeowners are doing well and building wealth, while first-time buyers are being left out and the American dream is unattainable,” said Lawrence Yun, chief economist for the National Association of Realtors.
“Is this going to exacerbate social discontent? Right now we’re essentially approaching that situation unless we dramatically increase supply.”
The situation is drawing growing political attention, including calls for more investment in affordable housing and stricter rules for landlords.
The market is responding, too. Construction has increased, and last month the U.S. central bank raised interest rates for the first time since 2018, a move that should help curb price appreciation by cooling demand.
But for now, experts say supply has so far outstripped demand, and they expect prices to remain high. The increased costs will only make it harder for first-time buyers and people with moderate or low incomes to enter the market.
“It’s going to take a decade or more to really see real progress,” Mr. Herman said.