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Increasing Home Prices

Katie Bearup and Aspen Moraif

Home prices have seen a consistent increase since 2012, however, tax and mortgage rates impacting the price of purchasing new homes will likely level these rising prices. Home prices began decreasing in 2006, and declined with further speed during the 2008 recession. Not until 2012, when the economy began to heal, did home prices take un upward turn, and they have yet to slow in significant ways since.

Just in the first month of 2018, there was a 6.2% rise in home prices. Data for the month of January is the only data available for the year 2018 so far.

Home prices are growing at twice the speed of incomes, consequently making housing purchases increasingly difficult. Regions experiencing the steepest increases in housing prices are in the West, with Seattle experiencing a 12.9% increase, an 11.1% increase in Las Vegas, and a 10.2% increase in San Francisco. Even prices for starter-homes are rising, with the low price-tier home prices growing by an average of 10.6% over the last 12 months, compared to all homes in the market at 6.8%, making it hard for millennials to enter into the market.

The new tax law passed in December of 2017 negatively impacts mortgage interest-deductions, and has consequently decreased the incentive to own a home, with renting a home becoming more, or equally as, attractive. Additionally, the current mortgage rate is a steep 4.45%. New residual investment is driven by mortgage rates, so a hit will be taken to consumers investing in new homes. This new law, paired with already high mortgage rates, makes buying homes less affordable, consequently decreasing the appeal of purchasing a house. Though the impact of the tax and mortgage rates has yet to take effect, they will likely decrease the demand for houses for the remainder of the year and cause the price of homes to eventually decrease to meet the price demand of the buyers.

After being seasonally adjusted, the national index rose 0.5% month-over-month.

  • Kusisto, Laura. “Home Prices Continued to Rise in January.” The Wall Street Journal, Dow Jones & Company, 27 Mar. 2018.

17 thoughts on “Increasing Home Prices

  1. myerse20

    This is so well-written! I like that you touched on so many aspects of the housing market, including mortgage rates. It's obviously a sellers market in general across America, but I'm curious, is this just in big cities? In a small "all-American" town, like Lexington, does the market fluctuate that much? I'm under the impression that it doesn't, though I could be wrong.

  2. johnsonjm20

    This is a cool post! Right now as we are in college the housing market doesn't seem very relevant but in reality we are only about 5-6 years away from potentially buying our first house. This post does a great job highlighting the complex nature of the housing market. It will be very interesting to see how this new tax effects the market. I agree with your prediction that the high prices will eventually diminish demand causing prices to go down to return the market to equilibrium.

  3. spencerc20

    This is really interesting and super relevant! Hopefully we will be able to see what the lasting effects of this tax bill will be on the housing market. It seems like with the rapid growth, we could be heading towards another crash but maybe we will be able to avoid that happening again.

  4. legarthb20

    This article is awesome! I really like how you took into account the idea of millennials having to purchase houses in the near future. It will be interesting to see if the home prices continue to rise with an inevitable bubble coming in the near future. I personally think that renting a home will be the way to go moving forward and the new tax bill makes that much more attractive.

    1. Cade Hornak

      Brian, I think it may depend on location. For instance, I live in Birmingham, AL, which has the third lowest cost of living in any city for millennials. In this market, it had made sense to buy as property prices in the city and surrounding region have increased dramatically over the last five or so years because we expect them to continue rising. However, in already inflated cities such as San Francisco where it seems impossible for the COL to become any more expensive, it makes much more sense to rent as affording a home in that location really isn't feasible for most millennials.

  5. laytonr20

    I also think your findings are very interesting, since they imply that there we can anticipate further disruptions of the housing market as the new tax bill comes into effect. I wonder how long those effects will last, especially as we graduate and look towards needing to choose whether to buy or rent a house. The housing market will be one to keep an eye on in the future

  6. warej20

    This was a great post and very relevant today. While, the increase in housing market prices, may make it difficult for consumers, I believe that it can also be viewed as a positive sign. Homes are now regaining value since the housing crash of 2008. The new tax laws and mortgage rates do pose problems and seem to align with the decrease in homeowners. When I am potentially buying a home in the future I hope that the mortgage rates are lower!

    1. Chris Surran

      I really thought you guys did a great job researching your post. I agree with Jack Ware's assessment that rising housing prices are ultimately a sign that the economy is growing and in good health. I hope to buy a house some time shortly after I graduate, and I hope that your prediction that mortgage costs will decrease turns out to be accurate.

  7. radcliffec20

    Reading this made me wonder how HGTV and its home improvement shows might tie into this. These kinds of shows encourage potential home buyers to buy old houses and renovate them in their own style because it is more affordable than buying a newer home or building their own. It will be interesting to see if the fixer upper trend expands once the price of homes decreases and even more consumers can purchase houses.

  8. Cade Hornak

    I found your comment on the growing tendency of consumers to rent vs buy interesting. In some cities like San Francisco, it currently makes no sense to buy a home as the cost of living has dramatically increased and remains extremely high. Although, even if home prices level as you expect, I am still curious as to the impact of stable prices on these rent vs buy markets.

  9. hallk20

    It is interesting to see that we have now bounced back to the place we were before the recession, and even exceeded that in recent months. It would be really interesting to see a breakdown by region of the country. As you said, rates are rising really fast in the west, but could that potentially mean rates are decreasing in other areas?

  10. longa20

    It is interesting comparing your post as well as a previous post by Paton and Myers on Labor Force Migration, as technology has driven people to the west coast more than any other region. This region is also experiencing the greatest increase in housing prices, reflecting a rise in supply price to account for increasing demand.

  11. clintong20

    This is incredibly important to know as I have recently begun trying to organize a collective thought on the recent correlations of "consumption" and "income". Does the Government have any direct influence of this. To double income, is an insane amount and I find it increasingly interesting that this is not broadcasted more to the general public. Everyone needs to go take a look at FRED.

  12. trammellc20

    I thought this post was interesting and troubling because of the difficulties that the housing market has had in the past. If this new law is hurting the amount of decisions to purchase a home, then it will be interesting to see if there is a long-term trend in more rentals. The affect of more rentals on the housing market would also be intriguing.

  13. alisonw20

    This was very easy to follow! Its very interesting that people are becoming more inclined to rent houses rather than buy houses. As mortgage rates rise, it is no wonder people are tending to rent rather than buy houses. This will continue to hurt the banks who sell mortgages and force these banks to lower this rate until people are willing to pay the rates. I wonder what the mortgage rate will have to drop to until people begin to buy houses again.

  14. wickhamj20

    This post was very informative but raised a couple questions. One, why do you think that housing rises so much quicker than income? What macroeconomic factors accelerate the housing growth but hinder the income growth. Wouldn't on think that those would go hand in hand, the more disposable income in the economy the more houses would be bought. Also, regarding the renting, I think this is a very interesting measure taken by the United States government to avoid a housing bubble that caused the collapse of the world economy in 2008.

  15. Katie Paton

    These steep increases in home prices are incentivizing millennials to rent houses rather than to buy houses. It will be interesting to see how this increase in the rental market will effect the economy. I wonder if there will be a move toward renting primary homes for families if more policies are enacted that decrease the incentive of owning a home. Many of us will be searching the market for home in the next few years so it will be interesting to see if any of us will buy a house/apartment.

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