Are rising home prices due to larger paychecks?

Key Takeaways

• A new paper by three economists found that the main cause of rising housing prices is rising incomes rather than supply levels.
• The paper raises questions about economists' conclusions that limited housing supplies are behind stubbornly high housing prices, instead of pointing to higher wages.
• The economists claimed that proposed changes to zoning and housing regulations may not have the expected effect on housing prices.

The price of houses has been steadily rising and economists point to the same culprit: a low supply. There are too few houses to buy, so sellers can demand higher prices.

Three economists, however, have come to a different conclusion about what could be driving up home prices. They say that rising wages are the likely culprit. 

The trio argues, in a paper released by the Federal Reserve Bank of San Francisco (FRBSF), that areas with a higher income growth will usually have higher housing costs. Supply levels are less influential on price movements as is commonly believed.

The authors’ conclusion could have policy implications, as they raise questions about the need for regulatory changes and zoning that some have claimed are necessary to boost housing market.

“Contrary prevailing beliefs and influential narratives, our empirical findings consistently demonstrate that higher household income growth predicts the same growth in house prices and housing quantities, population and living space per capita across more and less constrained cities,” wrote Schuyler Louis, an economist at the University of California at Irvine, and San Francisco Fed’s John Mondragon, and Johannes Wieland.

The rise in housing prices and supply is linked to rising incomes, according to a new paper

The paper examined housing supply elasticity. This measures how much housing supply will change when prices change. Housing supply elasticity differs across cities and regions. Local housing regulations and geographic constraints have an impact on the amount of housing supply that can be added as housing prices increase.

The economists' research showed that a city or region that has higher income increases will not only see greater growth in home prices, but also increases in housing quantities, population, and rooms per person. The reaction to higher incomes occurs regardless of the city's housing supply constraints, the report showed.

"These results challenge the prevailing view of local housing and labor markets and suggest that easing housing supply constraints may not yield the anticipated improvements in housing affordability," the paper said.

The paper is released as wages in the U.S. continue to rise. According to the latest Census Bureau data, the median income increased by 4% in 2023. The housing market continues to face affordability challenges, with high prices pushing existing home sales to their lowest level in three decades in 2024. 

Paper Argues Zoning Changes Might Not Help With Prices

The conclusions could have policy implications. Many economists cite a lack in housing supply as the primary factor that drives prices higher. They estimate that the market is nearly 4 million homes short of demand.

Some economists attribute the lack of housing supply to local housing regulations, which make it difficult to build houses. This is especially true of zoning laws that favor single-family homes over other types. 

"Our findings challenge the consensus that relaxing regulatory constraints would substantially lower housing prices and meaningfully expand housing quantities," the authors wrote.