Norbert Michel and Jerome Famularo
In the aftermath of the COVID-19 pandemic, the United States experienced a much higher rate of inflation than at any time during the prior few decades. Like the prices of many goods and services, the cost of housing rose rapidly, with the median home price increasing almost $100,000. (Figure 1.) Unsurprisingly, many potential homebuyers were—and still are —shocked and upset.
As they have in years past, many politicians have latched on to the anger surrounding the recent housing market turmoil. During the presidential debate, Vice President Kamala Harris said, “Here’s the thing: we know that we have a shortage of homes and housing. And the cost of housing is too expensive for far too many people.” Prior to the election, Donald Trump outlined his own solutions, and now federal officials want to implement a host of policies, ranging from subsidies to selling federal land.
But is the United States really facing a housing crisis? Or a shortage of homes? And should Americans really expect recent federal policy proposals to make housing more affordable?
This Cato at Liberty post is the second in a series that examines these questions. (The first post is here.) While the series presents evidence that the United States is not facing a true housing crisis or shortage, nothing in the series suggests that local officials should refrain from relaxing zoning restrictions and other regulations. Elected officials should reduce rules and regulations to make it easier and less costly for people to live. Additionally, federal officials should end the many demand-side policies that place upward pressure on prices across the nation.
Just as important, nothing in the series ignores that many Americans have taken an economic beating these past few years—real wages have fallen, and prices have not reverted to pre-COVID levels. It is no surprise that so many people have been calling for increased government intervention.
As previously, though, if federal officials answer those calls, it will likely increase Americans’ economic burden. Evidence shows that over the long term, people have overcome the many federal roadblocks that increase the nominal cost of housing, but affordability would be much improved in the absence of those policies.
Fortunately, federal officials have an excellent opportunity to make it easier for Americans to afford housing because the lessons learned from the post-COVID-19 inflationary episode are directly applicable to the housing market. In both cases, federal policies that distort both demand and supply result in harmful outcomes. The housing market is just a microcosm of what can go wrong—and how difficult it can be to fix—when the federal government interferes with markets.
This post looks at the basic data behind the housing affordability issue. It focuses on home price data in both nominal and real terms, and it demonstrates how deceptive long-term price trends can be regarding affordability.
As Figure 1 shows, the median home price in the United States has been steadily increasing since the 1960s, with several notable spikes throughout the period. Focusing on the most recent few decades (Figure 2), home prices exhibited two abnormally large spikes above the trend, once in the years preceding the 2008 financial crisis and again in 2020 surrounding the COVID-19 pandemic.
The spike preceding the 2008 financial crisis stands as a testament to why federal officials should avoid expansive policies such as President Clinton’s National Partners in Homeownership. That effort, a private-public cooperative, set an arbitrary goal of raising the US homeownership rate from 64 percent to 70 percent by 2000. It did so by expanding incentives to borrow and lend, a trend that heavily contributed to the 2008 crisis. The ownership rate climbed to 69 percent by 2004 but then steadily dropped for the next twelve years, reaching 62.9 percent in 2016. It currently stands at 65.6 percent, essentially where it stood in 1979.
The more recent price spike is related to the federal response surrounding the COVID-19 pandemic, and it coincides with the near-record-high inflation that started in 2021. As Figure 2 demonstrates, this spike in home prices went well above the trend, with the median home price rising from $317,100 to $442,600.
Given this large and rapid price increase, it is hardly surprising that Americans are concerned about rising home prices, much like they were upset about rapidly rising consumer goods prices. Still, these increases are only nominal, and prices did partly reverse. From October 2023 to April 2023, for instance, the median home price fell from $442,600 to $412,300.
Obviously, this most recent value is still well above the pre-pandemic median home price, so any prospective buyer in the market before and after the pandemic will be particularly unhappy with the higher price. However, it is vital that policymakers do not overreact to short-term price movements because doing so could easily cause home prices to rise even more rapidly.
Regardless, these two large price spikes don’t, by themselves, answer the question of whether homes have become unaffordable over time, much less whether there is some kind of structural problem—a crisis—in the housing market. There are, in fact, many reasons to doubt the crisis story.
Looking Deeper
One reason to consider contrary evidence is that while the US homeownership rate was 64.1 percent at the end of the second quarter of 2019, it was 65.6 percent by the third quarter of 2024. So, while home prices rose, a larger share of Americans now own homes. At the very least, whether homes have become more “unaffordable” over time requires more investigation.
A good place to start investigating this question is to examine home prices in real terms, as opposed to simply nominal price movements. Figure 3 presents both the real (inflation-adjusted) median home price and real median household income. As the figure shows, the increase in real home prices is not as steep as the nominal increase presented in Figure 1 and Figure 2. Still, Figure 3 also shows that real home prices have risen at a more rapid rate than income (recently and throughout the period).
Given this relationship between income and home prices, the idea that homes have become more unaffordable over time may seem like the obvious conclusion. Still, even this relationship does not tell the full story. One important factor to consider is how similar homes are now compared to homes purchased in the 1970s. Another factor to consider is whether the makeup of households is the same.
Both factors are critical to the story because homes have been getting larger, and households have been getting smaller. Put differently, people have been buying larger houses and living in them with fewer people. As Figure 4 shows, the median new home size increased 45 percent, from 1,535 square feet in 1975 to 2,233 square feet in 2023, while the average household size decreased 15 percent, from 2.94 people to 2.51. As a result, the total space per person increased 70 percent from 1975 to 2023.
When the data are adjusted for these changes, the evidence shows that homes have not gotten dramatically more expensive over time. In fact, as Figure 5 shows, homes have become slightly more affordable, even with the most recent price spike. When we hold both the average home size and household size constant, the share of household income spent on new homes has been on a slightly decreasing trend since 1975.
This change likely matters very little to someone coming into the market recently, but the long-term trend stands. Just as important, the federal government implemented many policies during this period that put upward pressure on prices, and housing would have become even more affordable over time in the absence of those harmful policies.
Finally, it is important to note that, contrary to conventional wisdom, Americans have experienced solid income growth over the past five decades. Income has not been stagnant, and it is not the case that only the well-off did better.
As we demonstrated last year (and mentioned in our new paper), even Americans at the lower end of the income distribution did better. For example, from 1967 to 2023, the share of households earning less than $35,000 fell from 31 percent to 21 percent, and the share earning between $35,000 and $100,000 fell from more than 53 percent to 38 percent. During the same period, the share of households earning more than $100,000 essentially tripled, from 14 percent to 41 percent. (These income figures are in real terms.)
Obviously, these figures do not indicate that every American has done better or that no Americans have had difficulty earning higher incomes. But the idea that most Americans failed to earn substantially higher incomes (in real terms) over the past five decades is wrong. Naturally, this kind of income growth is consistent with Americans seeking—and purchasing—bigger homes with more amenities.
The next post in this series takes a deeper look at whether changing consumer preferences could have increased housing demand during the past few decades.