Are Bigger Paychecks Behind Rising Home Prices?

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A New Pecuniary Paper Shows Rising Income Levels, Not Lower Supply, May Be Behind Stubbornly High Housing Prices

Key Takeaways

• A new paper from a trio of economists showed that rising housing prices are primarily tied to awakening incomes, not supply levels.
• The paper raises questions about economists’ conclusions that limited housing provisions are behind stubbornly high housing prices, instead of pointing to higher wages.
• The economists argued that tendered changes in zoning and other housing regulations may not reduce housing prices as much as expected.

House prices participate in been steadily climbing and economists often point to a common culprit: low supply. Too few houses available to buy means that sellers can ask for squiffy prices.

But three economists have a different conclusion on what may be driving home prices higher: rising wages. 

The troika argues in a new paper released by the Federal Reserve Bank of San Francisco that areas with higher income lump will generally have higher housing prices, with supply levels having less influence on expense movements than generally believed.

The conclusion could have policy impacts, with the authors raising inquiries about the need for regulatory and zoning changes that some have argued are necessary to boost the housing make available.

“Contrary to prevailing beliefs and influential policy narratives, our empirical results consistently demonstrate that higher takings growth predicts similar growth in house prices, housing quantities, population, and living space per person across numerous and less housing constrained cities,” wrote Schuyler Louie, a University of California at Irvine economist, and San Francisco Fed economists John Mondragon and Johannes Wieland.

Prospering Incomes Tied to Increases in Housing Supply, Prices, Paper Finds

The paper looked at housing supply resilience, which measures how much the supply of housing will change when housing prices change. Housing purveying elasticity varies across cities and regions, with local housing regulations and geographical constraints having an bumping on how much housing supply can be added when housing prices move higher.

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

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

The notepaper comes as wages in the U.S. push higher, with the latest Census Bureau data showing that the median revenues rose 4% in 2023. Meanwhile, affordability challenges in the housing market remain, with high prices help to push existing home sales in 2024 to their lowest levels in three decades. 

Zoning Changes May Not Pinch With Prices, Paper Argues

The conclusions could have implications for policy. Many economists point to a want of housing supply as a primary factor driving prices higher, with estimates that the market is short of on request on call by nearly 4 million homes.

One factor that some economists cite for the lack of supply is local housing pronouncements that make it harder to build houses, especially zoning rules that prioritize single-family housing closed other types of residential buildings. 

“Our findings challenge the consensus that relaxing regulatory constraints would at heart lower housing prices and meaningfully expand housing quantities,” the authors wrote.