What Factors Are Driving Home Prices So High?

Home values have steadily increased across the United States over the past 10 years, driven by diminishing housing inventory, which was caused by historically low mortgage interest rates through 2022. These favorable conditions allowed many families, including a significant number of millennials to enter the housing market and purchase homes at affordable prices despite the broader upward trends in real estate.  The increase in home prices over the past 10 years boils down to an issue of supply and demand particularly in the wake of the COVID-19 pandemic.

The surge in home prices during the pandemic was primarily the result of a sharp reduction in housing inventory. As fewer homes were listed for sale, competition for the limited available properties became fierce, leading to bidding wars among prospective buyers. In regions like New York, New Jersey, Connecticut, Pennsylvania, and Maine, where housing demand has historically been high, the reduced inventory forced homeowners to set higher asking prices, often receiving multiple offers above the original listing price. This competitive environment drove prices to new heights, particularly in the last two years, where bidding wars became a common feature of many housing markets in these states.

One key factor contributing to the rising home prices in these areas was the migration patterns sparked by the pandemic. As more companies embraced remote work, many employees who were previously tied to major urban centers like New York City and Philadelphia began relocating to less densely populated areas. Cities such as Albany, Schenectady, and Utica in New York, as well as Lewiston, Bangor, and Auburn in Maine, for example, saw an influx of buyers moving out of larger cities seeking more space, lower costs, and a better quality of life. For many of these buyers, the ability to purchase a larger home in a suburban or rural area became an attractive prospect. As a result, these regions experienced significant growth in housing demand, leading to a shift in the local housing markets.

In Maine, areas like Lewiston, Bangor, and Auburn saw a significant rise in home prices as more buyers from higher-cost areas in New York and New Jersey relocated to these towns, drawn by their affordability and the appeal of more space. In New York, cities like Albany and Schenectady, once more affordable alternatives to New York City, also saw home prices soar as buyers looked to stretch their budgets further. Similarly, in Utica, the trend of moving out of urban centers continued, creating more competition in these once-overlooked markets.

Meanwhile, mortgage interest rates, which had remained at historic lows for years, began to climb dramatically in 2022. Prior to that, rates had hovered around 3%, but by the end of 2023, they had surged to approximately 7%. This marked an increase of more than 2.5 times the previous rates, dramatically altering the affordability of homes for many buyers. This increase had a particularly strong effect on the housing markets in states like New York, New Jersey, and Pennsylvania, where home prices were already high. The higher rates forced many buyers to rethink their ability to purchase a home, and many were priced out of the market altogether.

At the same time, the sharp rise in interest rates made many homeowners hesitant to sell their homes. In New Jersey, New York, and Connecticut, where many homeowners had locked in low mortgage rates during the previous decade, the idea of selling a home at a time when home prices were high, only to buy a new home at a much higher interest rate, made little financial sense. In many cases, homeowners found themselves reluctant to trade their relatively low-rate mortgages. for higher ones. This shift in attitude led to a further reduction in the number of homes available for sale, exacerbating the inventory shortage and causing home prices to remain elevated across these states.

This trend was especially evident in suburban areas surrounding New York City and Philadelphia. In New Jersey, areas like Atlantic City, Pleasantville, Egg Harbor, Trenton, Newark, and Jersey City saw significant changes as demand increased for homes in more suburban settings. These areas, which had long been seen as affordable alternatives to the high prices of New York City and Philadelphia, saw their own housing markets heat up as residents from more expensive areas sought more affordable options in the Garden State. In Pennsylvania, the suburban Pittsburgh markets of McKeesport, Penn Hills, Plum, Monroeville, and McCandless, as well as Philadelphia, saw similar trends as people from the city sought more space and more affordable housing further out.

This housing gridlock was not limited to large urban areas, however. In Maine and rural parts of Pennsylvania, buyers from more expensive regions continued to flock to these areas in search of more affordable housing and larger properties. The increased demand in rural regions, driven in part by the growing trend of remote work, pushed up prices in previously under-the-radar towns and communities. In Maine, areas like Bangor and Lewiston saw significant price appreciation as city dwellers sought more space and a slower pace of life, further tightening the inventory in these areas. In rural Pennsylvania, the demand for suburban homes in towns like McKeesport, Penn Hills, and Monroeville saw similar growth, making once-affordable areas more competitive and pushing up prices.

As a result of these shifting dynamics, the housing markets in New York, New Jersey, Connecticut, Pennsylvania, and Maine have become increasingly competitive, with prices continuing to rise despite the higher interest rates. This has created a situation where many would-be buyers are left on the sidelines, unable to afford homes due to the combined pressures of higher mortgage rates and rising prices. At the same time, homeowners in these states are reluctant to sell, further reducing the already limited inventory and keeping prices elevated.

This situation, which is playing out across much of the United States, highlights the complex factors shaping the current housing market. Whether in bustling urban centers like New York City and Philadelphia or in smaller, once-overlooked towns like Lewiston, Bangor, and Utica, the combination of low inventory, rising interest rates, and shifting migration patterns has created a housing market in flux. While some regions have seen explosive price growth, others have faced a stifling gridlock, where high demand and low supply have led to continued home price appreciation. This evolving landscape is unlikely to change in the immediate future, leaving many buyers and sellers in a challenging position as they navigate the complexities of the current real estate market.