We’ve been dealing with high inflation in this economy over the last several years, with everything from groceries to new vehicles to construction supplies soaring in price.
But for one item in particular — houses — we’ve seen such sharp inflation over decades that it’s starting to change the landscape of American economic life. What happens in society, and in history, when costs for basic necessities, like shelter and food, shoot up in price?
Let’s start by going back four decades, to 1984. The movie “Ghostbusters” was a blockbuster that year. And the median price of a new home wasn’t so scary: $79,900 in the fourth quarter of 1984, according to data from the Department of Housing and Urban Development.
Since then, consumer prices overall have risen 203%, according to the Bureau of Labor Statistics information and analysis section. Meanwhile, the median price of a new home was $417,700 in the fourth quarter of 2023. That works out to an inflation rate of 423%.
“There’s no question that the cost of a house has gone up relative to cost of living overall,” said Christopher Mayer, co-director of the Paul Milstein Center for Real Estate at Columbia Business School. “More and more, a single-family home has become a luxury good, which has not been the case in the United States until now. It’s a trend that, if it continues, I think will change society substantially.”
Mayer conducted research in the 2010s finding that approximately 80% of people 65 and older owned their own homes, including a significant proportion who had neither a high school nor a college degree.
He said that for previous generations, working-class homeownership was plausible, even likely. “Homeownership was not just about people in the middle or the upper middle class, homeownership was something that people in the lower middle class could have.”
He’s seen this play out in his own family: “My in-laws lived in Redding, Pennsylvania; neither graduated from college. And yet, they were homeowners and owned multiple houses over their lives — having a part of the American dream. That would be very difficult for folks in the same circumstance, looking at the cost of homes today.”
This is not the first time America has dealt with rapid, destabilizing price increases, said Thomas Stapleford, an economic historian at the University of Notre Dame. “The big moments of price inflation are happening around wars — Civil War, World War I, World War II.”
In the early 1940s, as the U.S. prepared for war, factory towns sprang up across the country devoted to war production.
“So you have this big influx of workers coming into an area where there’s not adequate housing at the time, there’s not necessarily adequate services,” said Stapleford. “So food prices, shelter prices are going way up.”
The federal government took a number of actions in response, Stapleford said. It imposed price and wage controls, while the Bureau of Labor Statistics beefed up data gathering and analysis to better track inflation. Consumer product companies, meanwhile, got creative: “You have producers trying to navigate price controls and doing things like, ‘Well, maybe we’ll reduce the size of what’s going in a package, lower the quality of an item, use cheaper fabric.’ American housewives know that in fact prices are going up way more than the BLS index is showing.”
Under wartime rules, unions had to petition the government for pay increases, which they supported with a public relations campaign calling attention to rising prices. The government countered by trying to convince consumers inflation wasn’t all that bad.
“At one point in 1944, they actually produced a radio script called ‘Housewife versus Economist,’” Stapleford said. “It featured the acting director of the Bureau of Labor Statistics having a conversation with his wife. He talks about things like, ‘Well, you went and you purchased apples, and you saw the apples are so much more expensive than they were before. But maybe you didn’t notice how sugar prices are still the same.’”
The government was trying to calm American housewives, in part because of how badly they had reacted to soaring food prices in the World War I period, Stapleford explained. “It’s food that’s the dominant feature at that point. For a working-class family, food took up a huge part of the budget.”
Half or more of an urban working family’s monthly budget, in fact. In 1917, when food prices doubled, working-class women in New York rioted, just like they had more than a decade before in what came to be known as the 1902 kosher meat boycott.
This is a long tradition, going back to the 1500s, according to Robert DuPlessis, emeritus professor of economic history at Swarthmore College.
“In Europe in the 16th century, there was long-term inflation — partly due to population increase, part of it the influx of silver and gold from the New World,” DuPlessis explained. “Grain is the basic foodstuff. You can eat it as bread, you can eat it as gruel, but you also drink it in beverages, particularly beer. And if there’s a harvest failure, people feel it immediately.”
When grain harvests in Western Europe repeatedly failed, “you actually get religious and political rebellion as a result of a disastrous bout of inflation. Grain prices basically triple in a couple of months.” People stopped buying meat and new clothes, DuPlessis said, so they could try and buy enough bread to survive. “You also see that people riot.”
DuPlessis sees parallels today, as high home prices ripple through the late-pandemic economy. People have to rent rather than buy; they cut back on essentials to pay for housing; and they don’t buy as many of the consumer goods that go into houses, like furniture and appliances.
“The housing inflation of today is a little bit like the grain inflation of the 16th — actually, into the 18th century,” DuPlessis said. “Because remember, grain riots had a lot to do with the onset of the French Revolution.”
However, there are some reasons why riot and revolution may not be in the cards today. For one thing, food prices haven’t doubled or tripled in a matter of months. Instead, it’s taken four years since the pandemic hit for food prices to go up 25%, according to BLS data.
And while new home prices have more than quintupled, that’s happened over 40 years. Meanwhile, as much as mortgage rates have gone up lately, they were twice as high in 1984, peaking that year above 14%.
Still, Chris Mayer at Columbia Business School said home price inflation is fueling a lot of current discontent and disillusionment.
“You have people who are really discouraged about the potential of becoming a homeowner,” Mayer said. “Consumers are not happy about their housing situation, and they don’t have a lot of confidence that’s going to change.”
Mayer said that for the past century, homeownership has been a key stepping stone for building wealth and achieving the American dream. “Housing is aspirational: ‘When I make a lot of money, when I have kids, when I get married, when I get to the next stage of my life — am I going to be able to do something that’s a little bit better?’ And losing some of that future is discouraging.”
Mayer posed the rhetorical question: “Are you better off relative to previous times? Housing leads the list of things where the answer to that question today for many people is: ‘No, I’m not better off.’”
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Almost as soon as home prices began their unprecedented climb in 2020, doomsayers began warning of a looming crisis. The housing market, they claimed, was a bubble destined to burst.
A litany of supposed catalysts was going to send prices into a tailspin: the “Airbnbust,” the sudden surge in mortgage rates, a flood of grifters and hucksters looking to make a quick buck in real estate. Bubble watchers forecast chaos, then sat back and waited. And waited. And waited.
I’ve spent the past few years asking experts a simple question: Has the housing market reached bubble territory? The answer remains a resounding no. More than three years after prices started to soar, the only thing that’s gone bust is the gloomy predictions. Despite some cooling in a handful of overheated markets such as Charlotte, North Carolina, and Austin, the median home-sale price increased by a respectable 4% nationwide in 2023, Redfin reported. The price for a typical home has risen by more than 47% since late 2019, according to the S&P CoreLogic Case-Shiller National Home Price Index, a closely watched measure of housing costs.
But maybe I’ve been posing the wrong question all along. The B-word implies an impending pop, a point when the combination of greedy speculation, unscrupulous behavior, and soaring prices brings everything crashing down. Barring a large-scale economic disaster, there’s no pop in sight.
The staggering jump in home prices is concerning, to be sure. But it’s a function of a severe lack of supply, not a byproduct of investors swarming the market or shady lenders artificially juicing demand. Those looking for parallels to 2008 are grasping at straws — homeowners are in far better financial shape than they were the last time prices cratered, and homebuilders, rather than flooding the market with new properties, aren’t keeping pace with the sheer volume of millennials suddenly consumed by dreams of backyards and picket fences.
So if you’ve been waiting — maybe even cheering — for prices to plummet: Don’t hold your breath.
Warning signs
A funny thing about bubbles is they don’t fall neatly into a single definition. Ask a dozen economists to sketch out their criteria, and you’ll probably get 12 different answers. But Mike Simonsen, the president of the housing research firm Altos Research, offered a useful way to think of a bubble’s life cycle in a post on X, formerly Twitter, late last year (which I’ve slightly paraphrased):
1. You got rich! Good for you! You did the hard work and got in early.
2. Hm. It seems like everyone is getting rich?
3. Wait. That asshole?! That guy is not smart, maybe even criminal.
4. Pop.
For a time, it seemed like the housing market was doing a speedrun through Simonsen’s checklist. There were the runaway prices: Before the pandemic, you could buy a median-price home in Las Vegas for about $281,300, according to Redfin. Good luck finding that kind of deal now — even with a dip from pandemic highs, the cost of a typical house there has swelled to $422,000, an eye-watering 50% increase. Similar stories have played out in Miami (70%), Boise, Idaho (40%), and Dallas (36%). The typical household would have to spend nearly 34% of its income to afford major homeownership expenses such as mortgage payments and property taxes, according to the data firm Attom, the highest percentage since 2007 and well beyond the 28% debt-to-income ratio that’s typically preferred by lenders.
Then there were the people getting rich. Speculators were using supercheap loans to buy homes, expecting to profit by selling to an even bigger fool; home flippers, aspiring megalandlords, and Airbnb owners flaunted their debt-funded miniempires on TikTok; and seemingly everyone was signing up to be a real-estate agent. Even usually buttoned-up real-estate professionals were giving off bubble vibes: High-flying mortgage companies threw lavish parties featuring bands such as Imagine Dragons, while Zillow, the ubiquitous home-search site, morphed into one of the country’s biggest homebuyers — even though its acquisition math didn’t add up.
All the signs seemed to point to a bubble, and there were plenty of people predicting the “pop” was coming: In late 2022, the prominent Wall Street economist Ian Shepherdson forecast home prices to fall by as much as 20% the following year. Goldman Sachs expected a more modest, but still significant, decline of up to 10% from the peak. Countless headlines wondered whether home values were set to crash. Even Federal Reserve Chair Jerome Powell, whose every word threatens to move markets, said at a Brookings Institution event in 2022 that housing was in a “bubble” during the pandemic, with “prices going up at very unsustainable levels.”
But there was no pop, no sudden collapse in home prices. Even with mortgage rates tripling and buyers retreating, values held up.
The gloomy oracles could even point to an instigator of the coming collapse. The Fed, led by Powell, began raising interest rates in spring 2022 to fight inflation, sending mortgage rates shooting upward. Mortgage rates kept rising through most of 2023, eventually reaching a 20-year high in October of nearly 8%, up from less than 3% during the depths of the pandemic in 2020 and 2021. Suddenly it wasn’t so cheap to borrow money, making it tougher for reckless investors to enter the market. Speculation is the oxygen for a market-frenzy fire, Rick Palacios Jr., the director of research and managing principal at John Burns Research and Consulting, told me. By hiking rates, the Fed cut off the air supply.
But there was no pop, no sudden collapse in home prices. Even with mortgage rates tripling and buyers retreating, values held up. To understand why, you have to look at the fundamentals — the deep-seated reasons all the “Bubble Boys,” doomsayers, and fear-mongering headlines are dead wrong.
Debunking the bubble
Rising prices, no matter how steep, aren’t enough to constitute a bubble. Prices also need to diverge from the fundamentals, or the basic components of supply and demand, that determine how much things cost. If the run-up in prices defies logical explanation or obscures sketchy business practices, watch out. In the years leading up to the global financial crisis, for instance, lenders came up with creative ways to boost demand: They devised predatory mortgages that left borrowers on the hook for impossibly high payments once their teaser rates expired and handed out so-called NINJA loans (no income, no job, and no assets). If you owned a home at that time, you might’ve felt like the only direction its value could go was up.
The recent housing-bubble theory was always going to age poorly because of one fact: The pandemic soaring prices were justified. Prices didn’t spiral out of control because we built too many homes or made it too easy to borrow money, like in 2008; they took off because there simply weren’t enough homes for all the creditworthy people who wanted to buy them.
It’s a savagely unhealthy housing market. But it’s also a market that just had too many people chasing too few homes.
For home prices to suddenly crash, there would have to be a pool of desperate sellers looking to offload their homes on the cheap — or, worse, losing them to the foreclosure process. Sure, speculators were loud and proud about their get-rich-quick schemes, but they were a vocal minority. And regular homeowners have “never looked this good” when it comes to their financial and credit health, Logan Mohtashami, the lead analyst at HousingWire and an outspoken critic of bubble alarmists, told me. Less than 4% of outstanding mortgages were delinquent at the end of the third quarter last year, according to the Mortgage Bankers Association, a near-record low. In the fourth quarter of 2023, the median credit score for people getting a new mortgage was a stellar 770, according to the Federal Reserve Bank of New York. (Lenders typically consider a score above 700 to be a marker of future success for a borrower.) Almost 79% of homeowners with a mortgage have locked in a rate below 5%, a Redfin analysis of data from the Federal Housing Finance Agency found. In the history of rates, that’s a pretty incredible deal. And nearly 40% of homeowners don’t even have to stress about mortgage payments at all, according to census data — they own their homes free and clear.
Rather than facing a housing bubble, we’re staring down an entirely different crisis: a supply shortage that has regular buyers fighting just to break into the market. US homebuilders spent the decade after the global financial crisis building at about half the rate of the three decades prior, contributing to the housing crunch. Various estimates have pegged the national housing shortage anywhere between 2 million and 6 million homes. The supply constraint hit right as millennials, the largest living generation in the US, reached their prime homebuying years. Add in people’s sudden desire for a bigger house or a place of their own in the heat of the pandemic, and the recent surge in home prices seems less bubbly and more logical. The lack of inventory is the reason prices didn’t suddenly drop, even when mortgage rates shot up. Sure, buyers pulled back. But sellers pulled back even more, leaving the supply-demand imbalance in place.
“It’s a savagely unhealthy housing market,” Mohtashami told me. “But it’s also a market that just had too many people chasing too few homes.”
Staying high
It’s tempting to look for echoes of 2008 in today’s housing market. You might even be inclined to cheer on a crash in prices — all the better for everyone who feels locked out of homeownership. But cycles rarely repeat in the same way, Selma Hepp, the chief economist at CoreLogic, told me. Anything that could incite a housing crash probably wouldn’t leave average consumers in a position to suddenly pounce on all that excess inventory.
Fannie Mae now projects a modest 3.2% increase in home prices this year and a jump in home sales, along with a decline in mortgage rates. Goldman Sachs predicts a 5% rise in home prices. John Burns Research and Consulting doesn’t publish an exact forecast of home prices, but Palacios told me the firm expected to see a similar increase in the “low single digits.”
Perhaps the biggest threat to the housing market at large is a severe economic slowdown, one in which many people lose their jobs and can’t pay their mortgages. It’s notoriously difficult to estimate where the economy is headed, but right now, it’s roaring along, especially compared with other rich countries. Things aren’t perfect, but the vibes are definitely up. And even if the economy does take a turn, a run-of-the-mill recession probably wouldn’t be enough to topple the housing market. Things would have to get so bad that banks would be forced to walk away from the mortgage-lending space almost entirely, as they did during the foreclosure crisis. If the market is cratering and nobody can get a mortgage to put a floor on prices, “that’s where you get pretty meaningful declines in asset prices,” Palacios said.
There’s a silver lining baked into all this: Prices aren’t poised to drop, but the days of skyrocketing valuations appear to be behind us, Mohtashami told me. The housing market is far from balanced, but we’re at least heading in that direction.
After the past few years, the lingering fears of a sudden fallout are just a distraction from the bigger issues at hand. The bubble debate was fun; now it’s time to put it to bed.
James Rodriguez is a senior reporter on Business Insider’s Discourse team.
Interestingly, if he makes this election in the future, he can elect to treat the condo as his principal residence for up to four years before he moved into it, which may wipe out all but one year of taxation divided by the total years you all own the property.
Does an owner pay capital gains tax for moving into a rental property?
It depends on the steps taken. Liljana, I think your son can make a 45(3) election in the future. Although you and your husband could as well, it may lead to more tax later on your home. You might need to pay some capital gains tax now on the condo’s change in use to personal use. You might also need to pay more tax later on the subsequent appreciation as well from the time your son moved into it to the time you transfer it to him or sell it, or upon the second death of you and your husband. This appreciation will also be taxable, assuming you want to preserve your principal residence exemption for your house.
You can claim a property that your child lives in as your principal residence if it is legally or beneficially yours. But this has tax implications for your own home.
Ask MoneySense
I bought a condo in 2006 in another province for my daughter to live in. It’s registered in my name. I also have a house in another province. I am planning to sell the condo my daughter lives in very soon. Can I claim capital gain exemption in the condo she lived in all these years?
—Bill
Capital gains tax when selling a home your child lives in
Canadian taxpayers may be eligible to claim the principal residence exemption when they sell real estate. Since 2016, real estate transactions have been under more scrutiny with the Canada Revenue Agency (CRA) since taxpayers now need to report all sales on their tax returns, even if the sale is of a tax-free principal residence.
The definition of principal residence for tax purposes
According to the CRA, in order for a property to qualify as a principal residence, it must be:
- A housing unit, which can include a house, a condo, a cottage, a mobile home, a trailer, a houseboat, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation;
- Owned by the taxpayer, jointly or otherwise, legally or beneficially;
- Ordinarily inhabited in the year by the taxpayer, their spouse or common-law partner, their former spouse or former common-law partner, or child.
There can be nuances in the principal residence guidelines that may impact your ability to qualify for the exemption. Some examples are if your home was rented out or used for business purposes, if the acreage is significant, or if you owned another property during the same years that you owned the property in question and claimed the principal residence exemption for it.
Legal versus beneficial ownership of a property
An important nuance for you, Bill, is whether your daughter beneficially owned the property. If she did—meaning you were on title, but it was technically hers—she may be able to claim the principal residence exemption herself. This could be the case if she paid all of the ongoing expenses, amongst other criteria. But then the question may be where did the down payment come from, and if the property was in fact beneficially your daughter’s, but legally in your name, why did the two of you not put it in her name in the first place?