Why are home prices up 6% over the past year?

Last week, the Case-Shiller House Price Index updated, and I was surprised to learn that home prices are up over 6% from a year ago. While that’s nowhere as high as the 20% growth that home prices peaked at in 2022, it is roughly comparable to annual home price growth from 2014 - 2019.

If you were to look on YouTube, you’d find an abundance of real estate “gurus” predicting house prices would have fallen by now. That obviously hasn’t happened.

If you asked me a year ago what I expected in the housing market, I would have said that prices would likely move sideways. My hypothesis was that prices would stay level until the 2015-2020 trend caught up to where current prices already were.

Home prices are 30% higher than they “should” be based on the 2015-2020 trend

In the chart below, the green line represents the trend from 2015 to 2020. I have projected that trend forward to 2024 to visualize where prices “should” have been if Covid never happened.

The grey line shows the actual home price index, and the light blue line shows the trend from 2022 to 2024. As you can see, the light blue and green lines have similar slope. Current prices are once again growing at a “normal” rate, but price levels remain elevated (shifted upwards).

The price level is approximately 30% higher than it would have been been if Covid had never happened and the prior trend continued. So why is that?

Could remote workers be driving higher home prices?

One possible explanation is the shift to remote and hybrid working. Below are the results of 2 Federal Reserve surveys from 2021 and 2023. They show that, despite the much-talked-about “return to the office”, most college-educated workers have a hybrid or work-from-home schedule.

In both 2021 and 2023, 39% of employees reported working entirely or some of the time from home. That rises to 59% of employees with a Bachelor’s degree or more. Between 2021 and 2023, some workers shifted from fully remote to hybrid, but there was no increase in the share of people working fully in the office.

If 40% of all workers (and 60% of educated workers) are spending significantly more time at home, they may value having more space at home and thus are more willing to spend on housing. That could explain the sustained 30% shift in housing prices in 2020.

If that hypothesis is correct, then remote and hybrid workers are responsible for supporting sustained elevated home prices. So far, a shift to remote work shows no sign of reverting to the pre-pandemic norm. That could mean elevated housing prices are here to stay.

What does this mean for people who want to buy a home

If you’re hoping to buy a home in the next ~2 years, it no longer seems likely that housing prices will rapidly fall. At best, they may hold steady, but data from the past year suggests they could continue to rise. As a potential buyer, you’re likely better off paying attention to mortgage rates. If interest rates fall, that would make your home purchase substantially more affordable.

Currently, mortgage rates have settled near 7%. That is substantially higher than the 4% to 5% that was the norm from 2011 to 2019. If the Federal Reserve starts cutting rates later this year, that could alleviate some of the interest rate pressure, allowing them to fall.

Next Steps

Lastly, if you are saving for a home purchase, it’s important that you invest wisely to ensure your down payment savings continue to grow as home prices increase. At Toups Capital Advisors, we help clients design an investment portfolio to achieve their home purchase dreams. Contact us today to schedule a free consultations.

Beyond our free consultation, we promise never to make commissions from any financial products we recommend. Furthermore, we charge an lower-than-average annual fee on assets under management. We believe your financial future is dependent on paying the lowest possible fees, and we designed our pricing model to match that.