Prices from 1950 is relatively useless because they don’t count the effect of women entering the workforce in the 1970s and 80s. Once women were working en masse in the 1980s house prices spiked because there was now 2 incomes that could be used to pay for the house. This inflation is seen in the data but you can’t see it from this map.
The higher house prices get the more desperate people are to use every cent to buy a house. That’s why things like mortgage tax deduction is useless because that money immediately gets factored into increasing the amount of mortgage you can get and spikes the house prices.
It’s fascinating and sad because we are at the stage now where hedge funds are driving up the prices of single family homes so that millennials and gen z become renters for the rest of their lives.
The short answer is that a house is no longer a place to live, but an abstract financial asset. The problem with divorcing occupation and use from finance and ownership concerns remediation of grievances. The benefit of such a system concerns maximizing the building's utility. I'm personally in favor of a more boring housing market, in addition to automatic tenant enrollment in equity-sharing programs (ie, due to living in a building and paying rent, the person who experiences hardship and loses tenancy still has some small, depreciating ownership based upon what they paid as rent). This helps solve the problem of financial engagement for the less financially literate, in addition to enabling higher-density housing to be built.
This is all well and good but as someone who just went through a renovation, the cost of labor and materials is astronomical. Yes the land is expensive too but it’s not like it was free to get construction crews out either.
So while it is a financial asset, the cost is still tied to the cost of physically constructing the thing.
Bingo. People love to go into some deep analysis of housing and "agh it's a really hard problem", but it's simple at the end of the day: we have constructed, and continue to construct, a society where housing is not considering a right, but instead a way to inflate your bank account. It smells like this from the prospective house buyer at the bottom all the way to the government propping up the system at the top. Time to change the system. I refuse to believe that out of all the great things humanity has achieved, effective housing (shelter, of all things!!) is unsolveable.
The system will not change because the folks in charge profit and maintain power from a system of accelerated financialization. They then wring their hands and clutch their pearls as young people take rational actions by not having children (rapid fertility rate decline), worried what happens to the pyramid scheme as it runs out of steam. Their crisis is the young cohort's survival mechanism.
Young people have to do their best to survive in an unfavorable macro for the life they have left, and old folks age out eventually (which is the only way they give up power, the power which is needed to make change to improve the macro).
in my experience its normal that old folks have lots of children and inheritance works out that the house is sold and revenue shared among children instead of one of the children moving in
And a lot of folks don't have parents leaving them a portfolio or a high value asset they can live in. A material amount of people 55+ have no retirement savings, have material amounts of debt, or are in similar situations where the house might have to be sold versus be conveyed to children at death to break even (healthcare, senior|nursing home, memory care facility costs until death).
If you are lucky enough to inherit an unencumbered (or one with a mortgage you can at least afford) residential property you can live in as a young person when your parent(s) pass, that is fantastic luck. Take the win if you can get it. That is not the mean experience, based on the data.
Im a rube but it my knee jerk reading tfa is there has to be some correction or young people are financially and domestically doomed. The solutions you listed here seem great. Is there momentum behind establishing these in the US?
Is it more likely the trend continues and young people will simply become priced out, or is a correction more likely? If the latter, what are smart people expecting?
>Is it more likely the trend continues and young people will simply become priced out, or is a correction more likely?
As a layman, take this with a huge grain of salt: it depends. By established rules, a major correction should be imminent. In fact, it should have happened one of several times already.
Examples of catalysts include a bond liquidity crisis in late 2019, the flash crash at the start of the COVID pandemic, the Gamestop debacle in early 2021, the collapse of the Chinese real estate market later in 2021, and the US bank collapses of early 2023. There are also others, though several venture into conspiracy theory territory.
In every example I mentioned, unprecedented action was undertaken to prevent a catastrophic event that might have lead to financial contagion across global markets. There will be probably be more. It remains to be seen whether authorities will continue undertaking steps to shore things up when the bubble threatens to pop. (Trump's return to office is an interesting wrinkle; grab another grain of salt, but it's my opinion that the Gamestop thing only got as bad as it did because the regulatory regime under his tenure was asleep at the wheel.)
It should be noted that a correction doesn't necessarily lead to affordability if purchasing power simply continues falling or remains stagnant, as a result of a weaker job market. There are people who believe that sellers will simply refuse to drop residential real estates prices, as they have with commercial properties. Consolidation of ownership under large entities - as we've already seen to some extent - would allow owners to simply squat on properties, perhaps renting then out. Who knows what happens to the algorithmic rent fixing lawsuits, that might have brought those costs back to Earth a bit, after this year's electoral red wave.
A correction won't occur because there is a housing shortage of between 3-8M units, depending on who you ask. There is not enough labor to build more units at any reasonable rate, so it'll be a slow burn as the system reaches equilibrium over time (new housing comes into the market when owners must sell, demand destruction due to pricing). Due to demographics, a lot more housing could be satisfied by smaller units accounting for reduced forward looking family formation.
With regards to the labor market, due to structural demographics and labor shortages, it is highly unlikely in my opinion that the job market weakens to the point where housing experiences a crisis from a rapid, sustained increase in homeowners who cannot afford their mortgage payments.
Never say never, but yes, agreed. And that shortage depending on how it’s calculated may be more pronounced if we look at where people plan to live in the future. Central Ohio where I live is on track to gain in population while the state as a whole loses population. A house in a rural county doesn’t necessarily count/help, even if it’s included in official “here are many houses we have” statistics.
Home builders, especially with a risk-free 4% return today, do not have any incentive to build “cheap” or “affordable” housing, and as material prices continue to increase because there are 330 million people in America who also want those resources, new builds will have to continue to increase in price and perhaps decrease in quality, depending on how much oil goes into the construction of the house. Home builders, absent clear evidence of industry collusion will simply increase their profitability and will not build ‘starter homes” or “affordable housing”.
We can address the issue in a few ways, for example removing artificially limiting zoning practices, generally speaking, or perhaps the elected government can just pay for cheaper housing, or we can craft good legislation.
But on its own I don’t see a good catalyst right now that will cause home prices to “correct”* without a treatment worse than the disease (economic depression or global war or something else that is otherwise catastrophic).
* The term “correction” is popular but misused. The current price of an asset is always correct. When an asset decreases in price, that decrease is no more correct than a corresponding increase in price.
Great points, great comment. An additional measure to solve for this would be by making remote work a protected labor right (assuming it does not overly burden the employer and such), so workers can move where the housing is, or the housing is cheap. But we'd rather let old, status seeking folks at the top of the corporate ladder "show workers who is in charge" and maintain control while workers get extracted from for higher than necessary rent or mortgage payments near an office (where housing is in demand but very slow for additional supply to come online, if it ever does at all).
There should be no tax on selling a primary residence if and only if you buy another primary residence. Otherwise tax it like capital gains or higher. Make it economically unfeasible for people to own more than one house. I’m generally a capitalist but i’m okay with this because the housing situation is ridiculous.
Hedge funds and other corporations should be disallowed from purchasing single family homes. Period.
People don’t have the right to simply live in highly desirable areas for very cheap.
It is time for people to accept that if they want affordable housing they should look at some lesser developed areas in the country. Otherwise it’s pay to play.
And the jobs? The amenities that make areas highly desirable require workers who can actually commute to them.
It's a game of chicken. The people who live in these areas and expect to be served without complaint either acquiesce to density and lower property values, or risk (occasionally fiery) demonstrations against the unfair and unworkable situation. Their goal is to keep the game running, so that everyone else doesn't decide on one or the other end state. Essentially, "Highly desirable areas that are too expensive for low/middle-income workers," is a transition state.
In my city, the homeless are offered free housing that is away from the downtown area. They do not want it. Preferring instead to camp in downtown where they want to be.
Cheaper housing is available if people are willing to move to less densely populated areas.
At the end of the day, housing is all about supply and demand. Like most other things in life. There is not enough supply in the areas where people want to live. And no country has been able to figure out a solution for that problem.
The price of houses will fall and the price of basic services, food, etc. will skyrocket as people flee the stagnant cities and core economic activity moves elsewhere. It will never go this far of course (zero actual workers is an asymptote), but that's the way it will trend.
In places like Lisbon and Milan, the rich live in the center and the young folks live on the outskirts. The outskirts then become trendy and cool and filled with bars and restaurants and cafes (can also look at Brooklyn, and now we are seeing a second Harlem Renaissance as well). Eventually the rich realize this and move to that place, and then the young people move again. But no matter what, the young people always end up living in the most desirable area because they commune with each other and create a desirable community in that place; meanwhile retired wealthy people are inherently uncool and consume more than they contribute.
solar and starlink keep on improving. i continue to be surprised remote work communities arent commonly developing in scenic, non-traditional locations. it seems idealistic, but makes a lot of sense on paper
> The short answer is that a house is no longer a place to live, but an abstract financial asset.
This line of thinking is commonly repeated, but it fails to take into account the old “location, location, location” thing. If you bought a house that was once in the middle of farmland 30+ years ago but now that house is on (let’s say) two acres of land in the middle of a coveted suburb of a large city where the average house sits on .2 acres, why _wouldn’t_ that house (or more accurately, the land) have appreciated greatly in value?
A LOT of these houses that “boomers” bought were once out in the boonies, and now those places are desirable, developed areas.
- Building codes have changed. Things are much safer now than in the past. The chance of dying in a fire has decreased 1/4 since 1950 [1].
- Houses are much bigger. Houses have almost tripled in size [2].
- Quality of finishes have increased. People will probably debate me on this because things have generally gotten cheaper over time but that means that the expectation for a house now is quartz countertops and not vinyl.
- Desirability has changed. For example, the number of sports teams have tripled since 1950.
I definitely agree that there's much more to housing prices than most simple analyses present.
Some food for thought in the other direction, though:
- Tools (e.g. nail guns, paint guns, concrete finishers, horizontal drilling for utilities, etc.) and materials (e.g. pre-engineered trusses) are significantly more efficient, so labor costs can be reduced which should drive pricing down. At least enough to offset changes in building codes, but likely more.
- Triple house size does not equal triple building costs.
- I would definitely debate on quality of finishes. Some might be better, but plenty is worse. For example, crown moulding is not as common (in my experience), and skirting is typically much cheaper, and I rarely see chair rails anymore. More often than not I see vinyl floors replicating wood instead of real hardwood floors.
The use of pneumatic nailers has substantially reduced the time required to frame a house.
Regarding labor costs and productivity, there is vastly more specialization in building a house now than there was in 1950. I suspect that in 1950 you only had a few types of skilled labor involved: carpenter, electrician, plumber, and maybe a flooring person (the flooring may have also been done by carpenter at that time). Now, there are additional specialties that need to be involved - roofer, concrete, HVAC, tile, countertop, appliance, etc.
Efficiency gains only lead to lower prices if they are bigger than wage increases. And those are driven by efficiency gains of the rest of the economy. Sure you can gain here and there some wins, but in the end construction is still a very labor-intensive job.
The percent efficiency gain in labor when we moved from hammer & nail framing to nail gun framing significantly outpaced the percent wage increase framers experienced.
But yes, absolutely, you are right that there are many variables at play. Which is what my original post, and the person I replied to, were trying to convey.
>Productivity in building construction has not improved much, according to data, even if tools have improved.
What data are you looking at? I worked in construction (to be fair, industrial and commercial sector) for over a decade. Productivity rates changed quite a bit during the decade I was an estimator. I will dig up my productivity books from when I first graduated and compare to the last one I purchased (a few years ago) when I get home.
>Even if tripling house size doesn’t literally triple costs, that is a straw man.
A straw man? Even if labor only accounted for 10% of the cost of building a house (it is much more), changes to labor productivity absolutely affect the cost to build. Productivity rates are different for a new build of 1000sqft and 2000sqft. Not sure how that's a straw man?
Also, just to clarify, I'm not really presenting an argument. I agree with the parent comment that these maps/analyses aren't able to capture all of the variables. They gave some variables to consider when looking at the article data. I'm giving some others.
>It certainly must account for some of the cost increase.
I said it's not a 1:1 relationship, not that size didn't account for costs at all.
Crown molding only it isn't common anymore because it isn't very desirable.
I wonder if we could do housing the Chinese way and just give people a concrete box to renovate (houses aren't sold new renovated in China, and you are expected to do your own re-renovation after you buy a house second hand), but that really hasn't helped housing prices over there very much.
I've not seen crown moulding be replaced with anything, it is now generally just drywall to the ceiling. From what I've seen, anyways. Do you have any examples in mind of something that has replaced crown moulding?
> Houses are much bigger. Houses have almost tripled in size [2].
I know the numbers support this but I always wonder why my observations are so different.
When growing up (I'm Gen X) all my friends houses and mine were pretty big. Most of us were lower middle class so these were cheap houses. Land was dirt cheap so houses used the space and still had huge yards. Houses were simple, but spacious.
By the 90s houses had shrunk, since now land was quite expensive so builders had less space.
All the construction going on right now in my town is even tinier, since land prices have skyrocketed, so builders have the incentive to stuff as many tiny units into tiny plots as possible.
The big houses are REALLY big. And, while I can find a small apartment, new homes under 2000 sq ft are tough to find. The house I grew up in was 1500 sq ft and plenty for a family of four. I wish I could own a 1100 or less sq ft home but they’re all very old
Almost all of the middle class tract homes built in California (for example) in the 60s/70s are around 1200sf. They also used cheap materials, had no insulation, maybe 2 bathrooms but often 1.5, very simple kitchens, etc.
The stuff that people buy now are much bigger and much more luxurious even at the bottom end.
If you asked me whether I would want to pay 5x more for a house that reduces my likelihood of dying in a fire from 0.00427% to 0.00104%, I think I would choose to roll the dice (and maybe DIY install a $20 smoke detector).
1950: 6,405 fire deaths / 150,000,000 US pop = 0.00427%
2022: 3,490 fire deaths / 335,000,000 US pop = 0.00104%
These are guesses but I think the main reduction in fires from 1950 to 2022 are:
a) better electrical wiring and circuit provisioning. Overloaded outlets or circuits were more common in the 1950s. Fuses could also be tampered with more easily than circuit breakers.
b) Matches everywhere. You had matches in the kitchen for lighting the stove, and around the house for lighting cigarettes. "Kids playing with matches" was a common cause of fires. You don't hear about that nearly as much today.
Death is a well tracked statistic and a severe and fairly distinct outcome. Other statistics might not be as available or accurate.
Similarly the murder rate is a more accurate than other crime rates. Burglaries, muggings and assaults are often not reported to police whereas violent deaths almost always are.
Gred's post however strongly implies that the only outcome worth considering is death. That might be true for them, but I'm not sure if that applies broadly.
Speaking from experience, losing your house to a fire is traumatic, expensive, and you lose things that can't be replaced. Even when there are no deaths.
Much of the US housing stock includes homes built before 1990 (30 years ago). If most of the median home price increase was due to build quality there would be a bimodal distribution of housing appreciation with newer homes having appreciated more than older homes.
Most of the appreciation in housing is due to higher household incomes due to two income households.
Why bimodal? Houses are being built every year. So maybe houses built in 2023 have appreciated 1% more than in 2022, and those have appreciated 1% more than 2021, and so on, leading to a smooth distribution.
I would change your last sentence to: is due to higher household incomes due to two income households without a similar increase in the supply of housing near where jobs are.
Looks like normalizing to price per sqft might make the price flat at least in some parts of the US? I always debate with my brother, an architect, why people consider an 80-sqm apartment big enough for a family of 4 (Europe), but wouldn’t aim below 150 sqm when considering a house.
I wonder, should arguments like this be used to justify the issue? With technological advancements things should become better (i.e. safer in this case) without raising inflation-adjusted costs. Wouldn't it be very similar to saying that processors should have become more expensive because they became faster or hard drives because they have larger capacity? Additional costs built into the new codes should decrease over time as builders become more efficient at implementing them or technological advancements allow them to become more efficient.
Not every safety item is necessarily an extra expense due to inefficiency. The simplest example would be electrical wire. 2 lead, paper insulated aluminum wire is less expensive than 3 lead PVC insulated romex, regardless of manufacturing efficiency. There's not a lot of modern AL electrical wire for price comparison, but Home Depot lists a 1000ft spool of #2 AWG USE-2 AL wire from Southwire for $0.80 / foot. The same spool from the same manufacturer in CU is $2.32 / foot. So while not a perfect comparison, if you imagine going from a 1950's 2 wire AL situation to a 2024 3 wire CU situation, you're talking a baseline price increase of over 4x with modern efficiency. And that's before you consider that modern building codes also require many more outlets and circuits than they used to. My home, built in the 70's has 3 circuits in the kitchen. 1 counter top, 1 fridge, 1 range. IIRC the modern building code is 1 circuit for every hard wired appliance, 1 for the fridge, 2 accessory circuits and a circuit for the room walls in general. If you assume a modern house with a fridge, range, dishwasher and over the range microwave/hood combo, that's 7 circuits minimum for the kitchen. So in addition to the 4x increase in wiring costs for the existing circuits, you also have a 2x increase in the number of circuits for just that room let alone outlet spacing requirements in other rooms and the like.
sorry what do you mean by saying "Desirability has changed. For example, the number of sports teams have tripled since 1950." ? I am like not American and I do not get how that is related to housing
Houses near desirable locations (e.g. sports stadiums) are more expensive. There are more of those desirable locations now (more sports teams = more sports stadiums). So the average is driven upwards even with no change to the housing itself.
Is living near a sports stadium really that desirable? I lived a few blocks from the Giants stadium in SF, and I'll never make that mistake again.
Running a 15 minute errand on a game day could take hours. It was impossible to get my car out of the garage or get on/off the highway. The food/trash left on the streets was terrible too, which made walking my dog a PITA instead of a pleasure.
I think the point is that if you live in an American city with a professional sports team, you’re living in an area that offers way more than just a sports team; there are many things of note to do within a 20mi radius.
People who choose to live, say 250mi from the nearest major professional sports team are going to have a ton less job opportunity, things of note to do, but will generally have a lot less to pay because no one else wants to live there.
I don’t think it is causative at all. The statement sounds like an AI hallucination. But this is testable. You do probably see some gentrification in the immediate area but you also have the negative externality of parking…
It would also be interesting to see the numbers relative to mortgage rates and availability. It looks like the 1950's had mortgages starting around the 5% range, but that steadily increase to a peak of near 20% in the 80's before dropping through the 90's and bottoming out around 2.5% in 2021. Along with that I imagine qualifying / getting a mortgage in 1950's was more difficult than modern times with 0% down first time home buyer loans.
My grandmother compiled a book of letters from families in my hometown that she gave all of the grandkids a copy of before she died.
One of the letters talked about how common fires were and how the standard practice was to just pull up a chair in the middle of the street and watch it burn.
When the zoning/permitting process limits the building of new houses, builders are going to build what gives them the biggest return: large, luxuriously finished houses.
> builders are going to build what gives them the biggest return: large, luxuriously finished houses
In a lot you could build one largish luxurious home and sell it for 1.5 to 2.0M
Or do 8 tiny townhouse units and sell each for 800K for a total of 6.4M
I don't see how the single home will ever be more profitable if a builder is doing it.
We're seeing a lot of these 8 townhomes per lot (4 on each side with small driveway in between) popping up everywhere, precisely because it maximizes profit per lot for the builder.
Exactly that: you've got a limited number of lots and a limited number of units that can be on those lots, so max the value of those units. With the lot supply and zoning, that equals giant McMansions.
The US M2 in 1950 was <$300 billion and in 2024 was >$20,500 billion (70x increase). The article is using an inflation estimate of ~13x. The author doesn't give an average but the top 3 states by population (California, Texas, Florida) saw increases of 65x, 39x and 44x respectively.
I think it is more likely that house prices have slightly decreased in real terms and they are tracking closer to the M2 as houses are assets not consumables. This gels with home ownership [0] which is generally stable or higher than usual, it doesn't look like people are actually struggling to acquire homes all that much. Especially since I expect household size is shrinking.
Most of the pain people are feeling is because of the insanity leading up to and flowing from the '07 crisis if the home ownership rates are good evidence.
Would be useful to see the cost of just the land as well if thats possible. As others have pointed out, the size and feature expectation inflation has to be factored in here. The little "wartime 4" I grew up in north of Toronto was smaller than a lot of "garage-ma-halls" these days and didn't really have insulation. It was a regular feature in winters to get ice on the living room window. My "modest" (by today's standards) house would be a rich persons place in the 70s.
I live in an affluent suburb in a rich city in a sleeper town just outside Toronto. My home was built in the past twenty years and is in a "McMansion" style neighbourhood. It's a relatively large home, but in many ways things have regressed.
Craftsmanship is non-existent. The kitchen cabinets look like Ikea specials with shelves held up by little plastic pegs. All of the various particle board doors are installed laughably poorly with giant gaps. Sound travels through the home with ease.
It's well insulated and has good multi-pane windows, but automation and mass production should bring a lot of that just with the passage of time. I would expect that all else being equal the same work should by better windows and insulation and so on than fifty years ago.
Regarding land value, it is interesting how in denial we are about land values. The city gives me property tax statements valuing my land at 1/10th the price of the dwelling...yet people are buying $1M homes on smaller lots and immediately tearing the home down to build new. More than a few cases of that demands that we completely upend our valuations.
There is an equation they use that might be biased toward improvements. In Seattle/King county at least they are gradually changing the equation to value land more and improvements less, so our property taxes have been going down each year even though our value is going up (since we are a narrow townhome on a small plot). This is to ultimately encourage more density and make it more expensive to hold unimproved land.
Your windows likely would still ice up today, except they are double pane with argon or another gas inbetween the panes so they are comparatively insanely well insulated.
If 101 people want to move to a city that has 100 houses, and they are prevented from building more, then house prices will be bid up as high as they can afford to pay.
The only solution is to legalize building more homes, especially at higher densities that allow more people to live in desirable locations.
It needs to account for the difference is sizes. Average square footage in 1950 was just under 1000 sqft; in 2024, it's more like 2300.
In Texas, for example, the inflation adjusted cost per square foot was $79 in 1950, and about $130 in 2024. Still a steep rise, but a 60% jump instead of the 285% without considering square footage.
I believe these kind of data is slightly misleading, because the price is directly affected by everything else that surrounds building a house these days.
Just some examples zoning/land use, building standards codes (electrical, plumbing, mechanical), permits, compliance, inspections, water, sewage, etc etc.
I am not advocating a wild west for building, but rules & regulations always increases and with that comes more costs.
This of course also drives higher rents, and if you think they are high now...
I only want to add that in 1950 a significant number of homes still did not have indoor plumbing, and I'd guess that a lot of existing housing stock was small square footage. I don't want to say there wasn't housing inflation, but I do think the the nature of housing stock has changed too.
In a lot of states there was a more than 3x increase in price which I think is hard to justify as a difference in stock. Median square footage for homes now is only 1835 square feet (https://fred.stlouisfed.org/series/MEDSQUFEEUS). There are also a lot of arguments like how quality has gone up but building technology has vastly improved. Either way that the price increase is mostly a function of housing quality doesn't seem convincing to me (I've seen really garbage houses go for crazy amounts recently).
One example is my grandparents' home was built in the 1930s. It's a small home but in a good location and they said when they were younger it was worth ~200,000$ (I don't know the exact decade they were talking about here but from context it was somewhere in the 50s to 70s). The literal exact same house is now worth around 3,000,000$. The house now needs a lot of work (it actually decreases the value of the land) but the price is still 15x higher.
Hedonic adjustments are important but, as you point out, have issues.
But, affordability isn't represented well by inflation, either. Median family income in 1950 was equivalent to $45k today; the actual number is $100k.
A big part of the issue is that workers stopped benefitting from productivity growth in the mid-1990s. That's what's really made the housing crisis particularly sharp.
I'm curious how much the equivalent modern home would cost in 1950? Also the medium salary has almost doubled. I suspect modern homes are a much better value
although more expensive.
There has been incredible inflation for items that cannot be exported in the US. Think healthcare, education and housing. Things that could be sent overseas like TVs, Computers, Clothing has seen their prices deflate. The combo of the two is what is called inflation but the later hides the fact we have increased our money supply incredibly since 1950 and that will show in the things that did not find a way to get cheaper.
I may well be completely wrong, I am not a social scientist or involved with the housing market; my sense of it is that building has been ever harder, while demand - more people with more money - has continued to rise.
Prices, accordingly, have risen.
I think what we see here is primarily a function of constrained supply.
I suppose what this illustrates is that, while the CPI does include rent (or “owners equivalent rent”) in its calculation, the equivalent rent is either not representative of the median home, or house prices have grown much faster than rent over the past 75 years… and yet the apparent popularity of being a “real estate investor” seems only to have increased, which suggests to me that the rent/buy ratio has gotten more favorable, not less
None of the above, the disconnect is that median income has risen (much) faster than inflation in the last seven decades. See my comment elsewhere. The whole post is an exercise in failing to recognize confounding variables.
Houses can be a good investment or they can be cheap.
A good investment outperforms its alternative asset classes. We chose policies that ensured they’d be a good investment. For housing to become cheap in our lifetimes, existing homeowners will need to experience an enormous capital loss.
This has been exacerbated by the long-term decline of interest rates. Sticker price and interest rate are roughly inversely correlated since the monthly payment a prospective owner can afford is roughly fixed. Over the past fifty years, boomers have been able to regularly refinance their loans into lower and lower interest rates as prices skyrocketed. This also made it easy to move since you could trade up on your home’s increased value relative to the remaining mortgage.
That pathway isn’t as available to millennials who bought at sub-4% interest rates, and it likely never will be.
Now the next question is why? Why the houses prices have surged in the past decades. And why is it a worldwide situation (at least in developed countries)?
My take as someone living in the northwest and witnessing exponential growth over my lifetime:
- We clearcut 95% of US timber, now the remaining 5% is in states like Oregon, Washington and Idaho. Some wood is an order of magnitude more expensive or simply unavailable, with prices held artificially low by importing wood and deforesting Canada, for example.
- Good, fast, cheap (pick any two). We build homes good and fast, but little effort is being made to reduce costs by an order of magnitude by using materials like hempcrete.
- Zoning laws have been changed so that row houses and 3-4 story apartments can be built right up to the road, maximizing profits but externalizing urban decay. High price/low value.
- The US adopted a service economy when it sent 100,000 factories overseas under the GW Bush administration in the 2000s after Clinton signed NAFTA in the 1990s. Now a smaller fraction of the population does the work of building homes, with most everyone else pushing paper, so charges what it wishes.
- People with high carbon footprints had more children. Bigger houses for high consumers left less housing for thriftier people.
- Garages, lawns and commuting wasted immeasurable resources after we could/should have transitioned to sustainable energy and transportation in the 1980s but chose to double down on the nuclear family, trickle-down economics, etc.
- The cost of those unnecessary roads was factored into property taxes, driving home prices higher.
- Nearly unlimited financing was available for home loans, while almost none was devoted to startups and other disruptive industries. We got what we paid for (McMansions instead of, I don't know, 3D printed homes).
- Modern techniques were almost never adopted into building codes. So rather than running wiring conduit through walls or encouraging similar practices to make additions and remodeling easier, we encouraged tearing down and building from scratch, which wasted countless trillions of dollars.
- The tax system doesn't value trees, existing structures, previous money spent on remodels, etc. So developers profit from bulldozing homes and razing lots in a day to build houses in a month. The human and environmental cost of that can never compare to moving homes, remodeling them, etc.
- Our culture and entertainment tell everyone they need granite countertops and $50,000 gas guzzlers. Things are expensive because other people consume more and more and more with insatiable appetites and expectations.
- Wealthy people who could have steered our culture in a positive direction chose to do nothing. Or worse, actively encouraged extractive and vulture economic policies to enrich themselves further.
More people want to live in the city than ever in the history of humankind for various reasons. See gigantic rental price drops in mid-2020 when people briefly thought city-life will never return to normal. Housing prices mostly went up during the year, but they're much stickier than rental and that flight didn't last long enough for people to sell their homes (well, it's much easier to drop your rental for another, than sell and buy somewhere else).
When demand starts slowing down or supply is caught up (it's happening everywhere outside of Tokyo in Japan, and somewhat in HK and other places as well), they stabilize or go down.
New home sales are at a near 30 year low at this very moment, at least in the US. No one is really buying, but prices are still inflated drastically. The people that -are- buying homes, are people that already have them. Houses in rural and suburban areas are also super inflated as well. It's not just a city phenomenon. There is clearly something very broken in the market. It really comes down to NIMBYs, entrenched interests and ZIRPs massive distortion of the market that locked a ton of people into a low rate.
Many current homeowners have their wealth in their home, they want it to (in some cases) to continue to out-perform the S&P 500. Since they live there, they bully the local governments to not allow more building so there is less supply to compete with their asset. State and federal agencies are going to have to step in at some point to incentivize local governments to upzone. Not even mentioning this isn't remotely sustainable as a tax base in most instances, because subdivisions and infrastructure to deal with the sprawl this a bill that will come due in a harsh way making higher property taxes inevitable pricing out many of the people that were in. The #1 reason people are fleeing California and New York is due to costs...and in turn they are about the lose electoral power in Congress and Electoral college.
Yeah I agree with basically every statement. But house prices are extremely sticky with 30 year mortgages. Less stickier in Canada because of 5 year mortgages. There’s actually a big drop in rental prices in my very-in-demand city. SFH still sell like hotcakes though. Since rates might be coming down again, it’s incentivizing people to move and lock in for 5 years.
too many people and not enough land in areas where people don't have to drive 3 hours to work.
Want pricing to go down then we need to build more dense housing even an hour drive from the city. The days of wanting a big backyard are coming to an end for most home owners.
Luckily, density is what makes mass transit viable. It's more cost effective to run a driverless metro every three minutes in an urban core than to run a mostly-empty bus once an hour in a distant suburb.
What if we put the jobs closer to the people instead of making the people get closer to the jobs? Just drop a big ol’ tech park in the middle of Oakland?
Who is the “we” in that sentence? Is there a Central Planning Bureau that forces “jobs” to be placed in certain locations? What jobs would you place near the people, whatever that means?
I was born, raised, lived in dense cities. I've lived in semi-suburban life as well. Unless you're into some hobbies that requires such tools, you just never use it? And when you have to... you just use it? I live in an apartment building in a city, and once a month or so, during daytime, people use tools and it's no biggie.
To each their own though. I definitely grew to understand that if someone was raised in rural or suburban life, it would be extremely hard to adjust to hardcore city life, and vice versa. But I don't think we should be blocking build ups for one, if there's demand.
It's not just "developed" country problem any more. It is also happening in developing countries, like India and Vietnam for example. In India, real estate prices have sky rocketed over the past 30+ years. Part of this is because of the rise of property development firms. Government encouragement too has played a role, I think, because construction (and the construction industry) does create a lot of jobs. Real estate is also a vehicle to hide black money, and that's another factor here in India.
(I wanted to strangle Trump when he once commented that real estate in India and other parts of Asia, are still "undervalued"!)
2. a lot more equipment in it: electricity, plumbing, AC
3. zoning restrictions reducing supply to increase the value of existing houses; owners benefit from that, local government benefits even more from higher property taxes and also from permitting taxes
4. increase of demand due to different factors, like lifestyle changes (back then almost nobody lived on their own in a house, single people were very rare by comparison), unequally distributed immigration and internal migration to some cities)
5. very different and more expensive safety requirements for new houses
6. more expensive workforce building the houses
7. huge reduction in self-building houses and price gouging by the developers
Given that even in the least attractive locations, home prices have grown around 100 per cent, we can probably chalk those 100 per cent up to general improvements of homes (size, appliances etc.) Neither homes, nor cars, nor planes are the same as they were in 1950.
Or a huge warning sign of the wealth disparity between the rich and lower-income group - it's a reality that lower middle-income group today cannot afford to buy homes; they are lucky if they can inherit one.
You could use the Dow though. It varied from 2700 to 2900 in 1950, and is now about 45,000, so about a 16x increase, while inflation over the same period has been about 30x. However the index price doesn't account for dividends, so total return has been much larger.
Depends if it's a liability or not. For many it's like a big savings account. The bigger the better. Inflation protected.
You can't trust the government not keep printing more and more money and diluting your after tax savings. But house prices are linked to physical structure. Government can't just print more houses out of thin air. So they appreciate against inflated paper currency which they do just print out of thin air sometimes.
Also, having owned older built Canadian houses, they're a constant maintenance. Many were not well designed and don't age well (wood construction). So for them to still appreciate tells you how much government has been busy printing. Where does all that money go? I sometimes wonder.
Indebted servitude to banks, a good chunk of a lifetime of work to pay off one of these mortgages.
And waging so government can take most of it in taxes.
I'm not sure if this is sustainable much longer without a revolt in Canada... at least younger Canadians may one day decide it's not a good system and turn the tables.
Average house price in Canada is like 700k now, average wage is like 54k.
Should also also adjust for price/sqft and energy efficiency/insulation savings, lack of plumbing in some and ~15% without electricity. And also externalities of 1950s air conditioning designs that would have depleted the ozone by now if we stayed with them, and things like lead paint causing mental development issues.
Median wages are up since significantly since 1950 (most stagnation was after 1970s), and house building is expected to be heavily affected by purchasing power parity, using a heavy portion of local labor.
Occupational deaths in construction went from 8 per thousand workers in 1950 to below 2 per thousand today, but I couldn't find numbers for residential. In the 1950s, if there was as much highschool attendance as today, out of each medium sized highschool you'd expect a higher than 50% chance of one of your peers to eventually die in a construction accident.
Getting long historical series of economic data is often a challenge due to changes in definitions and sampling methodology over time. FRED has a bewildering array of both income and house price series, all with subtly different definitions, most with pretty short histories.
10x-15x+ price to median income is common in many desirable areas. Completely ridiculous, but also what you might expect after a decade+ of QE, asset inflation, and the last four years of core inflation.
I think about this and wonder if it's supported by data.
I wonder because no one speaks about the poverty created by the last few decades, which might contradict what you wrote, or might not. I also wonder where one could track creation of wealth and creation of poverty.
(living outside income, for example, i think of as creating poverty)
That's because "desirable" areas aren't fixed over these timescales. Today's gated suburbs in the Bay Area were literally dust bowl farms in 1950! Like, literally Steinbeck wrote a famous novel about it.
Steinbeck's books were mostly late-30s, no? Which one are you thinking of? Grapes of Wrath is mostly around Bakersfield, Cannery Row and East of Eden are Monterey/Salinas Valley. I'm not sure of anything set that far north.
I have family photos from back in the 50s showing lots of good orchards in the Bay Area. Certainly no dust bowl stuff. If I remember correctly, my grandparents bought their 5BR tract house in Santa Clara in the mid-1950s for somewhere around $15 or $16k, which was ~40% more expensive than the median California house back then. The Bay Area has always been expensive!!!
This is still a bit spun though. Median income has risen even faster!
Some quick unverified googling says that in 1950 US Median income was $3300, and that inflation since 1950 has been a 10.89x increase. US median income today is $80k.
So indeed, housing has gotten a lot more expensive in real terms. But we've all gotten richer, and on average A US Household is spending less of its income on housing today than in 1950, not more.
California, it's true, is sort of out of control. But that's clearly a local thing in two metro areas, not a problem with the economy as a whole.
The higher house prices get the more desperate people are to use every cent to buy a house. That’s why things like mortgage tax deduction is useless because that money immediately gets factored into increasing the amount of mortgage you can get and spikes the house prices.
It’s fascinating and sad because we are at the stage now where hedge funds are driving up the prices of single family homes so that millennials and gen z become renters for the rest of their lives.
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