4 ms·

What really worries me about the terribly slow income growth is its inevitable effect on the housing market. There is a huge disparity between median income gro

What really worries me about the terribly slow income growth is its inevitable effect on the housing market. There is a huge disparity between median income growth and median house prices. Check out this FRED graph comparing median income growth and new housing price growth: https://research.stlouisfed.org/fred2/graph/?g=1yY7 https://research.stlouisfed.org/fred2/graph/?g=1yY7 We see that median income growth is flat at 1.8% while price growth of new housing has picked up dramatically from 1.3% in 2011 to 9.9% YoY growth in 2013. In nominal terms median income has grown $6,000 over the past decade while the price of a new house has jumped up by approximately $70,000. In real terms (adjusted for inflation) real median income has dropped -$4,000 while new house prices have increased by $2,000. [1] I'll leave the calculation of the 10-year % change of real median values as an exercise for the reader. As a recent grad with a decent job, there is still no way in hell I'm going to be able to afford a mortgage on any decent, middle-class house in a semi-urban area for a very, very long time, unless I want to move to Detroit or a similarly bankrupt/developing part of the US. I'm also speaking from a debt-free perspective: if I had come out of school with $100k+ in student loans, forget about it. The only kind of jobs that are going to pay for good houses in the future are banking/tech/fortune 500, which have median salaries of ~60k right out of school and a well-compensated track to climb. These jobs are becoming increasingly scarce and hard to obtain, especially with competition from out of country talent. I wouldn't be surprised at all to see my generation (I'm 22) having an extremely low & delayed demand for purchasing housing, and to eventually see what is happening in Detroit (houses abandoned, rotting away [2]) happen on a smaller scale across the country where there is too much housing supply for too little demand. And no, prices will not equalize to accommodate lower salaries because real estate always appreciates in the long run...right? The Chinese, Canadians, Mexicans, Indians, and British seem to think so: foreign investments in US real estate totaled $108bn over the past year, or 8% of total existing home-sales dollar volume. Unsurprisingly, they are "spending more money on fewer homes," aka they are driving real estate bubbles in major cities such as NYC and SF. [3] So we'll see a bunch of late 20, early 30 something's living together, splitting the rent in what would have once been a 4-6 person family house in order to make ends meet/be close to work. Maybe they'll even drive for Uber on the weekends. Welcome to the sharing economy. [1] The median sales price of a new house in June 2005 was $226,100, which would be $279,000 in 2015 dollars. As of June 2015 the median sales price is $281,800. I used this inflation calculator because FRED didn't have an inflation-adjusted real median sales price graph: http://www.saving.org/inflation/inflation.php?amount=226,100&year=2005 http://www.saving.org/inflation/inflation.php?amount=226,100... [2] http://www.motherjones.com/photoessays/2010/10/detroit-houses-photos/01af10m6025803tonedjpg http://www.motherjones.com/photoessays/2010/10/detroit-house... [3] http://realtormag.realtor.org/daily-news/2015/06/18/foreign-buyers-spend-more-us-real-estate http://realtormag.realtor.org/daily-news/2015/06/18/foreign-...

crdoconnor 11y ago
The ironic thing is that the insane price of housing was partly a direct policy decision, supposedly intended to make you feel wealthier so that you would spend more and stimulate the economy. The Fed calls it the 'wealth effect'. In private it was known as "foaming the runway" (making sure to spread out the foreclosures post-2008, so as not to bankrupt any major banks). To this day they're still scratching their head about why QE might be causing people to spend less on consumables (saving for an apartment, perhaps? paying rent?).
ChuckMcM 11y ago
On the one hand there isn't any arguing with the numbers, but the if the foreclosure crisis has shown us anything, it is that house prices don't "only" go up. When there is no one to buy them, or people who are living in them can't afford them any more, the price goes down. Sometimes significantly. So it is impossible for house prices to rise so high that "nobody" can afford them, although the job categories that can afford them might change. The question I ask is, what is the next transition? Do programmers buy all the future houses?
- CamperBob2 11y ago
  So it is impossible for house prices to rise so high that "nobody" can afford them, although the job categories that can afford them might change. 500 million not-so-Red Chinese looking for a place to park their new money beg to differ...
  - scarmig 11y ago
    Unfair--there aren't nearly that many princelings. It's more like 5 million of China's elite are engaged in a mass theft from 1 billion other Chinese, and after expropriating as much wealth as possible and destroying as much of the environment as possible they want a nice hideout so that when the revolution comes they're not the first up against the wall.
- roymurdock 11y ago
  Hey ChuckMcM. Good to see you around HN again. Check this out: https://www.cbo.gov/sites/default/files/cbofiles/attachments/49440-Distribution-of-Income-and-Taxes.pdf https://www.cbo.gov/sites/default/files/cbofiles/attachments... Specifically p.18 Figure 8. Figure 8 shows that since 1980, real income has grown 174% for the top 1 percentile of earners, 56% for the 81st-99th percentile, and 16% for anyone earning below the 81st percentile. Also note that these are 2011 numbers, and that inequality has gotten worse in the past 4 years. This is probably the most succinct and alarming graph that shows the degree to which inequality is growing and wealth is being transferred to the top 10% of earners in the US. Historically, a strong middle class has driven housing which in turn powers consumption, the engine that powers America's economy. [1] Housing construction was heavily subsidized on both the supply (construction) and demand (purchasing) front by the government after WWII - in 1940 only 44% of Americans owned a home whereas in 1960 62% could make this claim. Along with this spike in ownership came increased consumption of all goods that owning a new home implies - a car, a dishwasher, utilities, spending on children, etc. Owning a home also reflects well on an family's balance sheet: After paying off the mortgage in 10, 20, 30 years, the property is usually a middle class family's most valuable asset by far. With the decline of the middle class, less and less working class people will be able to afford to own a home. Instead, they will be forced to rent. [2] The rich will invest in real estate as they have since the beginning of time, and will seek rent as a generally reliable form of earning a return on their capital. With employment numbers improving, but income staying relatively the same, we can foresee a picture of more people working just to pay the rent, and not having enough left over to afford a mortgage, kids, etc. So to answer your question: the people with money will own the property, and the people without money will work to afford rent. Unless the government take serious steps towards reversing the rapid accretion of wealth to the upper quintile of earners, the future of housing for my generation looks very bleak in my opinion. [1] http://jcr.oxfordjournals.org/content/jcr/31/1/236.full.pdf http://jcr.oxfordjournals.org/content/jcr/31/1/236.full.pdf [2] http://www.census.gov/housing/hvs/files/currenthvspress.pdf http://www.census.gov/housing/hvs/files/currenthvspress.pdf

crdoconnor 11y ago

The ironic thing is that the insane price of housing was partly a direct policy decision, supposedly intended to make you feel wealthier so that you would spend more and stimulate the economy. The Fed calls it the 'wealth effect'. In private it was known as "foaming the runway" (making sure to spread out the foreclosures post-2008, so as not to bankrupt any major banks). To this day they're still scratching their head about why QE might be causing people to spend less on consumables (saving for an apartment, perhaps? paying rent?).

ChuckMcM 11y ago

On the one hand there isn't any arguing with the numbers, but the if the foreclosure crisis has shown us anything, it is that house prices don't "only" go up. When there is no one to buy them, or people who are living in them can't afford them any more, the price goes down. Sometimes significantly. So it is impossible for house prices to rise so high that "nobody" can afford them, although the job categories that can afford them might change. The question I ask is, what is the next transition? Do programmers buy all the future houses?

CamperBob2 11y ago
So it is impossible for house prices to rise so high that "nobody" can afford them, although the job categories that can afford them might change. 500 million not-so-Red Chinese looking for a place to park their new money beg to differ...
- scarmig 11y ago
  Unfair--there aren't nearly that many princelings. It's more like 5 million of China's elite are engaged in a mass theft from 1 billion other Chinese, and after expropriating as much wealth as possible and destroying as much of the environment as possible they want a nice hideout so that when the revolution comes they're not the first up against the wall.
roymurdock 11y ago
Hey ChuckMcM. Good to see you around HN again. Check this out: https://www.cbo.gov/sites/default/files/cbofiles/attachments/49440-Distribution-of-Income-and-Taxes.pdf https://www.cbo.gov/sites/default/files/cbofiles/attachments... Specifically p.18 Figure 8. Figure 8 shows that since 1980, real income has grown 174% for the top 1 percentile of earners, 56% for the 81st-99th percentile, and 16% for anyone earning below the 81st percentile. Also note that these are 2011 numbers, and that inequality has gotten worse in the past 4 years. This is probably the most succinct and alarming graph that shows the degree to which inequality is growing and wealth is being transferred to the top 10% of earners in the US. Historically, a strong middle class has driven housing which in turn powers consumption, the engine that powers America's economy. [1] Housing construction was heavily subsidized on both the supply (construction) and demand (purchasing) front by the government after WWII - in 1940 only 44% of Americans owned a home whereas in 1960 62% could make this claim. Along with this spike in ownership came increased consumption of all goods that owning a new home implies - a car, a dishwasher, utilities, spending on children, etc. Owning a home also reflects well on an family's balance sheet: After paying off the mortgage in 10, 20, 30 years, the property is usually a middle class family's most valuable asset by far. With the decline of the middle class, less and less working class people will be able to afford to own a home. Instead, they will be forced to rent. [2] The rich will invest in real estate as they have since the beginning of time, and will seek rent as a generally reliable form of earning a return on their capital. With employment numbers improving, but income staying relatively the same, we can foresee a picture of more people working just to pay the rent, and not having enough left over to afford a mortgage, kids, etc. So to answer your question: the people with money will own the property, and the people without money will work to afford rent. Unless the government take serious steps towards reversing the rapid accretion of wealth to the upper quintile of earners, the future of housing for my generation looks very bleak in my opinion. [1] http://jcr.oxfordjournals.org/content/jcr/31/1/236.full.pdf http://jcr.oxfordjournals.org/content/jcr/31/1/236.full.pdf [2] http://www.census.gov/housing/hvs/files/currenthvspress.pdf http://www.census.gov/housing/hvs/files/currenthvspress.pdf