Home price growth vs. income growth, and what it means for the path to 'normalcy'

I came across an interesting stat this month.

It stated that we’ve seen more home price growth in the first 4+ years of the 2020’s than we have in any other full decade since the 1980’s. And while this is true, I think it’s worth a deeper look at the broader dynamics at play, and what we’ve seen following similar growth events in the past.

As we all know, a large part of the affordability challenge we face today is the staggering rise we’ve seen in home prices over the past 4 years.?According to the April ICE Home Price Index, the average home has increased in value by 50% since the start of 2020, which – like the stat above mentions – is more growth than any other decade since the 1980’s.

However, simple 10-year time intervals don’t tell the full story here, and neither do home prices alone.

The boom in home price growth in the 2000s largely took place over the first half of that decade and was followed by a period from mid-2006 through early-2012 of severe and elongated price corrections.?

If we look at the 5-year span from 2000-2004, we see that home prices grew by 52%, a slightly larger increase than what we’ve seen so far from 2020-2024, although we still have 8 months left in 2024 to potentially add to (or subtract from) those gains.? Those growth rates pale in comparison to the late 1970s when home prices grew by 66% over the 5-year span from 1975-1979.

But what’s perhaps more noteworthy is the difference between home price gains and income growth during each of these high home-price growth eras.

In the late 1970s, home price growth (+66%) outpaced median household income growth (+40%) by more than 26 percentage points; in the early 2000’s that gap was even larger at 43 percentage points (+52% home price growth vs. 9% income growth).?While income data tends to lag, so far in the 2020’s the 50% growth we’ve experienced in home prices has been accompanied by an estimated 18% growth in median household income, a 32 percentage point difference.

Home prices, incomes, and interest rates are far from the only factors at play, with a much more nuanced micro- and macro-economic environment to consider.

But, it’s interesting to look back over time and track home price and income growth leading up to and following affordability stress events in the market, and to see if we can find clues as to how the current affordability challenge may play out in coming years.

In the early 1980’s, following a multi-year run of home price growth outpacing income growth, we see that trend reverse course with home prices underperforming incomes from 1980-1982, although home price growth never went negative on a nominal basis at the national level.

It’s also worth noting that interest rate declines played a huge part in bringing the affordability equation back into line in the 1980s, with 30-year mortgage rates falling by more than 9 percentage points from a peak of 18.5% in 1981 to 9.0% by 1987, nearly doubling the amount of home you could purchase with the same amount of income during that span.

In the 2000s, after seeing a 7-year string of home price growth significantly outpacing income growth — driven in large part by the expansion of exotic mortgage products that allowed prospective buyers to purchase more home than their income would traditionally support — we saw home prices underperform incomes for 6 straight years, including 5 consecutive years of nominal home price declines at the national level.

The environment we find ourselves in today is quite different than either of those periods for a number of reasons, not least of which is the credit quality of active mortgages in the market – but history suggests that a period of income growth outpacing home price growth may very well be part of the path forward to ‘normalcy’ for home affordability in coming years.