Despite Rising Prices, U.S. Homes Are Relatively Affordable
Relative to income or rent, it’s much more expensive to buy a home in Canada
It’s a great time to be selling a home in the U.S. In 2021, home sales hit a 15-year high, up 8.5 percent from the previous year, to 6.12 million. The price of homes also grew at a record pace in the year ended August 2021, at almost 20 percent. When my co-author, Andrew Lo of MIT, and I interviewed luminaries such as Bob Shiller, Bob Merton, Marty Leibowitz, and Jeremy Siegel for our book, In Pursuit of the Perfect Portfolio, a common theme was the importance of owning real estate, including one’s home. So, with the record increase in home prices, has that pushed home ownership beyond the grasp of first-time buyers, and thus forced potential buyers to search for other real estate investment opportunities? And what about the global housing market? Actually, U.S. homes are reasonably priced based on two key metrics, the price-to-income ratio and the price-to-rent ratio, which I’ll explain, when examined in a global context. The same can’t be said for America’s northern neighbor, Canada.
U.S. House Prices and Affordability
Let’s start with the U.S. housing market. As this first chart from the Federal Reserve at St. Louis’ Federal Reserve Economic Data (FRED) shows, the median sale price is at a record high.
The median price as of July 2021 was $404,700, compared with $337,500 a year earlier. The pandemic-era demand has risen with many households looking for larger homes due to working from home and yet the supply of homes on the market has been below historical levels, resulting in frequent bidding wars.
This next chart shows a somewhat different story, after adjusting for inflation.
While real house prices have increased by 60 percent since April 2011, current prices are 2.2 percent below all-time high prices in January 2006.