Above: 1970-2019 National median home price % increase VS. home construction % increase
There is lots of talk of national home prices increasing since 2008 and having stalled in 2018-2019 and what the possible causes could be, but what does that have to do with our local market. For years the national trend has been increasing at around 3% per year, however, very few areas in western Pennsylvania have seen this kind of return. The bad news is that western PA tends to lag the national trend. The good news is that this means that housing market crashes are far less severe in western PA due to a principle called “mean reversion.”
Perhaps the greatest lesson we can take away from national home prices is that when home prices suddenly appreciate away from their normal growth curve (see the black line above) they tend to then crash back through that curve, or “revert to the mean.” (for a very in depth look at this, and the many factors that are at work in real estate). Further, we can take a look at the relationship of building cost to the median home price - factors that certainly should affect one another. As seen above around 1990 and 2006 there were two hard reversions towards not only the mean, but also towards the building cost curve. Lets take a closer look at the time frame from 1990 forward.
As seen here, after the flattening of the curve in 1990 there was a 10 year period where the two moved in concert. However, in 2000 the median home price begins to accelerate rapidly, ending in a reversion below its mean in 2006-2009. For the next 2 years the two again move in concert, until approximately 2012 where median home prices again break to the upside, now seeming to make a top in 2018-2019.
What will the next 2 years look like in the national market? (See the green and red lines above).
IF the mean line of the last 10 years is in fact the new normal, there could be a flattening of growth similar to that of 1990, with little appreciation, and perhaps some regional loses in areas that experienced the greatest growth.
IF the mean line of the last 10 years is not the new normal, there could be a hard reversion closer to that of builder growth levels. This could indicate a decline more on the order of 2008.
What does that mean for western PA?
Sadly data becomes more limited and unreliable further back in time in the West Penn Multi List which covers much of western PA.
A few take aways from this data
Median home prices per quarter are very seasonal.
The housing crisis of 2006-2010” nationally was far shorter in this region. While 10-12 months nationally in length, that number is nearly halved to 6 in western PA.
The housing crisis was not nearly as deep for our region.
Median home price increases are out pacing building costs.
If a reversion to the mean occurs (is occurring nationally), western PA will like experience some pull back in home prices, however, not nearly as deep as the national trend. If national home prices only flatten, this will likely have little effect on the region as a whole, with the exception of areas that have experienced high growth.
Here is someone in 2006 seeing the “reversion to the mean” coming: https://seekingalpha.com/article/18667-housing-what-does-return-to-mean-really-mean