House Prices Outpaced Income Growth Over the Past 40 Years

Housing affordability in the United States has taken a sharp turn for the worse in recent years, as home prices surged to historical highs during and after the pandemic and mortgage rates climbed to levels last seen in the early 2000s, as the Fed was forced to raise interest rates to rein in inflation.

It all began with a surge in demand for houses during the Covid-19 pandemic, when many Americans, flush with cash from government stimulus checks, reevaluated their living situation and sought more space amid stay-at-home orders and the sudden possibility of remote work. Further fueling demand were the historically low mortgage rates after the Fed had slashed interest rates to near zero at the onset of the pandemic. At the same time, supply of new and existing homes was very constrained, as construction was disrupted by Covid restrictions and would-be sellers refrained from putting their house on the market during this uncertain time. This imbalance caused a rapid increase in home prices across the country, pushing many potential buyers out of the market, a trend that was exacerbated when the Fed started to tighten its policy stance in March 2022 in its efforts to cool inflation.

Looking at prices and income alone, houses have gradually become less affordable over the past 40 years. In 1985, the median household income in the United States was $23,620. The median price of new houses sold at the time was $84,300, or 3.6 times the median income. In 2000, the ratio of home prices to median income reached 4 for the first time and by 2023, it had climbed to 5.3. Between 1985 and 2023, the median household income in the U.S. grew 241 percent to $80,610 in nominal terms. The median price of houses sold in the country climbed 408 percent over the same period, reaching $428,600 in 2023.