After several consecutive years of relatively high inflation, the rising cost of living has become a main concern for many Americans. While prices have risen significantly in important categories like food and utilities, there is perhaps no other expense that can induce sticker shock like the price of homes.
The affordability and availability of homes have continued to decline in recent years, with prices appearing practically indifferent to buffeting forces like rising interest rates and falling demand. In the aftermath of the COVID-19 pandemic, as rising inflation prompted the Federal Reserve to begin raising interest rates, there were low expectations that a decade of booming home prices would begin reversing — instead, prices quickly resumed their rise and now sit at record levels.
Strangely, it is not as easy as it may seem to put a concrete number on home prices. There are different metrics for measuring the price of homes and housing, and the differences are often subtle and nuanced. The Consumer Price Index (CPI), for example, is the most commonly used measure of inflation, but it uses an unintuitive system to measure housing costs. Rather than examining the sale price of homes, the CPI attempts to estimate “owner equivalent rents,” which estimate what a homeowner would have to pay to rent their home. Other, more straightforward, metrics look at final sale or listing prices, while some measures of housing affordability attempt to factor in interest rates and the cost of financing a home.
All of these measures indicate the price of housing has increased substantially in recent years. One representative measure, called the Case-Schiller Home Price Index, looks at repeat sales of homes over time to create a broad index of prices. By this measure, home prices in America are at historic, unprecedented highs, and have increased by more than 300% since 2000.
What is astonishing about home prices in the U.S. is they seem indifferent to several trends that should, in theory, slow their rise, such as a sharp increase in mortgage rates. After a decade of decline, mortgage rates began to sharply increase in early 2022 as the Federal Reserve raised its interbank lending rates in response to rising inflation. From a low of just 2.8% in 2020, benchmark mortgage rates rose above 7% by 2023.
Rising mortgage rates can — in some situations — put a brake on home prices by reducing volume and demand in the market. In recent years, the share of Americans who moved to a new residence has been in a state of decline, according to data from the U.S. Census Bureau [1].
In this case there was no lasting impact on home prices due to an offsetting decline in supply.
Mortgage rates were at record lows for so long that most American homeowners were locked in at these exceptionally low levels. These homeowners are not ready to sell their homes, because doing so would mean abandoning their existing low rates and taking on new mortgages at the current market highs.
This lock-in effect has taken hundreds of thousands of homes off the market because owners either cannot afford (or are unwilling to pay) the interest rate differential. A recent study from economists at the University of California (UC) Irvine and UC Berkeley concluded that some 660,000 homes were kept off the market between 2022 Q3 and 2023 Q3 by this lock-in effect, suppressing the supply of houses and keeping the market frozen at high price points. [2]
As a result, despite the sharp increase in the rates on new mortgages, the average rate on outstanding mortgages remains very low by historical standards.
The lock-in effect and the corresponding drop in move rates has exacerbated a long-term shortage of housing, keeping home prices high across the nation — particularly in Idaho, where the population has continued to grow.
In Idaho, the financial crisis of 2007-08 led to a depression in home construction, resulting in new home construction sitting at abnormally low levels for most of 2010-2020, particularly in the context of the state’s growing population.
As a result of this deep slump in building activity, Idaho’s population growth outpaced the growth in housing supply. According to the U.S. Census Bureau’s American Community Survey, between 2012 and 2022, the number of housing units in Idaho increased from 673,048 to 796,968 – an 18.4% rise. During that same period, the state’s population grew by 25.8%.
The lack of housing supply created an intense demand, driving Idaho’s home prices ever higher. In 2016, the median single-family home listing price in Idaho was almost identical to the national median listing price, at approximately $260,000.
Since then, more and more new residents have moved to Idaho and the state’s median listing price has risen rapidly, outstripping the rest of the nation. The current median listing price in Idaho sits at more than $580,000 and is now 32% higher than the national median.
These larger trends have worked to keep the supply of housing in Idaho constrained at the same time the state has consistently been among the fastest growing in the country. For example, listing data shows a clear trend of decline from 2016 through 2022, as population growth continued uninterrupted.
The structural shortfall of housing units has now been exacerbated by a low volume of resale listings, as homeowners opt not to move due to the mortgage lock-in effect. The result has been an outsized increase in home prices in Idaho, even relative to the increase seen nationally. Median listing prices to median income ratios in Idaho have risen in excess of seven to one and are among the highest in the nation.
For prospective homebuyers in Idaho, the market has been slow to provide relief. While construction activity has begun to accelerate, the lags are considerable. Construction employment in Idaho (excluding civil construction) did not fully recover from the 2007 financial crisis until late 2020. With more than a decade of depressed construction employment and building activity, it will take time for the housing stock to equilibrate with the state’s robust population growth. The lags in monetary policy are similarly long and it may take years for mortgage rates to return to levels where homeowners feel comfortable moving again.
Sources:
[1] The percentage of people who have moved in the past year
[2] Household Mobility and Mortgage Rate Lock
Sam.Wolkenhauer@labor.idaho.gov, regional economist
Idaho Department of Labor
(208) 696-2353
This Idaho Department of Labor project is funded by the U.S. Department of Labor for SFY24 as part of a Workforce Information grant (48%) and state/nonfederal funds (52%) totaling $704,259.