Why are houses so expensive right now? Blame remote work

Housing costs across the U.S. have soared to near-astronomical levels in recent months — and the shift to remote work could be to blame, according to new research from the Federal Reserve Bank of San Francisco.

Home prices rose 24% between November 2019 and November 2021, the research, which was published Monday, found. Increased demand for working from home accounted for more than 60% of overall price hikes and similar increases in rent during that period. 

Economists August Kmetz and John Mondragon, of the San Francisco Fed, and Johannes Wieland, an economist and associate professor at the University of California, San Diego, noted that remote-capable workers “were able to relocate to cities with cheaper housing or more attractive amenities” as offices closed to curb the spread of Covid-19. 

These cities saw the biggest uptick in housing costs, while regions “less amenable” to remote work experienced slower house price growth. Some of the cities that emerged as remote work hotspots during the pandemic include Charleston, South Carolina; Orlando, Florida; and Wilmington, Delaware, according to LinkedIn. 

The researchers compared regions throughout the U.S. that had similar volumes of migration during the pandemic but different degrees of remote workers as well as areas that had different levels of migration yet similar degrees of remote workers to isolate the effect of remote work on housing demand separate from the effect of pandemic-spurred migration.

For example: Remote work increased in both the San Francisco Bay Area and Tampa, Florida during the pandemic, but the Bay Area experienced a pandemic exodus while Tampa’s population exploded. Yet homes in both regions got more expensive during the pandemic, Wieland tells CNBC Make It.

That’s because there was similar demand among remote workers in both regions for a new house, as the option to work from home allowed people to move farther away from the office and motivated them to buy larger houses to accommodate their new lifestyle, Wieland adds.

Even after adjusting for this migration, most of the effect of remote work on housing prices remains: Each 1 percentage point increase in remote work caused about a 0.9 percentage point increase in housing prices. The researchers also found that the surge in remote work had an “identical” effect on rent prices, which have hit record-highs across the U.S. 

“Our results suggest that rising house prices over the pandemic reflected a change in fundamentals rather than a speculative bubble,” the authors wrote. “This implies that the evolution of remote work may be an important determinant of future housing costs and inflation.”

Even with signs that the housing market is cooling off, it is still hot, thanks, in part, to housing shortages, persistent inflation and economic uncertainty. Earlier this week, the average 30-year fixed U.S. mortgage rate hit 6.87%, the highest rate since 2002, and rent prices continue to soar in cities across the U.S. 

Federal Reserve Chair Jerome Powell told reporters last week that the housing market needs a “difficult correction” to make homes affordable for more Americans. 

“There was a big imbalance … housing prices were going up at an unsustainably fast level,” Powell said. “For the longer term, what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again.”

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