What’s Worse Than Inflation? Decades of Spiking Home Prices

A new study from Clever Real Estate shows home prices have risen faster than inflation for the past six decades, locking many younger Americans out of homeownership.

Millennials have taken a lot of criticism for financially lagging behind previous generations, but it may not be their fault. After adjusting for income, homes are almost twice as expensive for millennials today than they were for baby boomers in their 30s, according to a 2024 analysis from Clever Real Estate, an agent-matching company.

In 1985, the median new home cost $83,200, about 3.5 times the median household income of $23,620. By 2022, the latest year with available income data, the median new home price climbed to $468,000 — a staggering 6.3 times the median household income of $74,580.

To put it another way, for homes today to be as affordable as they were in 1985, median household incomes would have to rise to $134,000 a year, nearly double their current level.

Clever Real Estate notes that succeeding generations may have it even worse if drastic changes aren’t implemented. At the present pace, the median home in 2030 will cost 6.9 times the median household income. By 2050, the median home will cost an unsustainable 8.4 times the median household income if this trend’s trajectory continues.

An Accelerating Problem

Home prices have long outpaced inflation, rising 2.4 times higher than in the 1960s. But the problem worsened acutely in the past decade. If home prices were level with inflation, today’s median new home would run Americans $177,500. But by the end of 2023, Federal Reserve data showed a median cost of $431,000.

This curve has steepened since 2013. In the last 10 years, inflation increased 31%, and home prices spiked 63%, catapulting the median home price to $431,000 from $264,800. While policymakers allowed small measures — homebuyer rebates and the mortgage interest tax deduction — homebuying Americans are up against systemic obstacles.

Demand is one of the largest obstacles for today’s U.S. homebuyers. Properties can take years to build, and in some regions, the low supply is a problem decades in the making.

“Unlike many things we buy, housing supply is often limited due to artificial factors like zoning or prohibitive land costs,” said Ezra Haber Glenn, lecturer for the Department of Urban Studies and Planning at the Massachusetts Institute of Technology. “Production can’t just ramp up. Even when production is possible, it’s not always quick enough to respond to demand.”

How Rising Home Costs Vary by Location

Housing prices vary greatly by state. While the collective U.S. has noted a price increase of 160% since 2000, buyers in a few states witnessed increases of up to 300% or more.

At the state level, Hawaii leads the way with a price increase of 309% since 2000. Once listed around $203,000, the typical home now costs buyers $832,000 in 2024. California is a close second, with a 259% increase since 2000, followed by Idaho at 258%.

Other jurisdictions in the top 10 include Washington, D.C., Florida, Maine, Vermont, Washington state, Oregon, and Rhode Island, which all saw home price increases of over 210%.

Buyers in Louisiana saw the smallest increase, with an 86% increase since 2000, followed by Illinois, Michigan, and Mississippi. They’re the only states where prices haven’t at least doubled.

In 14 of the 50 largest U.S. metro areas, average home prices have tripled, and in some areas, even more. In Miami, Riverside, Los Angeles, San Diego, and Tampa, home prices increased by 250% or more.

Only four major U.S. cities have seen increases of less than 90% since 2000: Cleveland, New Orleans, Detroit, and Chicago.

While there are some exceptions, trends indicate that homes in coastal states are rising faster than homes in middle America. If affordability continues to plummet, the U.S. may see a profound population reshuffle as people move across the country in search of market affordability.

Good News for Slower Price Growth

The Clever study expresses hope for would-be homeowners. Although home prices have surpassed inflation over the past several decades, 2023 was an outlier. Home prices rose 2.6% in 2023, while inflation grew 3.3%.

Policy moves drive this reversal. In early 2022, policymakers began raising interest rates to control inflation. Lenders quickly raised mortgage rates, and demand for homes plummeted. With fewer potential buyers, sellers cut prices, and home prices grew at a more controlled pace.

This article was produced by Media Decision and syndicated by Wealth of Geeks.