Why are home prices so high?

"The American dream of owning a house may be vanishing," the U.S. Government Accountability Office said in a research report, "because of higher housing prices and a decline in housing affordability."

"Many young, middle-income, and first-time home buyers can no longer afford to buy an existing house."

The GAO released this dire news on May 11, 1978. The median selling price of a house "hit an all-time high of $44,300" in 1976, the GAO glumly reported.

Fast forward four and a half decades and the median price of a home in the fourth quarter of 2023 was over $417,000.

Get out of here, disco-era GAO. Your median-priced home would be slightly better than the median amount for a down payment these days.

Why are house prices so high?

Historical housing prices

This graphic shows the steady rise of median home prices over the years, then the dramatic jump in prices beginning in 2020. Prices peaked in the fourth quarter of 2022 and then fell sharply.

This is about the best news a prospective home buyer today could look for. Prices seem to be moderating to a steady climb again rather than the previous hockey stick of growth.

Investors, seniors staying put, and fees contribute

The ongoing rise in home prices can be pegged to specific catalysts.

Real estate investors are snagging fixer-uppers and blocking family buyers. The U.S. housing supply is aging and in need of repair. The median U.S. home is over 40 years old, the Brookings Institution said in a recent analysis.

Investors, flush with cash to spend, often snatch up this inventory, renovate it, and put the houses on the rental market. Families looking to buy a home often lack the financial flexibility to compete.

Seniors are remaining in their larger homes rather than downsizing. Young families with children often look for homes with three or more bedrooms. That represents over 94 million American homes.

However, according to an Urban Institute analysis of the 2022 American Community Survey, more than half (56%) of those houses have only one or two occupants — most of whom are age 62 or older.

Another contributor to the high price of homeownership: fees. The Consumer Financial Protection Bureau is coming after lenders charging high "junk fees." Home buyers face a mountain of charges when closing on a house. These can include origination fees, credit report fees, discount points, and many more.

"From 2021 to 2022, median total loan costs rose sharply, increasing by 21.8% on home purchase loans," the CFPB said in a release. "In 2022, the median amount paid by borrowers was nearly $6,000 in these costs and fees."

A 2021 study by Fannie Mae found that for more than 14% of lower-income homebuyers, their closing costs met or exceeded the amount of their down payment.

Learn more: Should I pay for mortgage discount points?

And you can blame the pandemic

Economists at the Chicago Federal Reserve suspect the pandemic also played a role in the latest inflation of house prices in three ways:

• The pandemic led to many people spending much more time at home.

• Historically low interest rates reduced the cost of mortgages.

• Consumers spent less money and received federal stimulus payments that increased household savings available for down payments.

In the meantime, "supply chain problems and rapidly rising wages for construction workers led to higher homebuilding costs," the Chicago Fed added.

Learn more: Buying a new construction home — pros, cons, and how to finance it

A tale of two house-price booms

Not all house-price run-ups are the same.

"There have been two U.S. house-price booms in the 21st century," Lara Loewenstein, a research economist at the Federal Reserve Bank of Cleveland, wrote in a February 2024 analysis.

"The first, which occurred from about 2000 to 2006, preceded the Great Recession and was followed by a substantial fall in house prices and a spike in foreclosure rates. The second started during the COVID-19 pandemic, with annual house-price growth exceeding that of the 2000s boom."

The difference between the two house price escalations is pinned to two factors, Loewenstein believes:

• Single-family home construction has lagged in the 2020s

• Meanwhile, the number of new households has exploded

"The number of households grew by 3% every three years until 2004, after which it slowed during the peak years of the 2000s boom and then declined further to 1% during the Great Recession. By contrast, the 2020–2022 period saw the highest rate of household formation in recent history," Loewenstein noted.

Perhaps most importantly, the mortgage rate lock-in effect

"The most noteworthy feature of the housing market right now is the rate lock phenomenon — the fact that all these homeowners have low-interest-rate mortgages," Dr. Paul Willen, senior economist and policy adviser with the Federal Reserve Bank in Boston Research Department, tells Yahoo Finance.

In January 2024, nearly half (47.9%) of homeowners with a mortgage backed by Fannie Mae or Freddie Mac had an interest rate of 3.5% or lower, according to research by the Urban Institute. At the same time, the average interest rate for a new 30-year fixed-rate mortgage was 6.6%.

To get an existing homeowner with a low interest rate to sell, "you would need to pay them a lot more. So that's locked up the market for all but the people who are kind of forced to move," Dr. Willen says.

Research published in March 2024 by the Federal Housing Finance Agency shows that for every percentage point that market interest rates exceed a homeowners' existing mortgage rate, the probability of a sale decreases by more than 18%.

The mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in the fourth quarter of 2023 — and increased home prices by 5.7%, the FHFA study said.

Dig deeper: 5 strategies to get the lowest mortgage rate

What it will take to slow the rise in home prices

Dr. Willen says there will be older, empty-nester homeowners looking to downsize who ultimately realize there is more to the cost of homeownership than a low mortgage interest rate.

"I think right now, there's a certain amount of shock associated with the fact that rates are so high. But remember, mortgage interest is just one component of the cost of owning a house. There's taxes, insurance, utilities, all that stuff."

"I think what will unlock this, in a sense, at the very least, is time," Dr. Willen says.

Buying a house when prices are high

The graphic up top attests to the long-term price appreciation of houses in America. When you own a home, that's a very good thing. You're slowly building equity in your house. You don't want that to end.

If you were shopping for a house from mid-2020 through the end of 2022, you may have been embroiled in an overheated market. If you sold your house during that time, you're probably smiling.

Is this a good time to buy a house? It's important to remember that regional differences in home prices remain an important factor to consider. But the reversion to the mean since 2023 should make potential home buyers feel better about their prospects of getting a fairer price than they might have a couple of years ago.