Thanks to Core Logic we can get a pretty clear picture of what is going on in our housing market.
Between 2010 and 2013, new home prices increased 18 percent. The strong price appreciation partly reflects the very tight supply of new homes, but it also reflects the changing nature of homes being built. In 2010, the size of the typical new home sold was 2,392 square feet, but that rose to 2,598 square feet by 2013, a 9-percent increase (Figure 1). New homes not only became bigger, but they came with additional features such as more bedrooms, bathrooms, fireplaces, etc. Given that the new homes being sold today are larger than ones sold just a few years ago, one can easily see why new home prices have surged. Adjusting for those differences in quality reveals quite a different story.
The Bureau of the Census’ constant-quality new home price index reveals that prices have only increased 9 percent since 2010, compared to 18 percent on a non-quality adjusted basis (Figure 2). These differences are even larger at smaller geographies. For example, in the Midwest, the constant-quality price index increased 7 percent between 2010 and 2013, compared to 26 percent for the non-constant-quality index, a 19-percentage point difference and the largest of any region.
Adjusting for the changing quality of new homes reveals that new home prices have not increased as much as the headline data suggests. Adjusting the price of new homes for quality reveals lower price increases, but doesn’t diminish the primary driver of appreciation – the lack inventory, particularly for new, affordable homes. We may be building higher quality housing for tomorrow, but it could be at the expense of access to homeownership.
