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The U.S. housing market is a complex system, constantly impacted by a variety of factors such as economic conditions, political factors, and demographic changes. It is no secret that housing prices have increased in recent years, but just how much and why?
Nominal vs. real home price growth
When we consider the growth of home prices over time, we can consider the difference between nominal and real growth. Nominal home price growth refers to the market value of homes without considering inflation, while real home price growth adjusts for inflation.
In other words, real home price growth takes into account the increased cost of goods and services over time, while nominal growth does not.
In 2022, U.S. home prices grew significantly, even as interest rates climbed higher. However, the real growth rate was far lower. By Q4 2022, it had fallen to being flat year over year, making it the slowest real growth seen in a decade. This means that while home prices may appear to be increasing when not accounting for inflation, the actual increase is not as significant as it may seem.
When looking at home prices for the past 50 years, here are the highs and lows of the housing market for both nominal and real prices.
| Nominal Home Price Growth Year Over Year | Real Home Price Growth Year Over Year | |
|---|---|---|
| Q4 2022 | 7.1% | 0.0% |
| Peak | 19.5% (Q1 2022) | 12.9% (Q2 2005) |
| Low | -16.9% (Q4 2008) | -19.5% (Q3 2008) |
Home price growth the past 50 years
Here are the median home values for the first year of every decade since 1970. Prices are for both unadjusted and adjusted for 2020 prices.
1970
- Median home price (unadjusted): $17,000
- Median home price (inflation-adjusted to 2020 dollars): $112,941
1980
- Median home price (unadjusted): $47,200
- Median home price (inflation-adjusted to 2020 dollars): $147,879
- Price growth since 1970: 30.9%
- Average interest rate for 30-year fixed-rate mortgage: 13.7%
1990
- Median home price (unadjusted): $79,100
- Median home price (inflation-adjusted to 2020 dollars): $157,169
- Price growth since 1970: 39.2%
- Average interest rate for 30-year fixed-rate mortgage: 10.1%
2000
- Median home price (unadjusted): $119,600
- Median home price (inflation-adjusted to 2020 dollars): $179,331
- Price growth since 1970: 58.8%
- Average interest rate for 30-year fixed-rate mortgage: 8.1%
2010
- Median home price (unadjusted): $221,800
- Median home price (inflation-adjusted to 2020 dollars): $263,604
- Price growth since 1970: 133.4%
- Average interest rate for 30-year fixed-rate mortgage: 4.7%
2020
- Median home price (unadjusted): $336,900
- Median home price (inflation-adjusted to 2020 dollars): $336,900
- Price growth since 1970: 198.3%
- Average interest rate for 30-year fixed-rate mortgage: 3.1%
Since 1970, the nominal home price growth is 1,881.8% and the real median home price growth is close to 200%. In short, homes have nearly tripled in price.
In comparison, the total return of the S&P 500 during the same time period was 17,811.95% or 2,585.29% when considering inflation.
Factors driving home price growth
Several factors contribute to changes in home prices, including interest rates, economic performance, consumer preferences, supply and demand, and policy decisions. Today, a mix of factors are supporting higher nominal house prices.
First, the housing supply remains low. Total existing inventory stood at 1 million in April, under half the four-decade average. From 2000 to 2020, the annual U.S home construction fell short by 276,000 units compared to the preceding 30 years.
Additionally, zoning restrictions in certain areas have imposed limitations on the number of housing units that can be developed on a given plot of land. Since the 2008 global financial crisis, around 64% of all authorized housing construction has consisted of single-family homes. Ultimately, this scarcity in housing has contributed to the surge in prices.
As interest rates have increased, homeowners have been hesitant to sell, and the number of mortgage loan applications has fallen. This is pushing home prices higher.
Another factor contributing to home price growth is the majority of primary mortgages have interest rates locked in under 4%. As of Sept. 7, the average 30-year fixed mortgage rate stood much higher, at 7.12%. This leads to the second problem, as homeowners may not be able to afford high interest rates. This led to a drop in demand for more expensive homes.
Demographic changes are also influencing the real estate market. Millennials, the largest generation in the country, are buying homes. This generational shift has led to changes in preferences for smaller homes in urban areas, instead of previously preferred suburban homes. These changes drive demand, especially in cities with high job growth.
The U.S. residential market has an estimated value of approximately $45 trillion, and historically, it has displayed a high sensitivity to fluctuations in interest rates. The recent surge in interest rates has yet to significantly impact housing prices, and if home prices continue to contribute to inflationary pressures, the Federal Reserve may pursue further rate increases.
How to survive this market
The current housing market is challenging for prospective buyers. But fear not, there are ways to navigate the tricky waters of home buying among stiff competition. First and foremost, it's essential to have a clear understanding of your financial situation and create a budget that will help you determine what you can afford.
Work with a reputable local real estate agent who can keep you informed about new listings and offer valuable insights on the market. Be flexible with your home-buying criteria and be prepared to compromise on certain features. Finally, be patient and persistent, as finding the perfect home may take some time. Don't rush this important decision, and if you aren't ready to buy, take some time to save more -- putting more money down can help you get a better deal on a mortgage loan. By following these tips, you'll be on your way to finding your dream home in a difficult market.
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