5/10/13 10:57 AM Housing Price Increases

There is a lot of news lately about rising home prices. Let’s take a look at the long term.

Below is a Pew Research Center chart of real median home prices since 1968. Real means adjusted for inflation. This is my preferred way of looking at things because it takes out the effect of compounding that skews all other price charts.

Click to enlarge.

You can plainly see the housing bubble, the fall, and a recovery that has tailed off a bit over the last two quarters. Please note that when you look at median prices, that is, the price at which half the houses sold for more and half for less, it is influenced by how many expensive homes or how many inexpensive homes were sold.

For example, the more luxury homes sold, the higher the median price will be, and vice versa. It doesn’t necessarily mean the price of a 3 BR, 3 BA, 2,500 ft home in Charlotte, NC saw a price increase. That said, they do tend to run together. Also note that mortgage rates affect these prices a lot, since most people care about monthly payment, not price. Prices are also influenced by the number of homes on the market which is low. The less the supply of houses the greater are their prices, given the same level of demand.

Now look at housing affordability. Higher is better on this chart.

Housing will remain affordable until prices increase significantly or interest rates increase, which given how slowly the economy is growing, will likely be anywhere from later this year to a year or two. I don’t think you’ll see big increases in housing prices, again given the slow economy. That means that if you’re going to invest in housing, unless you’re buying a fixer-upper or a great deal on a foreclosure, don’t expect big profits in the near future, but do expect low financing costs for at least a little while longer. So, now is still a good time to buy, and I’m not a realtor.