Rising Incomes, Not New Housing, Drive Home Prices, Fed Study Finds
Average U.S. home prices have risen in lockstep with income growth over the past half-century, while new construction has barely registered in the equation, according to economists at the Federal Reserve Bank of San Francisco. However, its new report suggests that housing affordability may hinge more on how income is distributed than on how many homes are built.
Researchers Schuyler Louie, John Mondragon, and Johannes Wieland—joined in this latest study by Rami Najjar—found that average income growth strongly correlates with rising home prices but is "essentially unrelated" to growth in housing supply.
In contrast, population growth, not income, appears to drive the construction of new housing units. "House prices kept pace with average income," they wrote, "but there is almost no connection between average income growth and growth in housing supply."
That finding challenges the long-held assumption that supply constraints, such as local regulations, are a primary cause of high housing costs. In earlier work, the same San Francisco Fed team concluded that these constraints did not fully explain variations in home price growth or affordability among metro areas.
Examining decades of data, the researchers observed that from 1975 to 2000, home prices roughly tracked median personal income. But as average and median incomes began to diverge—reflecting broader gains among top earners—prices followed the average. Between 2000 and 2008, housing prices surged ahead of median incomes, mirroring the rise in average earnings, only to fall back during the Great Recession, then climbed again after 2012, aligning with average incomes by 2020.
According to the report, housing demand and prices moved almost one-for-one between 1975 and 2024, suggesting that affordability problems may stem less from housing shortages and more from uneven income growth. In other words, the housing challenge is also a labor market issue, where higher-wage job growth fuels price increases that outpace what middle-income earners can afford.
Historical patterns reinforce that connection. Just before the Great Recession, many households followed prevalent advice to "trade up" in the housing market, inflating prices beyond what most incomes could support. When mortgage-backed securities collapsed, valuations crashed, and foreclosures surged.
A similar surge occurred during the pandemic when low interest rates, investor appetite and remote-work demand funneled money into housing and commercial real estate, propelling prices even higher.
As past GlobeSt.com reporting has shown, new projects increasingly targeted wealthier buyers and renters, as developers needed higher returns to justify soaring costs. The latest research implies this trend may be structural—reflecting a deeper link between wage inequality and the limits of who can afford a home. Ultimately, housing markets appear to price toward the top of the labor market, not its middle.
Source: GlobeSt/ALM