Last Updated on March 29, 2023 by Mark Ferguson
When we hear something about the real estate market, all we seem to hear is how high prices are and how crazy the market is. It is true that prices are going up, and going up fast, but historically are prices going up faster than any other time? Why are prices going up and is it a false demand or limited supply that is causing it? Will the market crash soon or keep going or settle down? I will address all of these things based on data and my experience as a real estate broker, investor, author, and advisor!
How fast have housing prices increased?
Housing prices have increased significantly in the last few years, especially after COVID hit, but they were increasing before that as well. It seems like prices have skyrocketed, but part of that is because we also just came off one of the largest real estate crashes in history with historically low prices.
The median house value in the second quarter of 2020 was $322,000 and in quarter 4 of 2021, it was $408,000. That is an $86,000 increase in 18 months. That seems crazy but it is about a 27% increase over 18 months or about 18% a year. That is a large increase but it is not unheard of. You can see the price increase over the last 20 years below.
Are housing prices increasing faster than any other time?
A lot of people say prices cannot keep going up because they have gone up so fast. However, the increase in prices we have seen recently is not the highest increase in prices in US history. I am not even talking about the increase before the last crash. The 1970s saw housing prices increase at a higher rate and after that increase, there was no housing market crash. The 1970s also saw increasing interest rates, massive inflation, and 2 recessions.
Below you can see the increase in prices for each decade since the 1940s.
If we saw prices rise at the current rate, the 2020s would rank as the third-highest appreciating decade. Yes, prices are going up fast, but not as fast as some may make you think.
Even after coming off the worst housing crash in history, prices have not come close to increasing as fast as they did in the 1970s.
What is causing prices to increase?
A lot of people have blamed many things for housing prices increasing. Investors are blamed for buying all the houses. Foreigners are blamed for buying houses. The government is blamed for not allowing more building.
In my opinion, the cause for the high prices is not enough building and the cost to build. Yes, a larger percentage of houses are being sold to investors, but the actual number of houses investors are buying is not that high because inventory is so low. In fact, the share of owner-occupant houses is increasing much faster than the number of investor-owned houses.
As you can see there are not that many more rental units than 6 years ago but there are millions more owner-occupant units. The real reason housing prices are increasing is that there are more owner-occupants than ever and there are not enough houses for those owner-occupants.
The United States has had record low building for years after the last crash and that building has never been able to catch up. You may hear there is a ton of building going on, but those houses are not being finished. With supply chain issues, the time to build has increased significantly and the actual amount of houses being built is very low.
Completed new houses
You can see that they have been building very little in the last 14 years all while the population has been increasing. The birth rate in the US is going down, but those babies won’t be buying houses for decades.
If it was cheap and easy to build houses, they would! In almost all markets, the cost to produce is what drives prices. If another company can produce something cheaper and still profit, they will! The only time the cost to produce is not the driving factor is when there is a massive oversupply of homes from overbuilding or foreclosures. There is a massive shortage of housing now, not an oversupply.
The government has also made it tougher and tougher to build all while making it harder for investors. The more restrictions the government places on buildings, the more expensive the builds are. You can see this clearly when looking at places like Boulder Colorado where they have had massive restrictions on building for years, and the prices have been double or more, than the prices of neighboring towns.
Will housing prices drop or slow down their pace?
There are many things going on in the world right now with a war, interest rates, inflation, and threats of a recession. A lot of people are predicting a housing market downturn or crash. What is important to know, is the numbers and the facts. It is really hard for the price of anything to go down unless the cost to produce goes down. I don’t see the cost of building decreasing anytime soon. I go into the details in the video below:
The reason housing prices are going up is that it is expensive to build. It is hard to find people to build, the government makes it hard to build, and materials are expensive. Could housing prices slow down? Yes, they could slow down their pace of increase but inflation would need to slow down as well. it is hard to say exactly what will happen but I do not see a crash coming anytime soon.