Disinflation, Not Deflation

New home prices are much lower than a year ago. The average price of a new home sold in October was 10.4% lower, while the median price was down 17.6%.
Records on new home prices go back all the way to the Kennedy Administration and never before has the median new home price dropped so much in twelve months, even during the bursting of the housing bubble in 2007-11. Is this a signal that monetary policy has become excruciatingly tight, that deflation – an outright and generalized drop in consumer prices – is about to grip the US economy?


In fact, deflation doesn’t even have a grip on the housing market. New home prices only include the prices for the new homes sold each month, which in the past year has averaged about 55,000 per month. That’s out of a total housing stock of about 145 million homes. In other words, new home prices reflect what’s going on each month with only about 0.04% of all homes.

Another big problem with just looking at prices for new homes sold is that those sold in October 2023 might be very different in size and quality than the new homes sold a year ago. Mortgage rates are higher, so many new home buyers are cropping their appetites, buying smaller homes to reduce their projected future mortgage payments. And builders are reacting to this, building smaller, less expensive homes. As a result, the average and median prices are falling, but not the price per square foot.

Better gauges of national home prices include the Case-Shiller index and the FHFA index, which are designed to adjust for the quality of homes. They also attempt to track the sales price of the same homes over time. These two indexes show home prices up 3.9% and 6.0% in the past year, respectively. In other words, no deflation. Home prices are not really falling.