America is embarking upon a year that will culminate in the nation’s 250th birthday in July 2026. It is worth reflecting upon the American Dream, which for many is alive and well, while for others always seems to be elusively out of reach. A traditional aspect of the traditional American Dream is home ownership, which just over 50% of Americans per recent polling say is an essential part of that dream (#1 on the list was freedom and choice in how to live). Interestingly enough, different polling I found from 2010 found 71% of Americans holding homeownership as a key tenet of the American Dream, so although the polling methodologies may have been different, there is some leakage there over the past 15 years with regard to the dream of home ownership.
The big story in housing over the past five years has been, of course, the major run-up in prices and, especially over the past two years, the corresponding jump in interest rates, which is perhaps why some of those polled have given up on the dream of owning a home, or at least rated it lower. The impacts have been felt the most detrimentally by would-be first-time homebuyers along with purchasers and renters of low and moderate incomes, who are suddenly faced with the mathematical challenge of how to buy a higher-priced home when financing it with a significantly higher interest rate, or, how to simply keep up with rising rents.
Many housing-related costs have also notably increased in recent years: insurance, property taxes, the cost of repairs, etc. But that point does relate to the specific topic I want to address today, which is how to calculate the relative rise in the cost of housing when the cost of virtually everything is going up along with it.
Nominal vs. Real Inflation
I noticed this past week that the cost of my burrito at Chipotle, which has been $9.65 for most of the last year, is now $10.10 (I remember a few years ago it was $7.85, but such is the passage of time). The nominal inflation rate is simply the calculation of the percentage increase, which in this case from $9.65 to $10.10 is 4.66%.
To calculate the real inflation rate, you subtract the overall inflation rate from the nominal inflation rate of the specific thing you are looking at. The year-over-year CPI inflation rate through the end of May was 2.40%, so the real inflation rate of the Chipotle burrito is therefore 4.66% minus 2.40%, which is 2.26%. This means my burrito is rising in cost more than costs in the general economy. No doubt this is a reflection of the fact that food costs and labor, which are the two biggest inputs for any restaurant including a fast-casual spot like Chipotle, have increased more than the cost of general inflation, and those costs are now getting passed along to the purchasers of burritos.
The rising cost of a burrito at Chipotle is a First World Problem, for sure (although the rising cost of food impacts everyone, especially those on the margins). Truth be told, the cracking of the $10.00 psychological burrito barrier, was more painful to me than the 4.66% nominal increase or the 2.26% real increase, a question worthy of a behavioral economics deep dive. But for today, I use the Chipotle example as a means of showing that there are more nuanced ways to calculate the rising cost of something versus the simple nominal rate of inflation: is the inflation cost on the burrito 4.66% or 2.26%? Take your pick.
What About Homes?
Calculating nominal and real changes in prices relative to inflation works for bigger ticket items, as well. Look at homes, for example. The median home transaction price fifteen years ago in Q1 of 2020 was about $223,000, per data from the U.S. Department of Housing and Urban Development. In Q1 of 2025, it was about $417,000. This is a nominal rate of inflation of 87.00%. If you were to average this rate out over 15 years, the compounded annual growth rate in homes over the past 15 years averaged 4.39% per year.
To calculate the real inflation rate, you need to also factor in the increase in overall inflation during this time period. In January 2010, the CPI was 217.488 (don’t worry too much about what the 217.488 represents; it’s just a relative statistic to compare different time periods in which “100” is level-set to be average prices from 1982 to 1984). In January 2025, the CPI was 319.086. The rate of nominal inflation in the CPI statistic itself between January 2010 (217.488) and January 2025 (319.086) was therefore 46.72%.
So over this fifteen-year time period, the nominal inflation rate in homes was 87.00%, but inflation as a whole increased by 46.72%, which makes the real inflation rate over this fifteen-year time period the difference between the two, which is 40.28%. An increase of 40.28% might not sound like a lot over a 15-year period, but keep in mind that this is above and beyond the aggregate increase in prices for other goods and services that has come with the passage of time. In other words, homes have increased by 40.28% over the past fifteen years on top of or in addition to the increase in prices in the overall economy.
What About Rents?
The story on rents is very similar. According to Census data compiled by iProperty Management, the average nationwide rent in 2010 was $895. In 2025, it is $1,650, which is an increase of 84.36% in 15 years. If averaged annually over 15 years, the compounded growth rate would be 4.15%, which is quite similar to the average compounded rate of 4.39% for home purchases. The real rate of inflation in rents is the 84.36% nominal increase minus the same 46.72% CPI increase over that 15-year period, which equals 37.64%. Again, an increase of 37.64% might not seem like a lot over 15 years, but the 37.64% is on top of the general rise in prices in the broader economy.
Keep in mind, for sure, that there are regional variations in these statistics. Further, the rate of increase in home prices and rents has accelerated in the past five years. But the story on home prices and rents is definitely that they have increased in price more than you would expect in a normal economy of steadily rising prices for good and services.
One More Question - What About Incomes?
Looking at the rising cost of any item is interesting in itself, but to really get a feel for the impact felt by the consumer, you also need to look at changes in incomes over the same time period. Using the dataset I prefer (the U.S. Census Bureau via the Federal Reserve Economic Data, or FRED), the most recent year for which the full numbers are available is 2023, at which time the median family income was $100,800. Going back 15 years from there, the median family income in 2008 was $61,520. This is a percentage increase over 15 years from 2008 to 2023 of 63.84%.
That gives us an interesting set of data between the 15-year increases in homes, rents, and median family income (keeping mind some slight variations between homes and rents being calculated from 2010-2025 and median family income being calculated from 2008-2023):
Homes: 87.00%
Rents: 84.36%
Incomes: 63.84%
Overall CPI inflation: 46.72%
On the one hand, it is good news for the health of the American consumer and the American family that incomes have actually outpaced overall inflation. It may not always feel that way because so many of the sharply rising costs over the past few years have been on essentials like food, utilities, and, yes, housing. And on that very point, the cost of homes and rents has not only significantly outpaced inflation, but family incomes, as well. This is among the reasons why the home market feels so painful to would-be buyers right now — the costs have outpaced most other things in the economy and have notably outpaced income growth.
What Comes Next
I’ve written several times this year about I could see home prices and rents level off this year and even start to drop. This will be particularly true in the areas of the country that have seen the most new construction, particularly in the South and in the Sunbelt. Time will tell. For Americans to feel better about the housing market not to mention their own personal financial well-being and that of their families, incomes will need to continue to outpace overall inflation, but will also need to outpace the rising costs of the key items of life, including housing. I think this will happen for a several year period in the years ahead, but that depends not only on housing costs leveling off but incomes holding up.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
Ben, that's a clear explanation and to the point. Its good that median incomes are keeping up. But, what's happening at the low and high end of the scale?
In Australia it now requires two incomes at the average level to finance the purchase of an average priced house. If we go back to 1908 one man on the minimum wage could afford to keep a wife and three children. Granted, houses were smaller and less well appointed at that time and the man would have got around on two legs and a bicycle rather than a car.
I think in prior posts you’ve commented on how much a percentage of CPI shelter makes up and it being more than 25%? So the CPI inflation is already being pulled up by those price / rent inflation numbers too. The difference between price / rent inflation and a CPI inflation rate that was adjusted to not include shelter would be even more substantial!