Why Home Prices Are Still So High (And Will Stay High)

If you're looking to buy a home in nearly any metro area on either coast of America, you know that the real estate boom never actually ended. Sure, prices fell a bit here and there, but the cost of buying a place is still way higher than it was before the boom -- and, for many people, prohibitively high. 

This matters a lot because no cost hits harder than housing for people living in the most prosperous parts of America. And moving someplace else with more affordable housing is often not an option, given that many of the best jobs -- or only jobs, in some industries -- are in places that are doing well.  
 
So when the housing crash came, it carried a silver lining for those hoping to buy in cities like Boston, New York, Washington, Los Angeles, and Seattle. But prices have never actually fell far enough in many cities to make a difference for many would-be home buyers. According to The S&P/Case-Shiller 20-City Composite Home Price Index -- which measures the change in home prices in the top 20 cities in the nation -- prices are now where they were in July 2004, which was six years into a housing boom that peaked in mid-2006.
 
Of course, though, the situation varies widely from place to place. In some areas, like Manhattan, housing prices fell back on their heels for a short while, before continuing the climb upward and are now higher than they were at the height of the boom. But don't think you'll get a break if you schlep out to Park Slope in Brooklyn, because prices there are much higher now than when Lehman Brothers collapsed. Thinking of living in Arlington, VA, because Washington, D.C., is too expensive? Well, think again: housing prices there are now higher than they've ever been. Want to move out to Jamaica Plain because you've been priced out of Boston neighborhoods like the South End? Same story: Prices dipped in JP after the crash but then rose again past their boom heights. Ditto if you want to move to Silver Lake in Los Angeles because West Hollywood is too expensive. I could go on. 
 
In some ways the situation is actually worse now than six years ago because neighborhoods that once offered less expensive housing options have been totally gentrified. So it's checkmate in a lot of places for the middle class and professionals who aren't in lucrative industries. 
 
So why are prices still so high? Low interest rates are part of the story, obviously. But the bigger reason is that there are so many more wealthy people now than in the past. 
 
If you look at the run up in housing prices starting in the late 1990s, it closely parallels the explosion in the number of wealthy people. According to research by Ed Wolff, the number of millionaires increased from 3 million in 1995 to 4.7 million in 1998 to 5.9 million in 2001 to 7.2 million in 2007. The number of millionaires took a dip after the crash, but then started going up again and is now hitting record highs. 
 
So if you're wondering why it's so damn hard to buy a place, it's because you're bidding against the largest affluent class in U.S. history. For example, in New York State, A total of 346,290 taxpayers earned more than $200,000 in 2011. About 23,000 of those people lived in Brooklyn, 5,000 more than lived there in 2008.
 
That helps explain a thing or two about housing prices, doesn't it? And guess what: This isn't going to change anytime soon. 

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