Why can’t the average person (or millennial) afford to buy a home like back in the day?

The biggest factor?

US housing prices are rising twice as fast as wages

Yep, the United States housing prices are rising far faster than wages…meaning, that if you rely on a wage-based income, home prices are fast becoming out of your reach.

But this is a pattern we’ve been seeing for quite some time…

Lets just look at 2012–2014, during the housing recovery:

At that time, wages went up 1.3% while home prices went up 17 percent just during that ONE PERIOD.
https://www.realtytrac.com/news/home-prices-and-sales/home-price-growth-versus-wage-growth-during-housing-recovery

Over all, unless you can outpace the averages with your earnings or do something extraordinary (live with roommates, your parents, etc..), it becomes increasingly difficult to get into a home.

But this doesn’t just affect millennials – it affects everyone.

That retired person on a fixed income? When your house value goes up, often soon the “town reassessment” follows and your property taxes and school taxes go up, making your current home unaffordable.

It makes me incredibly angry….why?

Because I see all these articles telling people that “renting is better than owning.” These articles are just appealing to people who may *never* expect to own a home in their lifetime.

Americans deserve better – if you work a full-time job, you should be able to at least afford a home…it’s just not right.

In 1980, minimum wage was $3.10. Today it is $7.25. That’s an increase of 134%.

In 1980 the average home price was $47,200. Today it is $199,200.00[1] . That appears to be an increase of 322%. Wow, we must have a problem, right?

Well what if minimum wage just hasn’t “kept up” as so many say? (My opinions of minimum wage are irrelevant for this answer). In 1980, median household income for a white family (hey I didn’t break down the statistics, I’m just copying from the government’s websites) was $51,180. Today it’s about $64,000.00. That’s only an increase of 22% (wow minimum wage has grown faster than real wages…weird…..) But it still suggest we have a “problem.”

Except we don’t. Everyone who looks at this forgets one simple thing — supply and demand. Urbanization and moving from rural to the cities and burbs is not a phenomenon limited to the industrial revolution or even the depression.

From 1980-current day, urban populations have been growing at a staggering rate of 3x that of rural communities.

In other words, basic economics dictates that, absent a massive increase in supply (which can’t happen in a city as space is limited — yes it can go up and new buildings can be built — but there are still limits which can only be met by increasing costs), home prices should be more expensive than they were in 1980 in cities.

A quick way to test this theory is to look at the values of rural homes. Guess what, they have not appreciated at nearly the rate of urban homes[2] . In fact, there is even a much higher rate of abandoned homes in rural areas.

Put in simpler terms, there are more workers in the cities, which drives wages down. These workers need houses, which drives the demand for those up, and thus prices with them. It’s really that simple. More workers, lower wages. Higher demand for homes, higher prices.

What’s the solution? Well go live in a rural area — you can get incredibly cheap housing. It’s simply a trade off.

Population demographics aren’t the only thing to blame for the price increases though. The government is also a HUGE contributor. Two things impacted this:

  1. Increased regulations at all levels. Regulator compliance in construction has easily been 30–40% of the price increase in homes (as in medicine and many other fields). There are more inspections, more compliance points, more rules to follow, it takes longer to get plans approved….the list is really endless. This leads to higher costs to build, which leads to higher costs to purchase;
  2. Soft money lending. Some of this finally blew up in 2008 – but the government’s mortgage rules made it easier for many to get homes. This has the perverse effect of increasing home prices. (More money = inflationary). This also has happened with tuition. If it wasn’t for the government making money freely available in very large quantities, tuition wouldn’t be going up like it has – same for home prices (Mises has a great book on this).

In summary, a millennial has issues paying for living space because (1) housing prices are rising twice as fast as wages and (2) government policies have been enacted that dramatically increase housing prices.

 

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