The Truth About Real Estate Prices

Real estate has traditionally been considered a safe investment but recessions and other disasters tend to test that theory. Though the general trend of home prices has been upward, there have been bumps along the way. The length of time you own a home can determine how safe of an investment it is; the longer the better, all things considered.

Historical Prices

Before 2007, historical housing price data seemed to indicate that real estate prices could continue to rise indefinitely. In fact, with few exceptions, the average sale price of homes sold in the U.S. climbed steadily each year from 1963 to 2007—when the housing bubble burst and the financial crisis of 2008 ensued. Since then, though the trend has been upward, it has been more fragmented.

Rebound After the Financial Crisis

By 2013, the average sales price of homes sold in the U.S. had rebounded to pre-crisis levels. For the next several years, the uptrend looked promising, until 2018 when prices flattened, and then began to fall slightly in 2019. Prices saw a dip in 2020 but housing prices have been climbing drastically since then and leveling off around 2022 with dips and climbs through 2024.

Of course, real estate prices depend heavily on the market (location, location, location), and national trends can tell only part of the picture. A boom in California can mask a bust in Detroit.

Even within the same city, numbers can vary widely. Areas that experience new growth or gentrification can show significant price appreciation, while areas across town can be in decline. The chart below shows how the south, west, northwest, and midwest regions experience different trends in real estate prices.

When looking at the national and regional statistics, be sure to account for the reality of the market in your local area. Rising prices at the national level may not help you if your city, state, or neighborhood is in decline.

Current Home Prices

Home prices since 2020 have increased at unprecedented rates as the economy reemerged from the downturn of 2020. Record low mortgage rates and a shortage of homes for sale were the primary drivers of this phenomenon.

At the same time, temporary shortages in lumber and skilled construction labor added to the upward movement of prices.

Home prices started leveling off in 2022 when the Fed started increasing interest rates to fight the high inflation. The Fed's target rate went from between 0.25% and 0.50% in March 2022 to between 5.25% and 5.50% as of Jan. 2024, making borrowing more costly for would-be homebuyers, thereby reducing the demand. In Jan. 2022, the average price of a home in the U.S. was $501,200 and in Nov. 2023 (latest data) it was $488,900.

Home Trends

Of course, it's important to consider that factors other than supply and demand can affect real estate prices. For example, even before the numbers began to go the wrong way in 2008, the National Association of Home Builders reported that the average home size in America was 983 square feet in 1950, 1,500 square feet in 1970, and peaked at 2,740 in 2015.

This trend continued in the first half of the 2000s, after which it began to decline somewhat. Still, with homes getting bigger and inflation adding to the cost of building materials, it is only logical that home prices would rise. Other trends can drive prices up, too, such as buyer preferences for more expensive flooring, appliances, fixtures, and the like.

Homes as Investments

Because home prices tend to rise over time, buying a home has traditionally been viewed as a safe investment. Still, an important point to consider when looking at a home as an investment is that it won't ever pay off unless you sell it.

From a practical standpoint, even if your primary residence doubles in value, it probably just means that your real estate taxes have gone up. All of the gains you experience are on paper until you sell the property. Of course, for many homeowners, that's alright. A home that doubles in value is a nice asset to pass on to the kids and grandchildren.

Downsizing

If you decide to sell and buy another home in the same area, remember that the prices of those other homes have probably risen, too. To truly book a gain from your sale, you will likely need to move to a smaller home in the same area, or move out of the area and find a less expensive place to live.

Of course, downsizing is an attractive option for many retirees and those who no longer have children living at home. Aside from the potential financial gains, a smaller home is easier to take care of (at least in theory), and it can address future mobility issues.

Home Equity Loans

While it is possible to tap the equity in your home by taking out a loan against it, using your house as an automated teller machine (ATM) is not always a good strategy.

Not only does the interest you pay eat into your profits, but the loan payment takes away from your financial stability. If real estate prices decline, you may find yourself in the unenviable position of owing more on the loan than the house is worth.

Mortgage Rates

Mortgage rates generally rise during periods of economic growth. When this happens, the job market is healthy and people's wages rise, too. Conversely, mortgage rates tend to fall during economic slowdowns as the Federal Reserve tries to make it easier to spend and borrow.

The average 30-year fixed-rate mortgage rate had been below 5% since 2010 (keep in mind that even tiny changes in rates can have a huge impact on the overall cost of your home) until the Fed started aggressively increasing rates in 2022 to fight inflation.

This chart from the Federal Reserve Bank of St. Louis shows historical prices for 30-year fixed-rate mortgages, starting in 1971. The rate in Jan. 2022 was approximately 3.22% and in Jan. 2024 it was 6.62%.

So how does this play out for real estate prices? Lower mortgage rates don't necessarily have a direct relationship to home prices, even though we'd like to think they do. But they may have an indirect effect on them. When rates are low, consumers are more willing and can afford to take on more debt. That's because the cost of credit (i.e., interest) is cheap. Rising interest rates, though, tend to lead to weaker demand from buyers.

Is Buying a Home a Good Investment?

The idea that a home is a good investment stems from the fact that real estate prices tend to rise, at least historically speaking. Since there's no way to predict the future real estate market, it's important to avoid getting in over your head. A home is a good investment only if you can afford it.

Of course, you are unlikely to see any profits that you can spend if you plan to live in the same house all of your life. But if you buy with an exit strategy in mind, there is a much better chance of realizing a cash profit.

First, consider your motivation for buying a home. If you want to live in it, then you probably don't need to think about your home in terms of profits and losses. If you're hoping to make money, then you need to enter the transaction with an exit strategy. This also means you should have a selling price in the back of your mind, all while keeping the purchase price of the property at the forefront.

When the market reaches your price point, you sell the property just as you would a stock that has appreciated. This may not be a practical approach for your primary residence, depending on your lifestyle, but it is exactly what many real estate investors do when they purchase properties—renovate and sell them. Just remember that prices don't always move up.

The Bottom Line

With history as a guide, most would-be homeowners would do well to buy a place they actually hope to inhabit, pay off the mortgage quickly, live there until retirement, then downsize and move to a less expensive home. It's not a sure bet, but this strategy does increase the likelihood of making a profit.