Housing & Mortgage
Opinion: 80% of Home Price Gains Since 1990 Due to Falling Rates
What now? Housing shortage in some areas keeps prices rising
John Wake, who writes the Real Estate Decoded newsletter on Substack, suggests anyone sitting on a fat pile of housing profits has Federal Reserve chiefs Jerome Powell, Janet Yellen, Ben Bernanke and Alan Greenspan to thank.
Wake estimates that up to 80% of home price appreciation since 1990 has been driven by falling mortgage rates. Reading his argument is time well spent, even if you find yourself disagreeing. Without the decline in rates, Wake estimates that home price appreciation might have been around 40% during the past 30 years, not 200%+ owners have enjoyed.
The average 30-year mortgage rate in January 1990 was 9.9%; today it’s below 3%. The less interest you pay, of course, the higher the home purchase price you can afford in terms of monthly payment.
The rate road ahead?
At today’s start point of a roughly 3% rate for a 30-year mortgage, a 6 percentage point decline in mortgage rates over the next 30 years seems, well, impossible. That suggests that achieving a large increase in the value of one’s home could become even more dependent on location, and that across-the-board leaps in values are far less likely.
In other words, the opposite of what’s happening right now. An index of U.S. home prices gained 12% in the 12 months through February, a period when the official inflation rate was below 2%.
Since early 2012, the low point for home prices in the wake of the housing fueled Great Recession, home values are up nearly 80%, a period when inflation was 16%. And dialing back 30 years — which includes the bursting of the housing bubble that began in 2007 — the index is up more than 200%, about double the inflation experienced over that period.
That’s neither an argument against buying a house now, nor in favor of selling the one you’ve got to lock in gains. But realizing that a 30-year-long gale force wind at the back of homeowners is likely to calm, it’s wise not to project price gains of recent years into the future. That would introduce some major speculation into your financial plans.
“It seems extremely likely that real U.S. house price appreciation over the next 30 years will be a lot less than the last 30 years,” Wake says in his analysis.
Constricting the supply
Of course, other factors can keep prices rising. The NIMBYs among us are a roadblock to increase the supply of new homes, at least in areas where housing is most in demand. The annual rate of new home starts is still below the level before the housing bubble, yet demand has grown, as the number of households is 23% higher since 2000. That has contributed to a decades-long decline in the monthly supply of homes for sale and a severe housing shortage on the West Coast and in some other markets experiencing population and job growth.
Absent a government intervention to force municipalities to accommodate new home construction, many of these markets can be expected to continue to experience a shortage of units. And that supports prices.
The shift to remote work has contributed to a surge of eager buyers in some markets, further pushing prices up. More homebuyers have been willing to waive important contingencies — appraisals, home inspections — when making an offer. Bidding wars and sale prices above the original asking amount have risen, too.
One possible positive outcome of a less-torrid rise in home prices could be fewer speculators — house flippers and Wall Street single-family-home landlord funds — to compete against for families trying to buy a house, Wade notes. Steeply rising prices have made that kind of speculation lower risk than it would be in a period of stable home prices.