Three things are certain in life: Death, taxes, and ever-rising home prices. The last is, of course, slightly less certain because there are moments in American history when prices have fallen, but it’s a rarity. So much so that you can pinpoint only two eras in recent time when home prices declined: a short-lived recession in the early 90s and the Great Financial Crisis in the aughts. To state the obvious, this is extraordinary for anyone who owns a home and dire for anyone who doesn’t; think of the dichotomy between baby boomers and their millennial children.
Beginning in the 70s and into the 80s, baby boomers who were coming of age and entering the housing world fueled a boom, so home prices generally rose (as did mortgage rates). An economic downturn began in 1990, but it was pretty mild; unemployment peaked in 1992 and home prices were already beginning to rise again.
Then there was the Great Financial Crisis, the big bad wolf. From the end of 1991 up until what would become the early aughts of the crisis, you can see home prices rising. It’s a slow burn at first, but by the early 2000s, home prices are leaping. In 2004 and 2005, values were seeing double-digit increases. But of course that all came to an end, because as housing was becoming more and more unaffordable, lending was crazy. “There was no money down and liar loans,” as “Poison Ivy” Zelman once told me. Zelman was one of the only analysts to call the housing crash in 2006 as it was developing and before it turned into the financial crisis.
Home prices nosedived and didn’t really begin to recover until 2012. Even so, given the severity of the crash, which saw multiple large lenders filing for bankruptcy and millions of homes foreclosed on, you might have thought it would be worse.
“By my count, there have been just seven down years for the U.S. housing market over the past 75 years,” Ben Carlson, author of A Wealth of Common Sense, a well-recognized blog on all things wealth and finance, wrote recently on why housing is everyone’s favorite investment. “That’s losses just 9% of the time. And five of those seven years occurred after the housing bubble popped.”
More than a decade later, here we are. Home prices have only gone up since—exponentially so during the pandemic. Interestingly enough, in this latest cycle, mortgage rates soared in a small echo of the 1980s, and home sales plummeted, similar to the financial crisis. But home prices haven’t really fallen. The latest reading showed home prices rose 5.4% in June from a year earlier, another all-time high, despite showing signs of slowing.
Either way, it doesn’t seem as though home prices will fall anytime soon, even if they’re no longer rising as rapidly as they had during the pandemic. Housing policy analysts, urban economists, regular economists, and even some real estate executives will mostly tell you why with one single reason: there aren’t enough homes. The deficit of homes in this country didn’t happen all of a sudden. It’s the result of years of underbuilding, and in some places, decades of policy failure that made it almost impossible to build anything but single-family homes, thanks to zoning and land-use regulation all controlled by localities. That was all happening before the pandemic housing boom, which only worsened things and helped. Housing crises that had been somewhat contained to coastal, blue states spread.
But it was the sudden change in mortgage rates triggered by the Federal Reserve’s fight to tame inflation that hit the brakes on the housing market, at one point sending rates to a two-decade high. Anyone who locked in a 3% mortgage rate or around that isn’t selling unless they have to, tightening inventory further. “Some of that is just this artifact of 30-year mortgages,” Redfin chief executive Glenn Kelman once told me, “it actually has the perverse effect of keeping home prices high.” He’s one exec who believes the only way to get out of this is by building homes.
Luckily, mortgage rates have come down and inventory has gone up, so the situation is less bleak for anyone who doesn’t already have a home, but still pretty dire. On the other hand, it’s looking good for homeowners who are watching their home values appreciate, even though it doesn’t exactly make them rich unless they sell, at which point they’ll probably need another home to live in. Not many see home prices dropping anytime soon, unless millions of homes miraculously appear. And while one presidential candidate has vowed to end the housing shortage, laying out a plan to build three million homes, it’s not totally clear how she’ll do that, if it’d be enough, or if she’ll get the chance to put her plan in action.
