The Real Affordability Crisis — You’re Buying Too Much House
- Loan Genie Insights
- Apr 6
- 8 min read
Fifty years of construction cost data tell a different story than the housing affordability crisis.
⚡ The Bottom Line
📈 Home prices rose ~18× since 1970 — but construction costs only ~10×
💰 Wages grew ~11–12× — closely tracking build costs
🏡 Homes are ~47% larger today — that’s a big part of the “crisis”
📉 Mortgage rates today (~6–7%) are BELOW the 50-year average
🏛️ Zoning + economics = fewer starter homes
The narrative is familiar: home prices have soared while wages stagnated, a generation has been priced out of ownership, and the American dream is in crisis. But it may be telling only half the story — and the half it omits changes the conclusion.
When you strip away what we’re choosing to buy and look instead at what it actually costs to build, something surprising appears. Construction costs and wages have tracked each other nearly 1 to 1 for more than fifty years. The real driver of the affordability crisis is a combination of three things that rarely get named together: lifestyle creep that have quietly grown the square footage of a typical home by nearly half, regulations that has made it unprofitable to build smaller ones, and a decade of super low mortgage rates that conditioned an entire generation to mistake recency bias for economic reality.
What the long-run data actually shows
The RSMeans Historical Cost Index — the construction industry’s most authoritative long-run measure of what it costs to build, maintained continuously on the same methodology since the early 1970s — tells a story that rarely makes headlines. Indexed to 1970 alongside the Social Security Administration’s National Average Wage Index, the two series move in near lockstep for more than three decades. Both roughly 10X-ed in nominal terms between 1970 and 2025, with wages growing slightly faster than construction cost, while general CPI grew slower at only 8X over the same period, meaning construction costs and wages both grew somewhat faster than general consumer price inflation — but consistently with each other.
The median home sale price, by contrast, has risen closer to 18X its 1970 level — far outpacing both wages and construction costs. That gap is the affordability story. But it does not mean construction itself became unaffordable relative to incomes. It means the home people actually buy became radically different from the home they bought in 1970.
~10× RSMeans construction cost growth 1970–2025 | ~12× National average wage growth 1970–2025 | ~8× General CPI growth 1970–2025 | ~18× Median home sale price growth 1970–2025 |
Lifestyle creep, built into every wall
In 1970, the median new American home was approximately 1,500 square feet. Today it is around 2,200 square feet — a 47% increase in size. The household occupying that space has simultaneously shrunk, from an average of 3.1 people in 1970 to 2.5 today. The result: living space per person has roughly doubled, from about 480 square feet per person to more than 900.
The square footage is only the beginning. In the early 1970s, fewer than half of new homes had central air conditioning. By 2020, 97% did. Two-car garages were the exception in 1970; they are the standard today. The typical 1970 home had one or one-and-a-half bathrooms. Today’s buyer expects at minimum two full baths, often with an en-suite primary, a powder room, and a separate laundry room. Add granite or quartz countertops, stainless appliances, hardwood floors, open-plan kitchens, home offices, walk-in closets, smart thermostats, high-efficiency HVAC, and triple-pane windows — none of which existed as middle-class expectations in 1970 — and you have a product that is simply not comparable to what your parents or grandparents purchased.
When researchers adjust home prices for size alone, the per-square-foot price growth from 1970 to 2020 tracks remarkably close to income growth. Home prices rose roughly 1,300% between 1970 and 2020, but per-square-foot prices rose only about 820% — nearly in line with the roughly 750% rise in median family income. The remaining gap is explained primarily by land costs and quality upgrades now treated as baseline expectations. We are not paying more for shelter. We are paying more for a fundamentally different, dramatically larger, substantially better-equipped product.
“Home prices rose ~1,300% from 1970 to 2020. Per-square-foot prices rose ~820%. Median family income rose ~750%. Once you control for size, the affordability crisis largely disappears — at the national level, and outside supply-constrained coastal markets.”
The supply-demand tangle on smaller homes
A fair objection: if people wanted smaller homes, wouldn’t the market provide them? The answer is more tangled than either pure-demand or pure-supply explanations allow, and the data resolves the tension in a specific way.
According to NAHB’s 2024 buyer survey, 26% of prospective buyers say they want homes under 1,600 square feet. Yet only 16% of new single-family homes started in 2023 were that small — a 10-percentage-point gap where stated demand meaningfully exceeds supply. So the lifestyle-creep story is incomplete if taken to mean that buyers universally chose size. A substantial minority want smaller homes and cannot find them.
The reason supply doesn’t meet that demand is three overlapping forces, not one:
1. Zoning makes small homes illegal in most places
Minimum lot sizes, setback requirements, parking minimums, and density restrictions built into most American zoning codes make it effectively impossible to build a small home profitably in desirable locations. Less than half the land in a typical American state is zoned to allow single-family development on lots under two acres. The 1,100-square-foot home on a quarter-acre lot that was perfectly ordinary in 1970 is prohibited by code in the majority of suburban jurisdictions today. Houston — which deregulated its inner-city lot sizes in the 1990s — remains an outlier that routinely produces entry-level townhomes where other cities produce nothing.
2. Builder economics push toward larger homes
Rising material and labor costs squeeze margins hardest at the affordable end of the market. In the 1980s, homes under 1,800 square feet represented about 40% of new construction. By 2023, that share had collapsed to 12%. Fixed costs — permitting, land, infrastructure connections, professional fees — are nearly the same regardless of home size, making per-unit profit on a $250,000 starter home a fraction of that on a $600,000 move-up home. The market isn’t ignoring demand for small homes; it is structurally prevented from serving it profitably.
3. The rate lock-in effect froze existing supply
The stock of existing smaller older homes — the natural supply channel for first-time buyers — has effectively been taken off the market. Owners who bought or refinanced between 2020 and 2022 at 3% rates face a stark choice: sell, and buy again at 6–7%. For most, this means a dramatically higher monthly payment on a comparable or smaller home. The existing stock of starter homes is not cycling back to new buyers, compounding the new-construction shortfall.
The verdict: lifestyle creep explains why aggregate home sizes grew for 40 years. But the current scarcity of small homes is at least as much a regulatory and market-structure failure as it is a demand story — one that prevents the market from serving the substantial minority of buyers who explicitly want less.
The geography of the crisis: where homes trade below replacement cost
The most powerful evidence that housing affordability is a localized rather than universal phenomenon comes from markets where the math runs backwards: 54 cities where existing homes sell for less than it would cost to build them from scratch.
Replacement cost — the cost to rebuild a structure of equivalent size and quality, runs roughly $160–200 per square foot nationally at average quality. Applied to a 1,500-square-foot home, that is roughly $240,000–$300,000. In a large number of American cities, existing homes sell well below that figure.
Our earlier blog post points to eight cities where the population is growing and homes still sell at less than replacement value. The American Dream is alive and thriving in those cities.
On the other hand, coastal California, New York, and coastal Massachusetts represent the opposite extreme, where homes trade at two to four times replacement cost. That premium is the price of location and of the supply suppression that has prevented new construction from competing that premium away.
The mortgage rate illusion — and the recency bias behind it
Another popular argument for the affordability crisis is the high mortgage rates we face today, but this argument is driven almost entirely by recency bias. The idea that today’s mortgage rates represent some historically unusual burden is simply not supported by the data. Freddie Mac has tracked the 30-year fixed mortgage rate since 1971. The long-run average across that entire period is just under 8%. The rate peaked at 18.4% in October 1981, and for most of the 1980s and 1990s — years when millions of Americans bought homes, raised families, and built equity — borrowing cost between 9% and 13%.
1981 PEAK 18.4% Homes still sold. Families still bought. | 1980s–90s AVG ~10% The era most boomers bought their first home | TODAY (2026) ~6.5% Below the 54-year average of 7.7% |
The perceived rate shock of 2022–2024 was not a shock relative to history. It was a return to normal after an extraordinary decade of near-zero rates — themselves the product of post-financial-crisis emergency policy sustained far longer than anyone anticipated. Recency bias — the human tendency to treat recent experience as permanent baseline — led an entire generation of buyers and commentators to anchor on 3% rates and call historically ordinary rates a catastrophe. The 6–7% rates prevailing today sit below the 54-year Freddie Mac average of 7.7%. People bought homes comfortably at 10%, 12%, even 14%. They took smaller loans (often at 10 year or 15 year terms), bought smaller houses, and refinanced when rates fell.
What this means — and what it doesn’t
None of this is to say that housing is uniformly affordable, or that the pain people feel is imaginary. The affordability crisis is real in specific places for specific people. Post-COVID construction costs jumped roughly 25% in two years before plateauing, keeping new construction expensive across the country. The rate lock-in effect has genuinely frozen supply. And the regulatory barriers preventing small-home construction are a policy failure with real human consequences.
But the 50-year story — the story told most loudly in political debates and media coverage — is more nuanced than the standard narrative allows. The cost of homes has not dramatically outrun what workers earn, but is actually growing slightly slower. What has changed is the specification of what we build, where we insist on building it, and the regulatory apparatus that has progressively eliminated the lower rungs of the housing ladder.
A 1,100-square-foot home with one and a half bath, a one-car garage, and a central heat system remains perfectly buildable today at a cost accessible to median-wage earners — if you can find a jurisdiction that will allow it, a lender willing to finance it, a builder whose economics permit it, and a buyer whose expectations accommodate it. All four conditions have become harder to meet, for reasons that have almost nothing to do with the underlying cost of construction materials and labor.
We upgraded our standard of living, hardwired those upgrades into law and lending standards and consumer expectations, then experienced recency bias in reverse — forgetting that the smaller, simpler home was ever the norm — and declared a crisis when the bill arrived. The crisis is real. So is the role we played in creating it.
Data notes
RSMeans Historical Cost Index: all values on 1993=100 scale; 1970–2020 from Weston WI public PDF (RSMeans book insert); 2021–2025 January values from rsmeans.com quarterly update pages. RSMeans is a nonresidential construction input cost index used here as the best available long-run proxy for residential construction cost trends. Wage data: SSA National Average Wage Index. Home prices: U.S. Census / HUD Median Sales Price of Houses Sold (FRED MSPUS), annual average of quarterly values. CPI: BLS CPI-U. Mortgage rates: Freddie Mac PMMS annual averages; 54-year average through February 2026 per The Mortgage Reports. Home size data: U.S. Census Bureau Survey of Construction; AEI (2015); realtor.com (2025). Replacement cost: NAHB Cost of Constructing a Home 2024 (national avg ~$162/sqft excl. land, ~$195/sqft incl. GC fee). MSA sale price per sqft: Clever Real Estate, HomeBay, Zillow (2023–2024 secondary sources). NAHB buyer preference data: What Home Buyers Really Want 2024. All figures nominal. This analysis does not constitute financial or investment advice.
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