Average house prices remain very close to the all-time highs reached at the beginning of the year. As a result, public opinion polls show growing concern about housing affordability issues, and politicians are also paying attention. The Trump administration has declared a national housing emergency, which could be issued soon, to give the president something to do. We may have to wait until an executive order is issued to find out exactly what Trump thinks his emergency powers will do in the area of housing policy.
But are house prices really higher in the long run, or are they just an economic mirage?As an economist with a background in home construction, I think about this question a lot.
When you read articles about the housing affordability crisis, you tend to agree with the economic-informed consensus that America has a fundamental housing supply problem. A combination of regulatory constraints such as zoning, permits, energy efficiency standards, and occupational permits drive up the cost of home construction. Tariffs and eliminating illegal immigrant workers won’t help either. I support the argument that deregulation makes housing significantly more affordable.
On the other hand, it feels like much of the fuss about rising house prices is based on incomplete analysis. Relevant factors have not been sufficiently considered to fully explain the trends observed in the data. Good economic analysis requires holding other factors constant. This is the famous ceteris paribus assumption. There are many other factors to consider when analyzing home prices. A fairly simple calculation using easily available data supports the claim that home prices are not significantly higher than the long-term average.
Other factors important in housing
So what criteria should we hold as paribus when analyzing long-term trends in U.S. home prices? Let’s start with the big and obvious inflation. Nominal home prices from 2019 to 2025 cannot be compared (CPI rose 26% in those six years alone). Much less compare it to dates like 1990 or 1960, which we have chosen as the golden age of affordability.
Suppose that 1960 (the first year for which we have data points for all ceteris paribus categories) is the exemplar for housing affordability in the United States. The nominal median home price increased by 3.421% from 1960 to 2024, but when adjusted for inflation using the Consumer Price Index, it shows a more modest, but perhaps still disastrous, increase of 232%. But now let us also take into account the much smaller but significant increase in household income over this period. Generally, the median home price is divided by the median household income to find the home price/household income ratio. In fact, this ratio rose from about 2.1 to about 5.2, or 145%, over the same period.
Now let’s consider what exactly people get by buying a median-priced home. In 1960, the median size of homes built in the United States was 1,500 square feet. Median home size has steadily increased, peaking at about 2,700 square feet in the mid-2010s, before declining slightly to 2,400 square feet in 2024. Assuming that bigger is better, and that people are happy to shell out more money for more homes, you can adjust for this size factor by calculating the actual home price per square foot of home size. This indicator increased by 107% from 1960 to 2024. While still a significant increase, it is much more manageable than the raw real median price alone or simply adjusted for household income.
As we get closer, we would like to make comprehensive adjustments. One very important element of analysis that I learned from the great Thomas Sowell is to pay attention to compositional effects, changes in group characteristics over time that can distort simplistic statistical snapshots. Sowell teaches us to be aware of compositional effects in household statistics, because household size can and does change significantly over time. In 1960, the average household size in the United States was 3.33 people. By the 2020s, this number had fallen to about 2.5, but most of that decline occurred before the 1990s.
This means that median household income is distributed among a small number of household members and that growth in household income over time at the individual level is underestimated. In other words, real per capita median household income has increased by more than is evident across the household income data series. You can incorporate this into your house price analysis by calculating the ratio of real house prices to real household income per person. This indicator has increased by 96% from 1960 to 2024.
Finally, let’s combine changes in household size and household composition in the final calculation. The final adjustment yields the ratio of real home price per square foot to real household income per person. Drum roll, please. According to this comprehensively calibrated measure, housing affordability rose by just 6% from 1960 to 2024, but it has actually fallen significantly from its peak in the late 1970s.
Furthermore, all of these adjustments do not take into account perhaps the most important change: changes in housing quality in terms of features and amenities that have become more common over the years. We have yet to find a housing quality indicator that reliably tracks these characteristics. Based on personal experience and a bit of data, I have a strong impression. From there, we confidently concluded that today’s homes are better places to live than homes of 30 or 60 years ago. As the 2011 U.S. Census report summarizes, in addition to home size, “homes built today include more room types such as more bedrooms and bathrooms, more amenities such as washers and dryers, garbage disposals and fireplaces, and more safety features such as smoke and carbon monoxide detectors and sprinkler systems. Today’s larger, more spacious homes have more energy-efficient utilities, more user-friendly appliances, more garage space, and larger, better-equipped kitchens with stone countertops instead of Formica. If we could find a way to factor all these changes into a comprehensive home price adjustment, we could see no change in home prices, or even declines.
In conclusion, the housing price crisis is no big deal.
While it is important to think carefully about changes in ceteri, I would like to reiterate that there is a housing affordability issue that deserves attention and a sensible public policy response. While I hope my “comprehensive” real house price adjustment here is thought-provoking, this analysis is lacking in at least two key ways. 1. You have chosen the starting and ending points appropriately. 2. Because this is nationally aggregated data, it does not detect regional variations in house price changes over time.
Over a 10-year span, there is significant variation in the evolution of house prices, even according to my preferred ratio of measures of real house price per square foot and real household income per capita. Prices in 2024 will be 22% higher than 10 years ago, giving an emerging generation plenty of reason to complain that housing prices are becoming unaffordable. The recent rise in home prices also supports the argument that the housing market plays a role in transferring wealth from poorer Millennials to wealthier Boomers. Housing price growth also varies widely by region. Hot markets (primarily coastal and Sunbelt meters) have seen price increases of 1.5 to 2 times the national average over a 10-year period. In some cooler markets in the South and Midwest, growth rates were not much lower than overall CPI inflation.
As this great map from Visual Capitalist shows, it’s much easier to buy a home (ceteris paribus, of course) in the Midwest than in the West, Northeast, or Florida. (I knew I needed a disparity to compensate for Michigan’s miserable winters!)
Addressing rising house prices is easy, but politically it is not. We need to recoup the relative increase in home construction costs. In other words, the housing supply curve has to shift to the right more than the demand curve has shifted. Your builder will know exactly what this will require. That means fewer restrictions (especially for multi-family housing), simpler licensing and permitting processes, less stringent building and energy standards, free markets for labor and materials, and perhaps consumer acceptance of smaller, simpler homes.
All data sourced from Federal Reserve Economic Data: fred.stlouisfed.org.
Datasets and calculations are available upon request: tylerwatts53@gmail.com
Tyler Watts is a professor of economics at Ferris State University.
