Home price increases have added to the net worth of households in recent years

Modern Machine Shop, August, 2005

Home price increases have added to the net worth of households in recent years. The resulting gain in wealth has likely been a major contributing factor in sustaining a solid pace of consumer spending in the face of a large rise in energy prices. Home prices have risen considerably faster than workers' incomes. During the 5 years that ended in the fourth quarter of 2004, average home prices rose at an annual rate of 8.4 percent, while average weekly earnings in the business sector increased just 2.7 percent. In the past year, the gap was even wider--an 11 percent increase in home prices compared to a 2.3 percent rise in average weekly earnings. These nationwide statistics include moderate increases in some areas and huge increases in others.

The median home price in the United States was $189,000 in the first quarter of this year, up 9.7 percent from a year earlier. In April, the year-over-year increase was 15.1 percent, suggesting that the pace of price increases may be accelerating. But in metropolitan areas on both coasts and some other areas, medium home prices were much higher--and rising much faster. For example, median home prices in the first quarter were $398,000 in Boston, $435,000 in New York, $363,000 in West Palm Beach, $475,000 in Los Angeles, $584,000 in San Diego and $689,000 in San Francisco. Incomes in these cities are generally higher than the U. S. average, but the gap between typical household incomes and home prices is vast.