Higher Rates Then, Higher Prices Now

1

High rates, low prices: the 1980 trade-off

We used Census and Freddie Mac records for the US, California and the Bay Area. The test is simple. Take the median value of an owner-occupied home and the median household income in the same place and year. Then compute two things. The first is the price-to-income ratio, or how many years of income the home costs. The second is the monthly mortgage payment as a share of monthly income for a buyer who puts 20% down on a 30-year fixed loan at that year's average rate. On the first measure, homes are much less affordable today. On the second, the two eras are closer than the gap in rates would suggest.

In 1980 the average 30-year fixed rate was . Rates then rose further: they averaged across 1981 and in 1982, and peaked at in . But prices were low relative to income. A typical US home cost years of income in 1980, versus in .

The monthly bill shows a smaller gap. At 1980's rates, the median US buyer would have spent of income on principal and interest. In the figure was . In the Bay Area it went from to . Both eras look harsh for new buyers. The difference is that the 2010s, with prices high and rates near 3–4%, look cheap on this measure.

A stress test: price the median 1980 US home at 1981's average rate of . The payment rises to of income. That is worse than today, but it's not double. Where today's buyers fall clearly behind is the down payment. Saving 20% of the median price took of income in 1980. It now takes , and in the Bay Area . Buyers in the early 1980s could also refinance when rates fell through the decade. Rates have no built-in tendency to fall from here.

2

Boomers to Gen Z: the same age, a different market

Comparing generations only works at the same stage of life. A 60-year-old Boomer and a 25-year-old Gen Zer face different markets today for reasons that have nothing to do with when they were born. Pew 2023 So we line each generation up around age 30. In the 1980s the typical first-time buyer was in their late 20s. Today the median first-time buyer is 40, a record, which is itself part of this story. NAR 2025

We use the Pew Research Center's birth years: Boomers 1946–1964, Gen X 1965–1980, Millennials 1981–1996 and Gen Z 1997–2012. Pew 2019 Pew Trusts 2026 Each generation's age-30 window is the span of years in which its members turned 30: 1976–1994 for Boomers, 1995–2010 for Gen X and 2011–2026 for Millennials. We average the same Census, ACS and Freddie Mac figures from Part 1 over the years we have inside each window. Gen Z has not reached 30. The oldest turn 30 in 2027. Their row shows the market they face today, using data, when they were years old.

Nationally, the median home cost years of income when Boomers were around 30, for Gen X and for Millennials. For Gen Z today it is . Every generation has faced a pricier home than the last. The monthly payment tells a different story, because rates fell for 40 years. Boomers' 30-year loans averaged , so the payment took of median income. Gen X and Millennials paid less, and , because rates of and offset higher prices. Gen Z gets neither break: high prices and a rate push the payment to , the highest of the four generations.

California and the Bay Area show the same pattern at a higher level. A California home cost years of income for Boomers at 30 and for Gen Z today. The payment share dipped from to for Gen X, then climbed back to . In the Bay Area, price-to-income went from to , and Gen Z's payment share of is the highest of the four generations, above the Boomers' . Saving a 20% down payment there would take of median income for Gen Z, against for Boomers.

Fewer young owners, and Gen Z is tracking Millennials

Homeownership by age is the other side of the ledger. Among US households headed by someone aged 25 to 34, owned their home on average in Boomers' window (). That edged up to for Gen X, helped by the mid-2000s credit boom, and fell to for Millennials. Gen Z is just entering this age range. In , of householders aged 25 to 29, most of them Gen Z, owned. At the same age, Boomers averaged , Gen X and Millennials .

3

Proposition 13: does a tax cap keep homes off the market?

California voters passed Proposition 13 in June 1978. It capped the property tax rate at 1% of assessed value, down from a statewide average of 2.67%. It also reset assessments to the purchase price and limited annual increases to 2% until the home sells. The longer you stay, the further your tax bill falls below what a new buyer next door pays. The hypothesis is that this lock-in discourages moving and downsizing. Fewer homes come up for sale, and prices rise. LAO 2016

The lock-in is well documented. Wasi and White compare California with other states from 1970 to 2000. Owners in California stayed about a year longer, roughly a 10% increase. The effect grows with the size of the tax break: about a tenth of a year in inland cities like Bakersfield, more than two years around Los Angeles, and three or more in the Bay Area. Ferreira finds that when owners turn 55 and can carry their tax base to a new home (Propositions 60 and 90), their moving rate jumps by 1.2–1.5 percentage points on a base of about 4%. The LAO finds a similar ~20% jump at age 55 in 2014 data. It also finds that land held for decades is far less likely to be developed. Its caution: turnover fell for many reasons, including an aging population and rising prices.

How much could that add to prices? A transparent back-of-envelope

No published study isolates Prop 13's effect on today's prices, so this is not an estimate of one. Instead, we chain published numbers and explicit assumptions through two channels:

1. Capitalization. A buyer's tax bill grows 2% a year instead of tracking market value. The present value of that saving over the years they expect to own is bid into the price. Rosen (1982) found Prop 13's original tax cuts showed up in Northern California prices, about $7 of home value per $1 of annual tax saved. Rosen 1982
2. Lock-in. Longer tenure (Wasi & White) means fewer sales a year (LAO). Only some of those moves would have freed up a home on net, for example by moving away, downsizing or renting. Divide the withheld share of the housing stock by how sensitive housing demand is to price.

Under central assumptions, Prop 13 adds roughly to California's median home value () and in the Bay Area (). The plausible range runs from under 1% to about . Compare that with the gap to explain: a California home costs years of income, versus nationally, more. The channel can be real and still account for a small part of that gap.

4

Expensive housing, later and fewer births

California's total fertility rate fell from births per woman in to in . The national rate fell from to . The average age of a first-time mother in California rose from to . In , that was years older than the US average.

Across states the pattern holds. Where homes cost more years of income, women have first births later (correlation ) and have fewer children (). But a correlation is not a cause. Share of adults with a bachelor's degree predicts age at first birth far better (). It is also correlated with house prices (), because high-wage, high-education metros are expensive.

What the data says