Is the Housing Shortage the Real Driver of High Home Prices? What New Fed Research Says

What the new research claims

An Economic Letter from the Federal Reserve Bank of San Francisco argues that the usual “we didn’t build enough homes” explanation for high U.S. home prices is incomplete. Using two demand indicators—average income growth and population growth—the authors study how prices and housing quantities moved across metropolitan areas (MSAs) from 2000 to 2020.

Their headline finding: **house-price growth is strongly related to average income growth**, while **housing unit growth is strongly related to population growth**. In many metros, housing units increased faster than population, including in expensive coastal markets. [frbsf.org]

Why that matters

If demand is rising because more people are moving into a metro (population growth), you’d expect both *prices* and *the number of units* to rise as builders respond—exactly what the research shows in the aggregate. But if demand is rising because higher earners are willing (and able) to pay more for better locations, larger homes, or upgrades, then prices can rise without a commensurate increase in unit counts. In that world, affordability becomes less about the raw number of homes and more about **who is gaining purchasing power** and **what kind of housing they want**. [frbsf.org]

Why “average income” matters more than “median income”

The FRBSF analysis highlights a long-run divergence: after about 2000, U.S. house prices rose much faster than *median* income, but tracked much more closely with *average* income. The gap between average and median income is a useful proxy for uneven income gains—if the top of the distribution grows faster, the average rises even when the typical household’s income doesn’t keep up. [frbsf.org]

In practical terms, that means a metro can look “healthy” on average income while still becoming unaffordable for many residents. It also helps explain why adding supply doesn’t automatically “filter” into affordability for middle-income households if the marginal bidder is wealthier and competing over the same neighborhoods, school districts, and commute patterns.

Where the housing-shortage narrative still fits

None of this proves supply is irrelevant. It changes the question from “Is there a shortage?” to **“A shortage of what, at what price point, and for which households?”**

For example, the National Association of Realtors has emphasized that middle-income buyers face the largest gap between what they can afford and what’s listed, and it argues that the country needs materially more homes priced for that segment. That’s a *market composition* problem, not just a total-units problem. [nar.realtor]

And even the idea of a national “shortage” depends heavily on definitions—like what vacancy rate is considered “normal,” whether you count would-be households that haven’t formed yet because housing is too expensive, and whether you benchmark against long-run construction trends. Brookings shows how these choices can move estimates substantially, with a simple stock-vs-households method yielding a lower-bound shortage estimate around 1 million units at the end of 2023. [brookings.edu]

Practical takeaways for buyers and investors

**1) Track demand drivers, not just permits.** Look at whether your metro’s growth is coming from population inflows, higher-paying job growth, or both. The research suggests those drivers can produce very different outcomes for unit growth vs. price growth. [frbsf.org]

**2) Treat “more supply” as a partial fix unless it matches the price tier.** New construction that lands mostly at the top end can relieve pressure there, but it may not translate into affordable options for middle-income buyers without time and sufficient scale. [nar.realtor]

**3) Rates still matter for monthly payment affordability.** As of 2026-02-26, Freddie Mac’s Primary Mortgage Market Survey shows the average 30-year fixed rate at 5.98%. Even small rate moves can materially change monthly payments, which can shift buyer demand quickly—even if listing prices are slow to adjust. [freddiemac.com]

Bottom line

The new FRBSF work doesn’t say “supply doesn’t matter.” It says that across U.S. metros, **income-driven demand—especially when it’s uneven—can be a major reason prices climb**, while unit growth tends to follow population. For affordability, the most useful lens may be less about a single national shortage number and more about the intersection of incomes, price tiers, and where new supply is actually delivered. [frbsf.org]