People are staying in their houses longer, and it's driving up home prices. But why?

The American housing shortage is usually framed in terms of supply and demand: There aren’t enough houses for sale to accommodate the number of people who want to buy them. This is true in the simplest terms, but the dynamics of the current housing market are a little more complicated. A big part of the problem is that there’s a mismatch in the type of housing available in the cities and neighborhoods that prospective homebuyers want to live in.

The pattern of movement in the housing market has historically looked something like this: As older couples whose adult children have moved out decide to downsize, they vacate their larger homes that young, growing families can buy. But as the price of downsizing has skyrocketed and the savings of going from a big house to a small house have evaporated, that’s happening less and less. 

In just the past four years, a roughly 30 percent increase in median home prices has been compounded by doubled interest rates and climbing home insurance premiums. As a result, a homebuyer today can expect to pay twice the monthly payment they would have had for the exact same house in 2020. That’s not much of an encouragement for anyone to give up their home in search of a new one. And 77 percent of homeowners over 50 would prefer to age in place, citing proximity to family and friends, desire for independence, emotional attachment to their homes, to say nothing of the jaw-dropping price of senior facilities and retirement communities.

All of these factors leave us with a self-perpetuating cycle, in which fewer people selling their homes keeps inventory on the market low, driving up prices. And as prices stay high, fewer people can afford to move out of their homes. This is especially true in desirable urban neighborhoods that benefit from good access to transit, commercial amenities, and green spaces. 

A recent Redfin analysis of housing sales data shows some correlation between the amount of time that a homeowner stays in one house and how insane and supply-constrained the housing market is where that homeowner lives. Los Angeles, San Jose, and San Francisco all appear in the top five cities with the longest homeowner tenure: 18.7, 17.8, and 16.7 years, respectively.

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Because all of these cities are in California, it’s important to note the effect of Proposition 13. It’s a law passed in 1978 that keeps the value assessments that determine property tax rates from increasing by more than 2 percent per year until a home is sold to a new owner, at which point the taxes jump to match the sale price. As a result, property taxes are kept artificially low for those who have owned their homes through periods of double or even triple-digit percentage increases for property values, and the higher taxes that would be paid on a newly purchased home constitute a major disincentive to move.

But there’s a demographic element in play here, too. Why is Cleveland, which is not known for a wildly competitive housing market, also in the top 5? It’s a Boomer hotbed, where residents over 60 own the highest proportion of three-bedroom homes – 30.8 percent. That’s right up there with Cleveland’s Rust Belt neighbor Pittsburgh, which is the worst offender in this department: 32.1 percent of the city’s homes with more than three bedrooms are owned and inhabited by Boomers with no other family living in the home; while Millennials own only 12.7 percent of that segment of the housing stock. 

Cleveland and Pittsburgh suffer from the same dilemma: Each city has both a larger-than-average 60+ population and an influx of young newcomers attracted by low costs of living. And while rent is cheap, those newcomers are finding it hard to buy homes that older residents are unwilling to sell.

Meanwhile, the Millennial generation has reached the age at which they’re growing their families. Those families are pushed to rent — occupying about a quarter of three-bedroom rentals in the country — or buy new construction homes, which tend to be in tract developments on the outskirts of cities. 

So what’s the outcome? We see the same pattern replicated in cities across the country: core urban neighborhoods get more and more expensive, with little movement in the market; and sprawling suburbs get bigger and bigger as younger buyers are pushed farther away from transit, work, and often their family and friends.

It’s impossible to alleviate this problem without meaningfully growing the housing supply in core city neighborhoods. We need more homes for older residents to age in the communities they’ve lived in for decades, and for young buyers to build their families in the neighborhoods that best fit their lifestyles.

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