How's this for an idiot economists view of the housing market?
Dean Baker tells us that paying out 34% of your income on housing in 2024 is OK because
--today's house are bigger than before (not in UK), and
--they boast lots of extra goodies like double glazing and central heating (true, but that only accounts for a tiny amount of the huge price rises. I know, I've done the research 1984 J Valuation)
--Most ridiculous argument of all. Food used to be 24% of household spending, now less than 10%. So you've got all this spare cash, which can be diverted into buying your accommodation. Is Baker mad? Why isn't housing going down in cost like everything else? If it was then we could earn as much as we do today and splurge out on luxuries, or BETTER STILL, keep our current lifestyles and get by on lower incomes.
BY DEAN BAKER
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I am not ordinarily a celebrant for the state of the economy, but the
media have been so over the top in pushing the economic doom story during the
Biden presidency, that I feel the need to put some reality into the picture.
One of the central lines among the doomsayers is that we are spending a
larger share of income on housing and that for many it has become altogether
unaffordable. I will agree that housing is a serious problem. In fact, I
recently authored a piece in a new collection on the issue, which I would encourage everyone to read. We need to
build more housing and especially more affordable housing.
But acknowledging that housing is a serious problem is not the same as
saying it is an unprecedented crisis, and many of the things that have been
asserted in the media are simply not true. For example, it is not true that
homeownership is no longer part of the American dream for young people. In
fact, homeownership rates for young people are above their pre-pandemic level.
It’s true that the run-up in mortgage interest rates since the Fed began
hiking in March 2022, coupled with rising house prices, has made the cost of
buying a home prohibitive for many new buyers, but few expect rates to stay
this high for long.
Mortgage rates are highly cyclical, they go up when the Fed raises rates
in an effort to slow the economy. The current rates of near 7.0 percent are
high compared to the 3.0 percent rates we saw during the pandemic, but they are
not high by historic standards. In 1981, they peaked at over 18.0 percent.
I don’t recall reporters at the time writing pieces as though 18.0
percent mortgage rates would persist for the indefinite future. I am not sure
why they feel the need to write that way about the current 7.0 percent rates.
Another aspect of the manufactured housing crisis story is that we are
spending higher shares of our income on housing, with a record number of people spending more
than one-third of their income on housing. This share has been dubbed as a
crisis point by some.
It is certainly true that we are spending a much larger share of our
income on housing than in prior decades, but a big part of that story is that
we are spending a much smaller share on other things. The graph below shows the
share of disposable income going to food, clothes, and household furnishings
since the late 1940s.
Source: National Income and Product Accounts, Table 2.3.5 and author’s
calculations.
As can be seen, there has been a sharp reduction in the shares of all
three. This is especially striking with food. In 1947 we spent 23.0 percent of
our income on store-bought food. This had fallen to just 7.1 percent last year.
The share of income going to buy clothes fell from 10.3 percent to 2.6 percent.
The share for buying household furnishings dropped from 5.5 percent to 2.5
percent.
These declines freed up income to go to other areas, and one area that
extra income went to was housing. The houses we live in today are on average
much larger than the ones we lived in 75 years ago. They are also far more
likely to have air conditioning and relatively clean sources of heat. (Coal
furnaces were still common in the late 1940s.) They are much better protected
against fires and less likely to have harmful chemicals like asbestos and lead.
As a result of reduced spending in other areas, and the higher quality
of the housing we live in today, the share of our income going to housing now
exceeds 34.0 percent, on average. (This figure includes “owner equivalent rent,” the money
that a homeowner would be paying to rent the home they live in.)
Given the 34.0 percent figure is an average, it is hard to see the
one-third level as a crisis. Rather, we probably need to recalculate what share
of income going to housing costs presents an unmanageable burden.
None of this should be taken to mean that we don’t have to do things to
make housing more affordable. We need to ease up restrictions that block both
new construction and the conversion of empty office space to residential. And
we should ensure that a substantial share of these new units are affordable.
We can also take short-term steps to improve affordability, like limiting vacation rentals and
having moderate rent control. A vacant property tax is also a good way to get
more units on the market. It will also be good when Jerome Powell and the Fed
get over their inflation fears and start to ease up on interest rates.
We have a serious shortage of housing in the country due to a sharp
plunge in construction in the decade following the collapse of the housing
bubble. We were gradually getting back to more normal levels of construction
when the pandemic broke out. If we can sustain higher levels of construction
for several years and convert many of the offices that are currently vacant,
due to the explosion in people working from home, we can lower housing costs.
But it is helpful to look at the issue with clear eyes. The biggest
reason housing has grown as a share of our income is that we are spending so
much less on other necessities. That is a good thing.
This first appeared on Dean Baker’s Beat the Press blog.
Dean Baker is the senior economist at
the Center for Economic and Policy Research in Washington, DC.
