MarketWatch First Take: Home prices have risen 100 times faster than usual during the COVID-19 pandemic


We all know that house prices are rising at a record pace right now, but few realize just how far from normal this is.

Over the past year, nominal U.S. home prices are up nearly 20% on average (and about 15% in real terms). Most of the time home prices barely keep up with inflation (and the return after inflation is what counts).

In fact, for the entire 20th century, the annual average increase in home prices was only 0.2 percentage point more than the rise in the cost of living, according to the Case-Shiller home price index. From 1955 to 1998, home prices increased just 0.1 percentage point per year over the inflation rate.

You might have to squint to see it in this chart, but from 1955 to 1998, home prices increased just 0.1 percentage point per year more than the inflation rate.

Over shorter periods, home prices are extremely volatile, as anyone who remembers the great housing bubble of the 2000s will recall. From 1998 to 2006 (when prices peaked), nominal house prices more than doubled on average. After factoring in the loss in purchasing power due to inflation, real prices rose at an annual rate of 6.9%.

Homeowners lost most of those gains over the next six years as real home prices fell at a 7.1% annual rate.

Since 2012, home prices have been on a tear, especially in the 18 months since the coronavirus upended the economy. From February 2012 to February 2020, the real rate of return was 4.3% per year.

Since the virus hit, inflation-adjusted home prices are up 11.8% annualized. Which means real house prices have been rising about 100 times faster than they did from 1955 to 1998.

This is not sustainable. Over time, home prices can’t grow much faster than household incomes. While the housing bust to come won’t follow the 2006-2012 playbook exactly, it will come at some point. Price appreciation will revert to the mean.

Rex Nutting has been writing about economics for MarketWatch for more than 20 years.

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