Rising Housing Prices – A Wealth of Common Sense

I found two new tools to look at the historical price increases of the various components that make up the ratio.

Jesse Livermore created a tool at Philosophical Economics that allows you to compare 300 different goods and services with the rate of inflation over time.

For example, this is the price of eggs compared to the per capita price index since 1959:

Surprisingly, long-term inflation grew at a lower rate than PCE (2.4% vs. 3.2%). But look at all the price shocks on the charts when there are egg supply problems. It shoots up but quickly returns back or below the trend.¹

Here are the houses over time:

The long-term housing growth rate is slightly higher than inflation — 3.78% vs. 3.24% since 1959.

However, there is a caveat here. The inflation-adjusted housing figure takes into account both rent inflation and the rent charged (how much homeowners think they will pay to rent their home) and therefore does not measure the cost of buying a home.

What Should I Use has an inflation calculator that allows you to compare the price of goods back in 1970 to today’s price and what the price would look like if it tracked the rate of inflation.

For example, here is bacon:

It cost 81 cents a pound of bacon in 1970. If that price had simply tracked the rate of inflation it would be $6.76 today. The average cost is actually $7.50, which means the price has increased faster than inflation.

The average liter of milk is the opposite:

Milk prices have grown much slower than general inflation.

Now look at the cost of buying an average home:

This makes intuitive sense.

Homes are more expensive today than ever, even when you factor in inflation.

However, some context is needed here. At that time, when housing was very affordable, it also had very few amenities.

There are no open concept floor plans. No quartz countertops. No stainless steel appliances or 3 car garages or mud rooms. Many houses lacked some of the basic things we take for granted as well.

I’ve written about this before but it’s worth revisiting:

The US Census releases an annual report on the characteristics of new housing. Check out the difference between now and the early 1970s:

• • In 1973, 49% of homes did not have air conditioning. Now only 7% of houses do not have AC.
  • In 1973, 40% of homes had 1.5 bathrooms or less. Today only 4 percent have less than 1.5 bathrooms.
  • In 1973, 64% of homes had 3 bedrooms and 23% had 4 or more bedrooms. Now 42% of homes have 3 bedrooms and 47% come with 4 or more bedrooms.
  • In 1973, the average house had an area of ​​1,525 square meters. Today it is close to 2,500 square meters.
  • In 1973, the average US family size was 3 people living under one roof. That average has dropped to 2.5 residents per house.

Houses were small back then. More people under one roof had to share bathrooms and bedrooms. Homes are big and beautiful now and higher prices reflect higher quality. That does not explain all of the price increase but it is part of it.

Land is also very expensive.

Look, I’m not here to give you the opposite view on housing costs. They are definitely high.

But this example is one of the reasons that calculating the long-term rate of inflation can be challenging (and why no one really believes the reported data).

Economists try to combine the hedonic adjustment to improve quality but an exact science.

One of the downsides of having a high standard of living is that it is very expensive. High housing costs also have social costs. Everyone needs a roof over their head and a lot of young people want to buy a home right now but can’t afford it.

It would be great if we could find sensible ways to encourage the building of big, beautiful homes today.

Michael and I talked about housing, inflation and more in this week’s Animal Spirits video:

https://www.youtube.com/watch?v=6VfHAMgosr8…

Subscribe to Compound so you don’t miss an episode.

Further reading:
How to Adjust the Housing Market

Now here’s what I’ve been reading lately:

Books:

¹These charts can be a bit difficult to read, so click on the link or just right click on the graph and press open image in new tab.