Friday, June 28, 2024

Why have home prices risen so much more than wages?

I hear and read lots of chatter mostly among frustrated young people about the cost of housing versus wages since 1980. It is true that a house in 1980 was substantially less money relative to the typical wages of the era. But how much of the complaint is real? Let's take a closer look.

I'll start with the basic facts using national averages and an FHA loan:

June 1980:

Median home price in USA $57,133 (CPI adjusted $216,614)

Median Household Income: $21,020 (CPI adjusted $79,665) 

Average Mortgage Rate: 14.5%

PITI Payment: $679

% of monthly income: 38.8%

June 2024:

Median home price in USA: $414,800

Median Household Income: $80,200

Average Mortgage Rate: 7%

PITI Payment: $2663

% Monthly Income: 39.8%

The point of using 1980 in these arguments is interesting as they always look at the purchase price of the house versus the annual income. In 1980 the purchase price of a typical house was 2.7x the typical annual income. Today it is 5.2x the typical annual income. But 1980 had the highest mortgage rates in history so the house wasn't any more affordable than it is today in fact it was is just 1% difference in the payment. We just came out of one of the most affordable housing periods in history in 2019when rates were in the 3's the median payment was less than 30% of income. 

Housing takes twists and turns and there are times when housing is more expensive and times when it is affordable. The people complaining now are mostly the same people that wouldn't pull the trigger and buy when rates were low and are now priced out. But hopefully when conditions are ripe again and they will be, they will take action and capitalize on favorable market conditions.

1980 was a better time for rich people to buy property as the high interest rates actually stagnated housing prices a bit which allowed cash buyers an opportunity to get great prices where as those using a loan paid much more in interest over time.

The most interesting thing about the higher cost of housing in America is the root cause. Do you know what the largest increase in line item expense has been over the last 40 years? Materials? No. Labor? No. Land costs? Close, but no. Development costs and that is code-speak for GOVERNMENT! Government mandates and development costs have skyrocketed more than 1000% since 1980 and it is the single biggest increase in expenses to build over that time. Here in Washington State lot development costs are nearly equal to the cost of the raw land per acre. The local and state governments continue to squeeze the proverbial turnip with developers and that leads to more and more expenses that have to be passed on to the consumer. 

The government blames the developers but they are the biggest culprit in rising housing costs. Keep that in mind when you vote. Remember a lot of local races are held in off years, Vancouver Mayor and City Council for example are held in off election years where voter turnout is low. We the people need to vote in EVERY election otherwise the government will continue the insatiable lust for revenue at our expense.

The financial information for this article were sourced from the US Census, Freddie Mac, Federal Bureau of Labor, and the IRS.

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