Why Have Houses Gotten More Expensive?

Today I want to revisit the world of housing. As an (almost) 30-something, buying a house is something that I have spent significant time thinking about. If my Facebook feed is any indication, then I am not alone in this.

Specifically, I want to explore the idea that it was more affordable for our parents to buy houses. Is this actually true? And if so, how does it square with the (previously-discussed) fact that the value of your house generally only grows at the rate of inflation?

Millennials aren’t buying

Millennials aren’t buying houses at the rate previous generations did. Home ownership among 18-34-year-olds is at a 30-year low.

The easy answer is to blame student loan debt. And sure, maybe that is part of the problem. But as someone with six figures of student loan debt (and not low six figures) this doesn’t seem like it could be anywhere near the full cause.

Some have speculated that Millennials just don’t want to own homes and that we are “experiencing a cultural shift.” However, Nerd Wallet, using actual data instead of just making things up, found that Millennials “look upon owning a home just as favorably as previous generations.”

Time suggested that maybe we’re “just too picky.” I think being picky may be justified when making the biggest purchase of your life, but maybe that’s just me. Anyway, I haven’t seen any data to back up the idea that “being picky” is leading to a 30-year low in home ownership.

So maybe some of these factors play a role, but let’s see if we can find anything more solid in the cost data.

Home prices

In December of 1975, the median new home sale was for $35,700.

That in itself doesn’t tell us much, given that we are terrible at calculating inflation in our heads.

What does help is knowing that in 1975 the median household income was $11,800. This means that it took just about 3 years of gross household income to purchase a house.

In December of 2015, the median new home sale was for $299,000. The median household income for 2015 was $56,516.

In 2015 it took 5.3 years of household income to purchase a new house.

When compared to income, a house in 2015 was 77% more expensive than in 1975.

Why are houses more expensive?

“But wait, Matt,” you may be thinking. “You told us that home value appreciation barely beats inflation! Did you lie to us?”

I would never lie to you, dear reader. At least not intentionally, I suppose.

Homes do only appreciate at right around the rate of inflation. And they are much more expensive than they used to be.

This chart from AEI shows the price per square foot (adjusted for inflation) for new homes in the US.

As you can see, the price has gone up and down over time, but the 2015 price is pretty close to the 1975 price.

The cause of this discrepancy, it appears, is that houses have gotten significantly larger over time.

According to the U.S. Census, the median new home in 1975 was 1,535 square feet. By 2015, this number had jumped to 2,467 square feet.

Our houses have gotten 60% larger over the past forty years!

This change looks even more drastic when you consider that family size is on the decline as well.

In 1975, the average household was 2.94 people. This figure dropped to 2.54 people by 2015.

So what does it mean to get rid of 40% of a person?

For one thing, it means that the remaining 2.54 people have a lot more space.

In 1975, there would have been 522 square feet per person if the average family lived in the median home. This number jumped by 86% to 971 square feet per person in 2015.

Takeaways

I don’t know why houses have gotten so much bigger over the years. It could be a case of keeping up with the Joneses run amok. It could be out of control hedonic adaptation. It could be any number of reasons that others have speculated.

The important takeaway is that houses are getting more expensive mainly because we are buying much more space for smaller families.

So if you’re looking to find a more affordable home, maybe think about how much space you actually need. A smaller option might just work for you. Your parents would have been fine with it.

15 thoughts on “Why Have Houses Gotten More Expensive?”

  1. Matt, I really think at least some of this about supply rather than demand. Builders build fewer little houses/starter homes because the margins are better on bigger houses. It seemed to me when i was looking for a house, there was a much bigger supply of homes that were larger than I wanted. The “right size/right price” homes got snapped up pretty fast.
    Emily @ JohnJaneDoe recently posted…Buying A Basic Cookbook Might Be Your Best InvestmentMy Profile

      1. I think beyond the number of sales the margins are probably larger for a builder on a larger home. There is some added complexity to a larger home sure, but I’d bet the costs of construction are not purely linear to the size of the home.

        My house is around medium size so I can’t say much on size. However the other thing I found is so many people have a propensity to buy a new home. Just like a car, if you buy new construction it costs more. It doesn’t necessarily mean there is less maintenance or the house is built better.

  2. Very interesting chart. Makes it look like we still have another handful of years of appreciating and over inflated house pricing.

    Good for me because I own 7 houses and I would love to cash out on some of them during a peak appreciation cycle. Then I would wait for the prices to be super low again and just buy all over again.
    Alexander @ Cash Flow Diaries recently posted…October 2016 Net Worth UpdateMy Profile

  3. Wow that’s incredibly interesting. I knew that houses had gotten larger but didn’t realize it was by that much. With that said, my dad grew up in a 4 bedroom/2 bathroom house, my grandma still lives there today. My wife and I live in a 3 bedroom/5 bathroom place. We don’t even use two of the bathrooms. So clearly we could definitely downsize without feeling it too much. Awesome post like usual!!!
    Mustard Seed Money recently posted…Is Your Home Truly an Investment?My Profile

  4. Great analysis, Matt, and very interesting. One other thought is how the median income has increased… Has it kept up with inflation or is it part of the problem too.

    I can tell you that my wife, kid and soon to be second kid live in a 3,000 sf house which is nice and comfortable for us, but we don’t NEED that much space. I think there is something to be said about fewer costly possessions filling up smaller houses.
    The Green Swan recently posted…The Swan Life: October 2016My Profile

    1. Thanks. When I first looked at the numbers, I expected to find that the change in ratio was because real median income had dropped. Instead, I found that the median income had definitely risen since 1975, but has been a complicated picture since the late ’80s. There have been some big ups and downs, to the point that as recently as 2012, the median wage was lower than it was in 1989. It has since bounced back really quickly and is shooting towards the 1999 high.

      Here’s a chart if you’re interested: https://fred.stlouisfed.org/series/MEHOINUSA672N

      Thanks for the comment!
      Matt recently posted…Why Have Houses Gotten More Expensive?My Profile

  5. Hi Matt,

    From my perspective, home price is reasonable and within means if it is within 2-2.5 times the gross annual income.

    Home size has been increasing. Not only that, self storage business has been growing at a crazy rate. All I can say is people are cluttering their life with things. Have you seen how storage business has exploded? I can’t find a logical explanation for either of them.

    –Michael
    Michael recently posted…Why You Should Be Thinking About Retirement as a MillennialMy Profile

    1. Thanks for reading, Michael.

      It definitely looks like people are just accumulating a lot more stuff than they used to. When you consider that prices of many consumer goods (such as electronics) are constantly dropping and yet people’s savings rates are not rising, it seems to fit that people are just buying more.
      Matt recently posted…On Politics and Personal FinanceMy Profile

  6. We moved to a relatively new neighborhood and the houses here are all pushing from 2500 to 4500 Sqft. My apartment was in a relatively old neighborhood and the houses there were from 1600 to 3000 sqft (median). I can see the builders are pushing for more space, but that’s because people are willing to spend on a bigger houses (Supply – Demand).

    1. Definitely true. My neighborhood is a very old one, but in a great location. This means that there have been tear-downs and rebuilds for the past twenty or thirty years. You can pretty accurately guess how old the house is by how big it is. It is crazy to see the tiny original build houses next to brand new mansions.

      Thanks for reading!
      Matt recently posted…You Have More Money Than You ThinkMy Profile

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