What caused the 40% price increase in houses and rents, and what are governments doing to try to fix the problem.
Topics covered include:
- Why 50% of the global population is frustrated with the lack of affordable housing
- How the housing collapse as part of the Great Financial Crisis contributed to today’s affordability crisis
- How central bank QE programs have magnified the housing crisis
- How restrictive zoning and short-term rentals contribute to the housing crisis
- What governments are doing to encourage more housing supply
- What individuals can do until housing becomes more affordable
Show Notes
Home Price to Median Household Income Ratio (US)—Longtermtrends
Home Ownership Affordability Monitor—Federal Reserve Bank of Atlanta
AMERICA’S RENTAL HOUSING 2024—Joint Center for Housing Studies of Harvard University
America retains “rent burdened” status—Moody’s
U.S. 2024 and 2025 Mid-Year Outlook Report—AirDNA
ARIZONA’S NEW HOUSING LAWS EXPLAINED—Tempe YIMBY
How Rent Controls Are Deepening the Dutch Housing Crisis by Cagan Koc and Sarah Jacob—Bloomberg
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 493. It’s titled, “The Housing Affordability Crisis. What Caused It, and How to Solve It.”
Home Price Trends
Recently, Gallup Analytics did a survey of individuals living in OECD nations—this is comprised of 38 countries, both developed and emerging markets—and they asked them what their level of satisfaction or dissatisfaction was of various topics.
Half of the respondents, 50% said they were dissatisfied with the availability of affordable housing. That houses were too expensive. That compares to only 30% of the population in those countries that were dissatisfied with the healthcare system, education, and public transportation. Housing is at the top of the list, and it’s not surprising when you see in the U.S., for example, U.S. home prices, the average has gone up 38% since January 2021, and it’s over 50% higher since 2015.
Throughout the OECD, home prices are 30% higher than they were in 2015. In England, house prices are now eight times the average annual wage, compared to only twice the average annual wage in 1997. If you look at what it costs for a median-priced home in the U.S., the monthly payment today is $3,100. It was $2,000 in January 2021.
If we look at longer-term trends—and I’ve found a chart, and I’ll link to it in the show notes—looking at the average home price in the U.S. divided by the median household income, the middle household income. I remember when I was in college, back in 1989, doing surveys of households, a lot of them in California, and one of their biggest concerns back then was how expensive housing was.
If we look in 1989, the average home price to median income was 4.6. In 1993, they were a little cheaper. 1993 is when LaPriel and I bought our first house. Home price to median household income was 4.4. We had the housing bubble that peaked in 2006. At that point, the home price to median household income got up to 6.8, an all-time high. It bottomed in 2012, at 4.8. That’s when LaPriel and I bought a farm and second home in Teton Valley.
In June 2020, we had an increase in home prices through the 2010s. So right before the pandemic hit, average home price to median income was 5.7. So it hadn’t reached the previous high of 6.8 in 2006. Since then, it’s gone absolutely crazy. The home price to median household income as of May 2024 is 7.74, an all-time high.
The Affordability of a Typical Home
What does that mean if you’re a homeowner? You bought a new home in June 2024—just the median home in the US would have cost you $389,000. If you earned the median income of $81,000, your mortgage rate would have been 6.9%. You have to pay property insurance, which has gone up, taxes. In many cases, you’re paying mortgage insurance.
And when you add all those together—I mean thousands of dollars, you’re paying 44% of your income. The median income is going toward that house every year. If you compare that back in 2013, it was closer to the bottom. That median household, with median household income of $52,000, purchasing a median home price at $205,000—it was only paying 28% of their income.
Now, that’s just the houses. Rent is just as bad. The Joint Center for Housing Studies from Harvard found that 50% of renters are cost burdened, which means they’re spending more than 30% of their income on renting their apartment or home, plus utilities.
Moody’s reports that in the top 20 least affordable metro areas, a low-income family, just to be able to keep their cost of housing less than 30% of their income, would need to work an extra 20 to 60 hours a week. Most in those areas are paying well over 50% of their income toward rent. A low-income family would have spent more than 30% of their income on rent, and 78% of the mid and larger-size apartment markets in the US.
A few episodes ago we talked about the home insurance crisis. Well, it’s also affecting multifamily housing, as apartment owners are seeing huge increases in their insurance costs, and then they’re passing those on to their renters, which are obviously adding to their cost.
Now, if we look over the long-term trend for renters, we can see that on an inflation-adjusted basis, backing out inflation, median rents have increased 21% since 2001, and that’s through 2022. Net of inflation, a 21% increase over the past 20 years.
Whereas median renter income has only increased 2% net of inflation. As rents have gotten more expensive, as it’s led to higher and higher percentage of income going to rent, that has led to greater homelessness. Why is that? What is causing this huge spike in rent and home prices? There are a number of factors.
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