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Thomas Gallatin / May 26, 2022

The Home Price Explosion

The price tag for buying a house over the last two years has jumped at a faster rate than prior to the 2008 bubble burst.

Anyone who has been paying attention knows that the price of houses in the U.S. has been skyrocketing. In fact, the average home price has jumped a whopping 35% in less than two years, which is a faster rate of increase than the buildup to the 2008 housing collapse.

Indeed, the jump in housing values has begun to trigger alarm bells as worry grows that America may be facing another bubble burst like the one that led to the Great Recession. “For the recession we are probably entering, the most likely outcome is that home prices decline somewhere between the 1982 rate and the rate from 2008,” observed the Hoover Institution’s Kevin Hassett. “After a 19.8 percent increase over the past year, the odds are that most American homeowners will end the recession playing with house money.”

To put things in perspective, the national average price of a home in 2020 was $374,500. Today, the average price has jumped to $507,800. This 35% increase in home values coincided with a global pandemic that shut down nearly half the country, putting millions of Americans out of work. Congress’s response of seemingly endlessly printing and redistributing money has only proven to send the inflation rate to a 40-year high. At least as the housing bubble grew prior to 2008 the economy wasn’t also in rough shape.

In March, the Federal Reserve Bank of Dallas looked at home sale data and called it “abnormal,” noting that “reasons for concern are clear” as “the price-to-rent ratio, in particular, and the price-to-income ratio … show signs that 2021 house prices appear increasingly out of step with fundamentals.”

However, the folks at the Fed are attempting to spin a positive tone by suggesting that high housing prices are “not as bad as the Great Recession’s housing crash.” But even back in 2008 when the bubble burst, the inflation rate topped out at 5.6% and the price of gas peaked at $4.11 per gallon before quickly dropping back to an average of $3.15. Today, inflation is well over 8% with the national average for the price at the pump hitting $4.60. Some are predicting $6 by August.

While the factors underlying the housing price increases that led to the 2008 bubble bursting are indeed different, that hasn’t stopped fears that this current price hike is also an unsustainable scenario that may soon collapse. In a recent Gallup poll, just 30% said it’s a good time to buy a house, which is a 23% drop from last year, indicating that fear of an imminent pop is growing.

What is similar between 2008 and today is that in both cases much of the basis for the sudden spike in home prices can be directly connected to actions taken by the federal government to “fix” problems. Unfortunately, the fix usually ends up creating a worse problem than what was originally being addressed.

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