The other day, I was looking at home prices. Is it just me, or does everything seem to be getting way too expensive?
Well, I had to know. So I sat down and started crunching the numbers.
Frankly, I was a little surprised. I fully understand inflation, but even this caught me off guard.
The cost of a housing today
It’s all too easy to get our financial brains stuck in the past.
Inflation is a reality that we all deal with. In fact, it is a healthy part of our financial society. Most experts believe that a 2% inflationary rate is the best spot to be in.
Inflation can be annoying. It wasn’t too long ago when I was paying less than $5 for a good lunch at most restaurants. How many times have you spent less than $5 for lunch in the last year?
While this principle is easy to see in cheaper things, it’s a lot harder to accept when it comes to the expensive things, like cars and houses.
Often we look at the price of something and think, how on earth can they get away with charging that much? They’re going to rob me poor.
Well, I hear you. It feels like a sucker punch to the gut every time you look at prices.
So how has inflation influenced housing prices over the years?
I went ahead and did a simple calculation of housing prices using the Consumer Price Index (CPI) which measures the cost changes in a hypothetical basket of goods. I then took three price points of houses and extrapolated them out over time.
For a new house costing $150,000 in 1990, you could expect to pay $197,000 in the year 2000, $247,000 in 2010, and $279,00 in 2016.
For a new house costing $200,000 in 1990, you could expect to pay $263,000 in the year 2000, $329,000 in 2010, and $373,00 in 2016.
For a new house costing $250,000 in 1990, you could expect to pay $329,000 in the year 2000, $412,000 in 2010, and $465,00 in 2016.
Basically, a new house that once cost 250K will soon be selling for half a million dollars!
Of course, when you look at this, it’s important to look at wages, not just the spending power of the dollar.
After all, while the sticker price on a given good may invoke an emotional response, the affordability of that good is important to look at also.
In 1990, the minimum wage for Utah was $3.80, $5.15 in the year 2000, $7.25 in 2010 through 2016.
Average take-home wages were actually closer to $21,000 in 1990, $32,000 in 2000, $41,000 in 2010, and $49,000 in 2016.
This suggests that the average take-home wages have been growing in Utah, faster than the cost of new homes. Naturally, I’ve oversimplified this quite a bit, but I don’t think I’m too far off in my estimates.
But if I’m close, this would suggest that the housing market in Utah is still rather healthy, even though it feels more pricy than the last time you or I bought a home. So next time you shell out $1.50 for that candy bar that only cost $0.45 cents not too long ago, take comfort in the fact that your paycheck has likely inflated more than the price of your chocolate bar.