First, I combined the real Case-Shiller home price index with a measure of US residential investment/personal income. They both exhibit a notorious tendency to move in a flat line over several decades, leading to sudden spikes outside the long-term range. A close parallel of them from 1945 to the 2008 crisis shows that the measure of overall real estate wealth has also been flat since at least the 19th century.
Then, I noted that the total cost price did not follow a building boom beyond the long-term trend. Quite the contrary, it coincided with a significant decline in residential investment. This is reflected in estimates of real housing consumption, which is now more than 20 percent behind trend in total spending compared to 1991. And, at the same time, rent inflation has accumulated to about 40% of the change in the general price level.
It is also reflected in net residential investment as a share of GDP (starting from the BEA’s total estimate of residential investment and subtracting brokers’ commissions and annual depreciation from the BEA’s current stock of homes). It was actually negative for several years after the Great Recession.
Another check is the actual cost of living per capita. It follows a similar pattern. Before 1980, Americans improved our housing conditions at a rate that matched rising real incomes. Then, from 1980 to 2007, growth in the quality and size of our housing slowed. Then, even in that measure, it actually pulled back a bit after 2008 and was flat for a decade.
Since 1980, the real value of the U.S. housing stock has fallen 29 percent relative to gross income, but the market value of these homes has increased 37 percent more than gross income. They cost more because inflationary rents have increased on existing homes where no improvements have been made to the homes themselves.
In Figure 6, I identify the actual aggregate values of total price in 1980 and trace real housing costs from there. I stress the residual value against rent inflation and attribute the residuals to cyclical changes.
A potential problem here is that both rent inflation and interest rates have followed somewhat linear non-stationary trends for most of these 43 years. The recent rise in mortgage rates has helped, and will continue to help, to confirm that rent inflation, not mortgage rates, has been the main problem there. The large cyclical drop in Figure 5 after 2007 is due to reduced access to mortgages. Since 2007, the lack of access to mortgages has interacted with rents as a decline in construction due to price declines has led to an acceleration in rents.
From 1980 to 2023, a 1% increase in rent inflation was associated with a 1.68% increase in aggregate price/income. As I often write here, wherever rents are high—over time, in metropolitan areas, or within metropolitan areas—a 1% increase in rent is always associated with a greater than 1% increase in prices. There are several plausible explanations for this. I think the most reasonable, and perhaps most important, point is that land trades at a higher price/rent multiple than infrastructure, and rent inflation is not associated with changes in infrastructure.
Trends in the underlying national aggregate tell the underlying story that price analysis between and within metro areas will unravel in more detail. Under current circumstances, the less we invest in homes, the more families pay for housing. Let me make a couple of points here:
If any of the additional rent inflation were to increase demand, this would imply both a higher demand elasticity and a lower supply elasticity. In other words, the more rising prices assign to rising demand, the worse supply constraints are to keep up with the relative production of new housing in front of it. should be
In other words, you can’t doubt the supply in the 2025 US. Our baseline condition has been a deep decline in real investment and the real value of residential real estate. If part of the high cost of U.S. residential real estate is due to demand stimulus (low interest rates, federal subsidies, tax benefits, etc.), the position have to do Coupled with the position that supply conditions are worse than they are.
And:
The most pressing sources of increased demand are buyer subsidies (mortgage tax cuts and exemptions for homeowners, federal mortgage lenders, and others). Home beer subsidies increase the demand for home ownership. Homeowners are both suppliers and demanders of housing, so a homeowner subsidy can increase both supply and demand. From the 1940s to the 1970s, new homeowner programs competed. Home ownership increased by 20 percentage points—an incredible scale. During this period real housing consumption increased and rent inflation was low. We have clear historical evidence of the impact of federal programs aimed at stimulating homeownership. While they were significantly promoting home ownership, they were not associated with such values.
Mortgage rates were low for much of this period as well.