Unexpectedly Intriguing!
August 4, 2016

In June 2016, median new home sale prices generally continued following the trend they have with respect to median household income since September 2015. Since that month, the rate at which the sale price of the median new home sold in the U.S. has increased has gone up by somewhere in the range of \$3.75 to \$4.50 for every \$1.00 that median household income has increased, the slowest pace we've observed since before July 2012.

In looking at the chart, we can't help but notice how different the current trend is for median new home sale prices with respect to median household income from the trend that existed in the years from 1987 through 1999. We thought it might be fun to try an interesting thought experiment to consider just one factor that may explain some of the difference: the change in square footage of new homes being built.

Let's say that the trend that existed for median new home sale prices from 1987 through 1999 kept going through June 2016. For a household income of \$56,800, that suggests that the median new home price today should be about \$217,596. Since the median single family home in 1999 occupied some 2,028 square feet, its cost per square foot would be about \$107.30.

For the same median household income of \$56,800 however, the current trend for the median sale price of new homes in the U.S. would be \$303,405, which is \$85,809 more than the equivalent price for the 1987-1999 trend, or some 39.4% higher.

But the square footage of a median new single family home today (or rather, in 2015, which we'll use to represent the square footage of a house built today) is 2,467 square feet, an increase of 439 square feet. Its cost per square foot works out to be about \$122.99, which is \$15.59 more per square foot than the equivalent cost of a home built in 1999.

Put differently, after adjusting for the increase in square footage, the median new home sale price today is 14.5% more expensive per square foot than its equivalent 1987-1999 counterpart. At 2,028 square feet, that home built in 1999 would cost about \$249,424 at today's price per square foot of \$122.99.

Obviously, the price per square foot and the number of square feet they occupy are not the only things that have changed about the median new homes being built during the past two decades, but it confirms that factors other than the increasing square footage of new homes have contributed to the observed increase in cost. By our back of the envelope estimation, that new homes are being built larger today than they were in the 1990s would only account for about 37% of the increase in median new home sale prices that has occurred.

### References

Sentier Research. Household Income Trends: June 2016. [PDF Document]. 21 July 2016. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 29 July 2016.

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