Here's the longer/full essay on housing prices (that will appear in the next issue of Indiana Policy Review). We spun three op-eds out of this-- everything below, except the arcane discussion of the faulty and inflammatory "median age of a new homebuyer" statistic as reported by one outlet.
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The increased price of housing has been a great cause for concern over the last few years. But how much of this increase in housing prices was caused by the general inflation of the Biden presidency, rather than inflationary variables particular to housing? And if there are factors specific to housing, what are they and how will they resolve going forward?
Inflation in housing and the economy as a whole
When I look at our family’s income and the value of our house (over the last 27 years), the ratio is almost the same. Sure, our house is worth more, but I make more money—and both are in line with the general rate of inflation. Seeing only one side of the coin or the other is like listening to grandpa tell you about cheap bread or gasoline “in the old days”, without discussing how low his income used to be.
We had inflation of about 25% during President Biden’s administration. So, prices generally rose by that much. But our perception of those prices depends on the context. Everyone noticed grocery bills and restaurant prices skyrocketing. But did we notice the price increases in clothing or appliances? Not so much. Why? Because we buy food much more frequently.
Housing is not something that we deal with often. But when we do—whether rising rents when we renew an annual contract or higher house prices when we look for a home—the resulting sticker shock gets our attention. With 25% inflation, a $200,000 house would jump to $250,000 and $800 rent would increase to $1,000. My mom is upset about her rent rising from $1,200 to $1,400 over the last few years, but it’s actually a smaller increase than inflation.
Really, the larger issue is whether your income also rose by 25% in the same period. If income increased by only 20%, then you’re earning 20% more green pieces of paper. But it takes 25% more green pieces of paper to buy the same things. Economists would say that you had a 20% nominal increase, but lost 5% in “real” (inflation-adjusted) terms. During Covid, wages rose quickly at first, but then inflation caught up. But in general, as is typical, wages mostly increased by the inflated cost-of-living.
So, how can we tell if housing “inflation” is different than general inflation? Each has a pricing index that we can use to compare. (The housing index is based on price data from 400 cities; the general inflation index is based on price changes for a representative basket of goods, including housing.) Since 1975, average housing prices rose by 1.5% more per year than the general rate of inflation.
With the impact of compound interest, these differences expand over time. Overall, prices have risen six-fold since 1975, while housing prices have increased by 11.6 times. A similar trend is evident since 1987 (when another data set for housing prices became available): general prices up by 2.8 times, while housing prices rose by 4.9 times. And after 2020, housing prices have risen only a bit more than normal: 55% for housing vs. 24% overall.
Why do housing prices tend to increase at a higher rate? Some of this stems from the differences between housing as a consumption good and as an investment. Housing is something that people “consume”. As such, it depreciates; without spending money on maintenance, it will lose value. But housing is also an investment: its value depreciates more slowly than other consumer goods, giving it an investment angle. Putting it another way: although owning a home is much more expensive than renting a home (all costs considered), it does allow one to develop an asset (with a low rate-of-return, compared to other investments).1
This broad look at housing prices (and housing values) obscures significant ebbs and flows that connect to larger trends in the macroeconomy. As something of an investment, housing values will fluctuate with other investments in particular and the economy in general. From 1983 to 1997, housing prices rose only a bit faster than general prices. But during the 1998-2006 housing bubble and the disruptions of Covid, we saw abnormal increases in home prices. And sometimes, housing prices change less than the overall rate of inflation—most notably, the 1980-1982 recession (dealing with the double-digit inflation of the Carter years) and 2007-2012 when the housing bubble burst and the housing market corrected.
Time period Increase in housing prices General inflation
1980-1982 4.8% per year 10.0% per year
Another complication is that it is difficult to compare apples to apples with homes (and many other items) because of technological advances in quality. With housing, it’s even more complex since house size (per person) and amenities have increased with income. When people have more money, they want nicer things. In a word, the homes of 1975 are not the same as today. A significant portion of higher housing prices/values is caused by an increase in house quality.
A faulty and inflammatory statistic
In November, a provocative statistic got a ton of attention. The National Association of Realtors (NAR) reported that the median age of a new homeowner increased from 33 to 40 years old, from 2020 to 2025. (Before then, it had been roughly unchanged, between 28 and 33 years old, back to 1981.) The first thing to notice is that it’s odd for a median age to move by more than the passage of time. For example, if every non-homeowner simply waited five more years before they bought their first house, the median age would only rise by five years.
To increase so substantially, it’s likely that there was a strange change in the sample. For example, imagine if all young people bought homes in 2021. New homeowners in the next few years would be much older, significantly inflating the statistic in subsequent years. Instead, the median age of a category rarely changes much. When it does, it could be influenced by odd factors (e.g., Covid)—and thus, likely to revert after the ripple effects end.
A statistical aberration could also be caused by poor surveys and faulty statistical work. And it turns out that the NAR methodology was problematic. According to Edward Pinto and Joseph Tracy at the American Enterprise Institute, the biggest problem is that the NAR result came from a small survey of 6,000 responses—a response rate of only 3.5%. Of those, only 20% were first-time homebuyers. So, the valid response rate was less than 1%. On top of that, the sample under-selected younger people and over-selected older people.
In contrast, data from the Mortgage Bankers Association, Cotality, the NY Federal Reserve Bank, and the Census Bureau’s “American Housing Survey”—all based on data from millions of mortgage records—indicates virtually no increase in median age over the same time period. In a word, the NAR result seems to be an artifact of sample selection biases. From there, media bias toward sensationalism and innumeracy among journalists (and the general public) allowed the flawed statistic to flower in the public eye.2
Cause/effect: Demand and Supply issues
I’ve already described how the investment aspects of houses make them more prone to price increases and price fluctuations. Most notably, as an investment, higher prices imply a positive rate-of-return for an investment and price fluctuations reflect the risks inherent in any investment. Beyond this, much of the increase in price is a result of higher quality and greater size in houses.
That said, there are other factors that may make it more difficult for (new) buyers today. First, as a stereotype, the younger generations have a reputation for not working as hard, not investing as much in career, and valuing the experiential parts of life more highly. That’s fine, but it does imply greater challenges in making a big purchase, especially when it requires a lender’s assistance. Young folks are also known for wanting nice things now. In the context of housing, this would manifest as wanting a bigger, newer house earlier in one’s life. An older, smaller, “starter” house for first-time home buyers today? It’s not clear that young consumers have much stomach for that.3
Second, workers have increasingly embraced the gig economy. In particular, younger people have become more interested in self-employment and side hustles for income. Again, this is fine, but it makes it more difficult for lenders to be confident about those borrowing for a home. Banks are making investments too—and are looking to maximize returns and minimize risks.
Third, compensation has moved toward fringe benefits over time—most notably, health insurance. (In large part, this is due to the subsidy for health insurance as a non-taxed form of employee compensation—what turns out to be the chief cause of the problems in health care and health insurance. But that’s a longer story.4) For potential homeowners, the issue is that health insurance premiums have diverted compensation away from wage gains, making it more challenging to buy a house.
Fourth, consumers have become increasingly dependent on non-mortgage debt, especially in recent years. Consumer debt rose about 70%—from $770 billion in 2021 to $1.28 trillion in early 2026. With more debt, consumers aren’t in a position to borrow as much for mortgages; banks and credit unions will be less excited about lending them money.
Fifth, we’ve seen much higher interest rates since 2022, increasing from 2.8% to 7% in 2024 (the highest since 2002). Rates drifted downward in 2025, but they are still high by recent standards. This tends to reduce the price of housing, since a higher price for credit discourages people from borrowing money and buying a home. But slightly lower home prices do not offset the much higher interest payments to banks, especially with a 30-year mortgage. (If you’re going to buy a house, make sure to calculate the numbers and see how much money you can save with a 15-year mortgage.)
Sixth, immigrants sometimes get blamed for higher housing prices, as people focus on their demand-side impacts, without thinking about supply increasing in the face of supposedly higher prices and profits. But it's difficult to imagine that this is anything significant. Think about it this way: When the Class of 2026 enters the housing market, will the same people complain about new graduates bidding up the price of housing?
Seventh, after the housing bubble burst and Congress passed the Dodd-Frank Act, both the market and the government have discouraged cheaper homes for those with less impressive credit. Regulation always increases fixed costs, making everything more expensive—especially things that had been relatively cheap. The regulations also increased consolidation in banking, since larger banks can handle regulatory overhead costs more easily.
Eighth, “institutional investors” (those who own more than 100 houses) often get fingered for some blame. They emerged in the market after the Great Recession. Their presence (and profitability) can be explained through “economies of scale”: lower average costs when bigger is more efficient. Increased regulatory burdens (which impose disproportionate costs on smaller investors) and technological advance have allowed them to enter the market, providing more competition for buyers and more opportunities for sellers. In any case, institutional investors only own 1% of the market overall and 3% of rental properties.5
With competition, standard supply and demand will result in modest profit margins and prices in line with costs. Here, it should result in more housing built when prices and profits rise. The market for housing is unusual because of its lags (from permits through construction)—and recently, that homeowners were reluctant to sell because they had advantageous, low-interest loans. Still, such market hiccups should only be short-term and modest in impact.
Another possibility is that the cost of building houses has increased over time. Here, we might point to tariffs on key building materials, higher wages for labor, and government regulations on the industry.6 This can be a national phenomenon, but often it’s an artifact of local labor markets and local/state regulations. In any case, if you’re complaining about home prices, make sure that you understand how regulations are working against your goal.
Capital Gains and Inflation
Finally, let’s talk about the impact of inflation on capital gains and capital gains taxation. With inflation of 25% from 2020-2025, if the value of your home (or other investments) increased 25% from $200,000 to $250,000, the "real value" (accounting for inflation) is the same. (You have 25% more green pieces of paper when you sell, but it takes 25% more green pieces of paper to buy stuff.)
Unfortunately, the government will treat this as a $50,000 "capital gain", even though your wealth is the same in real terms. In the case of your primary residence, you are artificially exempted from this tax—after a change in the tax law in 1997. (Before then, there was no capital gains taxation if you bought a house with equal or greater value. If you’re old enough, you may remember how this perversely influenced some decisions about houses to buy.)
In the case of all other investments—whether rental housing or anything else—the government will apply the capital gains tax to your "gain". This is yet another reason for the federal government to use subtle inflation taxes to finance its profligate spending and debt. It also helps to explain the shenanigans you occasionally see in the news about what constitutes one’s primary residence. (Similarly, your property taxes will increase as the assessment of your home is increased by inflation.)
Related: This is why some aspects of the tax code are "indexed" for inflation—most notably, when President Reagan reformed the federal income tax code in the 1980s. Income brackets and many other aspects of the tax code are adjusted upward by the government’s measurement of inflation. The same thing happens with Social Security benefits—and in essence, with cost-of-living raises at work. In these cases, you get more green pieces of paper to accommodate the inflation of needing more green pieces of paper to buy things.
It's important to understand the problems caused by inflation. When unanticipated, it necessarily creates a winner and a loser in a long-term contract—as one side will pay with more/less powerful money than expected. But even when anticipated, inflation still causes trouble with taxes and our perceptions about what things cost. And it can impact how markets function—as it has done in recent years with housing.
