Homebuyers are staying on the sidelines as housing prices hit record levels and homebuilding and rental supply are failing to keep up with the demand.

Home prices neared their all-time high last month, eclipsing $400,000 for only the third time on record.

This is due largely to the lack of options driven by years of underbuilding, seasonal market forces and economic policies that are keeping sellers rooted in their homes. 

High prices across the market are leading to bidding wars for starter homes and pushing some buyers back into the expensive rental market or toward newly built homes.

We take a look at how the housing bottlenecks in the U.S. could be solved and the part policymakers could play. 

Solving the housing shortage with new homes

“We have had over a decade of solid population and household growth and not enough new homes to meet that demographic wave,” Keeping Current Matters chief economist George Ratiu told The Hill. 

“Builders are responding to the strong demand by ramping up construction, but it will take more than a few months’ worth of new supply to overcome the inventory deficit,” he said. 

Construction figures from the first half of the year showed that homebuilders are eager to fill the inventory void with new homes but still felt a dip in starts for new homes last month. 

Privately owned housing starts fell to a seasonally adjusted annual rate of 1.43 million units last month, down 8 percent from the revised estimate in May at more than 1.55 million.   

Builders linked the drop-off partly to regulatory issues and to the Federal Reserve’s tightening policies that led to higher mortgage rates. 

But Lawrence Yun, chief economist at the National Association of Realtors (NAR), cautioned buyers that more construction will not bring more supply overnight.  

“It is really the demand fluctuation that will determine the course of home prices in the short term,” Yun said.  

“But in the long-term, it is really about meeting more supply so that home prices do not suddenly jump up quickly and be out of the reach of most people,” he added. 

Building rentals where households are forming 

On the rental side, economists are looking for record levels of multifamily housing construction to boost availability and bring down prices.  

That may only work if it’s built in regions where households are forming and people are settling, KPMG economist Yelena Maleyev told The Hill.  

“More supply means the prices will come down on net. But it depends on what region of the country you’re looking at and where they’re building and whether that’s where people are moving to and forming households,” Maleyev said. 

“If there’s that mismatch, some areas are going to see rent prices fall, but others are not. It just depends on where the building is happening,” she added. 

An end to Fed rate hikes 

High mortgage rates continue to push buyers out of the market. Average monthly payments for potential homeowners reached a record high of $2,656, according to real estate brokerage Redfin.

The Fed paused its rate hiking cycle last month after 10 straight increases but is expected to issue another hike Wednesday at the end of its July policy meeting.

Yun told The Hill that he expects a rate hike at this week’s meeting but noted that the mortgage market will have already adjusted in anticipation. 

“If the Fed says this could be their last interest rate hike, mortgage rates actually could go down as they try to price in the future activity,” Yun said. 

Lawmakers tackling competition

High home prices have also complicated matters for buyers by leading investors to target their purchases toward starter homes, which has intensified already fierce competition in an already tight market.  

Policymakers are taking note: Democratic lawmakers introduced a bill earlier this month that would curtail investor activity that can drive up home prices in local markets.  

The Stop Predatory Investing Act, introduced by Sens. Sherrod Brown (D-Ohio), Ron Wyden (D-Ore.) and others, would restrict investors who purchase 50 or more single-family rentals from deducting interest or depreciation on those properties from their taxes. 

The bill would also offer incentives to investors to sell single-family rentals back to homeowners or community nonprofits, while attempting to bolster housing supply by allowing owners to continue receiving tax deductions on homes financed using low-income tax credits. 

“In too many communities in Ohio, big investors funded by Wall Street buy up homes that could have gone to first-time homebuyers, then jack up rent, neglect repairs, and threaten families with eviction,” Brown said in a statement.   

“Our bill will help prevent corporate landlords from driving up local housing prices, and put power back in the hands of working families, who need a safe, affordable place to live and raise their children,” he said.