Where Real Home Prices Are At Record Highs

In one-third of large metros, nominal home prices hit a new record high in 2015. But, adjusted for inflation, real home prices are breaking records in just 7 of the 121 largest metros.

Home prices have been climbing nationally and in nearly every metro for several years. The rebound in prices after last decade’s housing bust and economic recession has been steep and widespread.

At first glance it looks like prices today in many metros are at all-time highs. In 43 of the 121 metropolitan areas (and metro divisions) with at least a half-million people, home prices hit a new local record high in 2015, according to the latest FHFA home price index.

But home prices, like almost all other prices, tend to rise over time thanks to general inflation. In fact, if real (that is, adjusted for inflation) home prices never changed, inflation alone would cause nominal (that is, unadjusted) home prices always to be at a new record high. Price indices like FHFA, Case-Shiller, CoreLogic, and others report nominal home prices.

Looking instead at real home prices, few metros are breaking records. (I adjusted FHFA’s nominal price index using CPI-U excluding shelter.) In only 7 of the 121 largest metros are real home prices now at record highs. These are:

  • Austin
  • Buffalo
  • Denver
  • Honolulu
  • Nashville
  • Pittsburgh
  • San Francisco

These record-setting metros all have booming housing markets today or had a very mild housing bust last decade, or — in the case of Austin — both. In a few other metros, real home prices are within 5% of their record highs but not quite there, including Durham-Chapel Hill, Houston, and San Jose.

In the vast majority of large metros — 97 out of 121 — the standing record for real home prices is held by last decade’s bubble. For nearly all of those 97 large metros, real home prices reached their peak in 2005, 2006, or 2007. Detroit and Indianapolis set their record a bit earlier, in 2003; Raleigh bloomed later, peaking in 2009.

Furthermore, in a handful of large metros, the record high came before last decade’s bubble. In 17 of the 121 largest metros, real home prices were at their highest in the late 1970s or 1980s (the FHFA index starts in the late 1970s for most large metros). These include much of Texas and Oklahoma, including Houston, Dallas, Fort Worth, San Antonio, and Oklahoma City, though notably not Austin, which is currently at a record high. Several mid-size metros in the Midwest and Northeast also peaked in the 1970s and 1980s, like Hartford, CT; Rochester, NY; Dayton, OH. No metro set a record high for real home prices between 1989 and 2002 that still stands today.

Many metros are still — despite the price rebound — far below their record high in real terms.
Real home prices are now 17% below peak in Atlanta, 29% in Chicago, 32% in Miami, and 44% in Las Vegas. There may be a lot about the housing market to worry about, but it’s hardly 2006 all over again.

(Download a spreadsheet with (1) the peak quarter for real home prices and (2) the difference between today and the peak, for all large metros, here.)

The rebound in home prices is therefore less dramatic than suggested by headlines about nominal home-price records. Certainly nominal home prices matter in some ways: neither mortgage payments nor capital gains are indexed to inflation, so nominal price changes can have real effects on homeowner behavior. But as an indicator of bubble risk, affordability, or other market dynamics, real home prices paint a more accurate — and less alarming — picture.