U.S. home price growth since 1984: What are its sources and can it continue?
Since 1984, the median sales price for a home in the United States has risen at an annualized rate of 4.1%, significantly faster than the 2.6% inflation rate and median household income growth rate of 3.2% during that same time period. While not all households have been able to benefit from this tremendous rise in home values over the last four decades, particularly low-income renter households, for homeowners it has been a real boon in terms of their ability to accumulate wealth. Even with home prices rising faster than wages, a majority of Americans have still been able to achieve the American Dream of homeownership as interest rates have fallen and kept housing affordability fairly stable. In this piece, we will examine the historical drivers of housing price growth and explain why we at Hilgard believe that housing prices will continue to climb in the coming years, and thus continuing to provide a source for homeowners to acquire more wealth.
The graph and chart below highlight the drivers of home price growth and their cumulative effects. The number one driver of housing price growth since 1984 has been the steady trend of falling interest rates. On average, perpetually low interest rates have added 2.8% per year to the value of the median home, as lower rates allow borrowers to borrow more money per dollar of income for a mortgage on a piece of residential real estate. Additionally, inflation has added another 2.6% per year. This financial engineering of lower rates and inflation is an indirect tailwind to the housing market that accounts for over 125% of the total increase in home prices. At the same time, the median household has seen their real income grow by 0.6% per year, allowing buyers to pay more. However, we also see a negative component in housing prices, driven by items like property depreciation and new construction easing supply constraints, at least in certain markets. We tend to see an increase in these negative drivers of price as financial drivers increase price.
Going forward, we see an ability for housing prices to continue to grow faster than the rate of inflation and create wealth for homeowners, though this rate is expected to slow. The rate of growth is forecasted to be 3.6% per year over the next decade. While interest rates are near record lows today, we continue to see central banks looking to drive rates lower in an effort to stimulate economic activity. Because of this, we expect lower rates will add 2.9% per year to the price of a home, which is about the average since 1984. We expect that inflation will stay below 2% in the coming decade, which will play a significant role in at least partially slowing home price growth. While the 2010’s saw real wages grow at their highest rate in the surveyed time period, we expect a reversion to near average levels going forward, especially during the COVID-19 pandemic.
Another trend that we expect to continue that will help drive home prices higher is the chronic underbuilding of new housing units relative to demand, especially in jobs-rich coastal markets. This has been due to many reasons such as NIMBYism, declining vacant land in urban areas, and rising labor and material costs that make it harder for projects to pencil out. We expect these trends to continue in the already expensive markets with the potential to expand into cheaper inland markets.
While our predictions should be welcomed news for existing homeowners, for those looking to buy in the coming years, better start saving money for that down payment ASAP.
If you are looking for further data or policy analysis to help your organization make timely real estate or land-use policy decisions, Hilgard Analytics would love to hear from you. For a free 30 minute consultation, please call us at 949–683–6201 or email us at Hilgard.Analytics@gmail.com
Data Sources:
Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis
U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price of Houses Sold for the United States [MSPUS], retrieved from FRED, Federal Reserve Bank of St. Louis
U.S. Census Bureau, Median Household Income in the United States [MEHOINUSA646N], retrieved from FRED, Federal Reserve Bank of St. Louis
U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis
About the Author:
David Rosen, who was recently named a Partner and Director of Real Estate Research at Hilgard Analytics, has a proven track record of success in the real estate industry. He is focused on providing clients with insights on real estate markets nationally. Mr. Rosen is also the Managing Partner of Meriwether Assets, an investor in workforce housing in the Midwestern United States. He received his undergraduate degree in business administration from Cal State Fullerton and has an MBA from the UCLA Anderson School of Management, with concentrations in real estate and finance.
