Why You Shouldn’t Fear Soaring Home Prices

Home prices have soared 16% over the last year.

I get it. That’s scary.

It probably makes you feel like it’s the mid-2000s again. That was the last time housing felt this crazy. And it was obviously a time of excess in the market, as prices rose much faster than what was sustainable.

It all ended with a massive collapse. And I understand if you’re worried about that happening again. But things are much different now, as I’ll explain today.

Not only have home prices risen less in recent years than you probably expect… but housing is also still affordable. And those two pieces mean this seemingly crazy boom can continue.

Let me explain…

Double-digit annual housing gains might feel like a bad sign. You might be wondering how a long-term boom can possibly continue from here.

There’s no question, the U.S. housing market is hot right now. But importantly, the median sale price for homes sold in the U.S. is only up 11% from its 2017 peak. Think about that… Prices have risen just 3% per year over the past few years.

That’s slower annual growth than much of what we’ve seen throughout history. Take a look…

Here is the price change per year of the average home sold in the U.S., separated by decade. These numbers might not seem huge, but housing doesn’t typically soar in double-digit percentages each year.

The 1970s bucked that trend. The U.S. had a high rate of inflation back then, and we see that reflected in home prices, too. The 1980s saw fast growth as well. But after that, we have three decades that show us a pretty consistent pattern…

Home prices tend to rise 3% to 4% per year. What we’ve seen in recent years is simply on trend. And it took the hot market to even catch up to those levels.

So yes, the market is hot… but no, the biggest price increases aren’t behind us. Housing can keep soaring from here.

If you still don’t believe that, you have to consider something else: housing affordability. The reality is that record-low interest rates have kept housing affordable even as prices soared.

You can see it in the chart below. It shows housing affordability, which takes incomes, interest rates, and home prices into account. A high level means housing is more affordable…

A reading of 100 on the chart means an American family with the typical income can afford the typical home. A reading of 150, like we have today, means that family can afford 150% of the typical house price.

That tells us that housing is actually darn affordable throughout the U.S. today. And despite a recent fall, we’re still above the long-term average.

This paints a picture that few see in housing today. Yes, prices have soared… but they’ve simply been playing catch-up. And despite those increases, homes are still affordable.

That’s why this time is nothing like the mid-2000s. And it’s why the rise in home prices doesn’t scare me. Instead, the smart bet is that those gains will continue.

Good investing,

— Steve

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Source: Daily Wealth