Is Your Home's Value Really Rising? Nominal vs. Real Growth

If a home was worth $300,000 when it was bought and is estimated at $375,000 today, it feels like a $75,000 gain. That number is real in dollars. Whether it represents $75,000 of added buying power is a different question, and it is where the idea of nominal versus real growth comes in.

Key takeaways

• Nominal growth is the change in a home's price in dollars, while real growth adjusts that change for inflation.
• In a hypothetical example, a home that rose 25 percent while prices overall rose 15 percent gained about 8.7 percent in real terms.
• Real growth can be found by dividing one plus the nominal growth by one plus inflation, then subtracting one.
• If the next home a household would buy has also risen in price, the buying power gained by selling may be smaller than the headline gain.
• Real estate is local, so price changes and inflation in one area may differ from national averages.

Two ways to measure the same change

Nominal growth is the change in price measured in ordinary dollars, with no adjustment for inflation. In the example above, it is 25 percent.

Real growth adjusts for inflation, so it shows how much more the home could buy compared with other goods and services. The Bureau of Labor Statistics describes this as converting current dollars into constant dollars, using a price index such as the Consumer Price Index.

A worked example

Suppose prices overall rose a total of 15 percent over the same period. To find real growth, divide one plus the nominal rate by one plus the inflation rate, then subtract one.

• Nominal growth: 25 percent, so 1.25.
• Inflation: 15 percent, so 1.15.
• 1.25 divided by 1.15 is about 1.087, so real growth is about 8.7 percent.

Put another way, $375,000 today is worth about $326,000 in the dollars of the original purchase. The real gain is roughly $26,000, not $75,000. That is still a gain, but it is a much smaller one, and it comes from the home doing slightly better than prices in general.

These numbers are hypothetical. Actual inflation depends on the period measured, and the Bureau of Labor Statistics provides tools for converting between dollars from different years.

Why the difference matters when selling and buying

The adjusted view matters most when a sale leads to another purchase. Imagine a household that sells its home for $375,000 and wants to buy another in the same area. If homes there have also risen in price, the next home may cost more as well. The extra dollars from the sale may not buy a bigger or better home, because the price of the replacement has moved too.

This is why a rise in a home's value can feel larger than its effect on what a household can do. The gain is more tangible when the household plans to stay, rent out, or move to a place where homes cost less relative to its own.

Fixed payments and inflation

A fixed-rate mortgage payment is set in nominal dollars, so it stays the same even when prices rise. Over time, that can make the payment feel smaller compared with the cost of other things, though how much depends on how incomes change. It is one reason people sometimes describe inflation as helping existing borrowers and hurting savers, but it works that way only to the extent that wages and other conditions keep pace.

Local markets are what count

Home prices are set locally. A national figure may be far from the change in a specific town or neighborhood, and the same is true of inflation, since housing, food and energy costs vary by region. For a household weighing a move, the question is less about national averages and more about how homes in the two places compare, along with taxes, insurance and the cost of living.

A short checklist

When reading a headline about home values, a household might ask:

• Is this figure nominal or adjusted for inflation?
• How much have prices overall risen over the same period?
• If I sold, what would a comparable home cost in the area where I want to live?
• What do the closing costs and moving expenses subtract from the gain?

None of this takes away from owning a home, which has value beyond its price. It simply separates what the number says from what it can buy.

Common questions

What is the difference between nominal and real home value growth?

Nominal growth is the change in price measured in ordinary dollars. Real growth removes the effect of inflation, so it shows how much more the home could buy compared with other things you might purchase.

How do I calculate real growth?

Divide one plus the nominal growth rate by one plus the inflation rate, then subtract one. For example, 25 percent nominal growth with 15 percent inflation gives 1.25 divided by 1.15, which is about 1.087, or 8.7 percent real growth.

Does high nominal growth mean I have more purchasing power?

Not always. If prices overall, or the prices of homes you might buy next, have risen as much or more, the extra dollars may not stretch further. The effect depends on local conditions and on what you plan to buy.

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