The sudden shift to remote work amid COVID-19 drove more than half of overall U.S. housing price growth during the pandemic — and as it becomes more embedded in our day-to-day life, it’s likely to continue to drive up home prices as well as inflation.

That’s according to new research published Monday by the Federal Reserve Bank of San Francisco, an economic letter titled “Remote Work and Housing Demand.”

“The transition to remote work because of the COVID-19 pandemic has been a key driver of the recent surge in housing prices,” the letter’s authors, economists Augustus Kmetz, John Mondragon, and Johannes Wieland, wrote.

As U.S. home prices have surged at unprecedented rates — by a rapid 24% between November 2019 and November 2021 — the researchers wrote the surge has “led to questions about whether the price increases are being supported by fundamental factors, such as the shift in demand from remote work, or driven by speculation, in part fueled by fiscal stimulus and accommodative monetary policy.”

One concern, they noted, has been that house prices could “pose a risk to financial stability, like the bubble that preceded the Great Recession. Furthermore, faster growth in housing costs has contributed to inflation, which has been running at its highest levels since the 1980s, creating challenges for achieving the Federal Reserve’s price stability mandate.”

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While researchers at the Federal Reserve wrote in a June report that low borrowing rates amid the pandemic likely did help drive demand, the analysis published Monday found the shift to remote work “accounts for more than half of overall price growth over the pandemic.”

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

Why did remote work impact home prices?

The COVID-19 pandemic “reshaped the way” Americans work, the economists wrote, noting that surveys show nearly a third of employees (30%) still work from home part time or full time as of last month, and “many employers and employees expect work from home to become a permanent fixture.”

A work-from-home environment may increase demand for housing because jobs that used to be done in an office environment “now take up space and time at home,” they wrote.

“This has significantly increased housing demand and is a key factor explaining why U.S. house prices grew 24% between November 2019 and November 2021.”

Their analysis shows that the shift to remote work may account for over half of overall price increases, as well as spikes in rents, and “this fundamental evolution in work-related housing demand may be important for future house prices.”

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For their analysis, researchers studied the relationship between the share of jobs done remotely in 2020 compared to pre-pandemic shares of remote work. They found remote work did increase during the pandemic.

The analysis also found the “types of jobs in a city matter because many jobs are not feasible to do from home.”

Why have some cities gotten more expensive than others?

These factors are key, researchers wrote:

  • Tech jobs: Cities with a concentration of technology jobs “would be expected to have more remote work opportunities than cities with mostly restaurant service jobs.”
  • More affordable: Cities with “relatively cheaper and more housing available attract more remote work because people working from home want more space at home instead of using space at an office.”
  • Desirable weather: Cities with “relatively pleasant climates tend to attract employees that can work remotely.”

Areas with higher shares of remote work had “significantly higher house price growth than those with less remote work,” the analysis found. “The difference continued to expand into 2021.”

After controlling for migration patterns, researchers found “that most of the effect of remote work on house prices arises from its direct effect on housing demand.”

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“Cities more attractive to remote work tended to see more residents moving in, which drove up house prices, while cities less amenable to remote work lost residents and saw slower house price growth,” the report states.

Their estimates show that 1 percentage point more remote work causes house prices to increase by about 0.9 percentage point, “smaller than the initial estimates but still very large.”

“This effect suggests that the national increase in remote work indeed caused an increase in housing demand,” researchers wrote.

Remote work increased to 16 percentage points, according to their data, implying remote work resulted in house prices rising by about 15% from November 2019 to November of last year, “accounting for more than 60% of the overall increase in house prices.”