Housing affordability in the United States has deteriorated sharply over the past decade. Between 2019 and 2025, average home prices climbed by about 60%, according to the Harvard Joint Center for Housing Studies. While rising demand, limited housing supply, and higher construction costs are widely recognised as contributing factors, new research suggests that foreign investment has also played a significant role. Research by Caitlin Gorback, Assistant Professor of Finance at the McCombs School of Business, found that an influx of overseas capital during the 2010s increased housing prices in areas that attracted the largest numbers of foreign buyers. However, the study also concludes that the broader affordability crisis cannot be explained by foreign investment alone, as housing supply across the country has consistently failed to keep pace with demand.
Gorback’s research shows that from 2009 to 2018, the responsiveness of housing construction to rising prices declined substantially compared with previous decades. Economists describe this responsiveness as supply elasticity. During this period, every 1% increase in housing prices resulted in only a 0.26% increase in new housing supply nationwide. Builders were therefore unable to add enough homes to offset growing demand, allowing prices to continue climbing. According to Gorback, the housing supply landscape has changed dramatically over the past 20 years, making it increasingly difficult for new construction to relieve pressure on home prices.
Foreign investment accelerated after 2011, when countries such as Singapore introduced taxes on foreign homebuyers to cool their domestic housing markets. Similar measures were later adopted elsewhere, encouraging many international investors to redirect their money to the United States, one of the few major countries without comparable restrictions. Working with Benjamin Keys of the University of Pennsylvania, Gorback examined housing markets between 2011 and 2018 and found that neighbourhoods with larger foreign-born populations experienced home prices that averaged 6.7% higher than comparable neighbourhoods within the same city. Despite this increase in demand, housing supply in those areas expanded by only about 1%, contributing to further price growth.
The study also found that cities differ greatly in their ability to respond to increased housing demand. In cities where development is heavily constrained, higher demand translates mainly into higher prices. San Francisco is a prime example. There, a 1% increase in housing prices generated only a 0.06% increase in housing supply because strict regulations and limited land make new construction difficult. By contrast, Charlotte, North Carolina, has fewer barriers to development, allowing builders to construct more homes as demand rises. As a result, increased demand in Charlotte is reflected more in the number of new homes than in rapidly escalating prices.
These differences highlight the important role local governments play in determining housing affordability. Zoning regulations, permitting requirements, and development policies largely determine how quickly cities can expand their housing supply. Gorback argues that municipalities possess many of the tools needed to improve affordability if they are willing to reform outdated regulations. As more Americans return to urban areas, reversing decades of suburban growth, cities face increasing pressure to encourage housing construction while keeping prices within reach for ordinary households.
Baltimore provides an example of how policy changes can improve housing supply. The researchers identified Baltimore as having the most elastic housing market among the 100 largest U.S. cities they studied. Further investigation revealed that the city had modernised its permitting process during the mid-2010s, making it easier for developers to build new housing. The findings suggest that while foreign investment can increase housing demand and contribute to higher prices, the severity of its impact depends largely on how effectively local governments allow new housing to be built. In the long run, improving housing affordability will require not only managing investment demand but also removing barriers that prevent housing supply from expanding.
More information: Caitlin Gorback et al, Global Capital and Local Assets: House Prices, Quantities, and Elasticities, Review of Financial Studies. DOI: 10.1093/rfs/hhag040
Journal information: Review of Financial Studies Provided by University of Texas at Austin