The Effect of Inflation and Personal Income on Long Term Home Price Appreciation

By: Victor Normand
Published: October 2013

The past year has been a good year for home sales and appreciating values.  In general, the Acton area has experienced home sale prices about 10% above last year’s level.  This makes home owners feel good and a bit wealthier and home buyers anxious, with both sides wondering where prices are headed.  Are we in a period of prolonged rising home prices?  Or are we in a bubble that could burst suddenly and send prices crashing back to earth?

Predicting the future of home prices is like predicting anything, nobody knows for sure what tomorrow will bring, but we do have history and past experience to point us in the right direction.  Local markets can vary wildly from one another and sometimes move in the opposite direction of the larger market over the short run. However, time tends to smooth out the rough spots.  Fundamentally, home prices must mirror inflation and changes in personal income. If home prices increased greater than the rate of inflation and per capita income, eventually, no one would be able to afford to buy houses.

As the chart shows, over the past twenty years (and I am sure for longer than that), home prices have indeed matched the general rate of inflation in the U.S.  If anything, they have lagged somewhat which makes sense given the prolonged period of depressed housing markets in many parts of the country.  So, in general, look for home prices to continue to play catch up.

blog chart
The other factor fueling home price increases is personal income.  If personal incomes increases faster than the rate of inflation, home prices can be expected to rise above the rate of inflation.  That helps to explain why the twenty year home price experience in Acton has outpaced the average for the rest of the country for both inflation and the general Home Price Index.

Over the past 20 years, per capita income in Massachusetts has increased at a greater rate than the country as a whole and the per capita income in Acton has consistently been higher than the statewide average. .  So, it is not surprising that states and communities showing patterns of greater income growth would also have higher home price appreciation.

Per Capita Income*



Rate of Increase










 Where are we headed?  Once the local housing market reaches equilibrium where the current supply shortage is corrected, expect price appreciation to continue, but at a slower pace.  Given the past history as well as the prospects for continued growth in incomes in the area, an extended period of steady 4% home price appreciation should not be unexpected.

As we said, predicting the future is not a perfect science.  So, the best advice is to keep in touch with a Resident Expertsm for the latest in market trends.