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> The median house costs 2.4 times what it did in the mid-’90s. Health-care expenses for one person are three times what they were 25 years ago. What is the ma

by jl6 6y ago

> The median house costs 2.4 times what it did in the mid-’90s. Health-care expenses for one person are three times what they were 25 years ago. What is the macro explanation for this? Is health and housing in any way 2-3x better now than it was then?

Veen 6y ago
Inflation. The average wage is also a little over twice what it was in the mid-90s. https://en.wikipedia.org/wiki/Average_Indexed_Monthly_Earnings https://en.wikipedia.org/wiki/Average_Indexed_Monthly_Earnin...
- Miner49er 6y ago
  I believe the article is using inflation adjusted vaules.
  - skeeter2020 6y ago
    Why do you believe that?
    - Miner49er 6y ago
      Well I'm wrong. It's not for the housing prices, but it's still comparing to an inflation adjusted salary. The point is that if you make the same as Homer did (inflation adjusted) you have far spending power than he did.
- darksaints 6y ago
  Those things have significantly outpaced inflation, and inflation is an entirely fallible metric in and of itself: you can literally game it in one extreme or another based entirely on the things that you choose to index, how you account for them changing over time, and how heavily you weight things within the index. Furthermore, with things like housing, we get major distortions of real world meaning that are completely obscured by macro trends. For example, the average housing price across the country has outpaced inflation metrics by a little, but if you narrow it to places of economic opportunity, it has drastically outpaced inflation. Any new growth in economic opportunity has been accompanied by even more severe growth in housing costs. The end result is that average housing prices appear flat-ish relative to income, but it has stayed that way due to massive emigration of economically disadvantaged people away from areas of economic opportunity. What has really happened is that America fell in love with dysfunctional markets. Free market prices, but with significant regulatory capture. We've got cartels on housing via hyper-localized land use regulation that decreases the relative supply of housing.
skeeter2020 6y ago
This seems roughly inline with inflation, which is about 2x over 1995-2020. Health and eduaction outpace this likely because of the extra focus on their importance. Meanwhile a lot of things have gotten significantly cheaper on a relative basis and the markets have done closer to between 5x and 7x returns. Talking about this in absolute terms is pointless and I believe the author knows it, but it doesn't help his narative.
nradov 6y ago
The US population has increased 24% in the past 25 years but the country hasn't gotten any larger. More homes have been built on existing land, but we still essentially have a larger number of people competing for a fixed supply of land. The median house price doesn't appear to have been adjusted for inflation or median income. So the factor of 2.4 times isn't quite as high as it might first appear. The size of a median single family house has also grown. Most people prefer to have more space, and are willing to pay more to get more. https://www.statista.com/statistics/456925/median-size-of-single-family-home-usa/ https://www.statista.com/statistics/456925/median-size-of-si... Health care expenses have increased for a variety of reasons. Baumol's cost disease is one factor: most healthcare work can't be automated (yet) and we have to pay the providers more every year. Americans on average are getting older, sicker, and fatter. New treatments have been developed which can extend the lives of some of the sickest patients but at an extremely high cost. In the past 25 years we've improved the 5-year cancer survival rate by around 8% but spent a fortune to accomplish it.
Exmoor 6y ago
With regards to housing prices, I would argue that the decrease in interest rates over time. Mortgage rates were apparently about 10% in 1990[0], so borrowing $100,000 for a home would cost you about $877/mo for a 30 year loan, which equates to $1,746 in 2020 dollars according to an inflation calculator [1]. Assuming interest rates around 3% currently, you could borrow $420,000 but still have roughly the same monthly payment in 2020 dollars. So, for the sake of argument, if an average workers salary had stayed exactly in-line with inflation, house prices could've gone up 4.2x and they would have spent about the same amount of their monthly expenses on the loan per month. Lots of caveats that make this not as true in practice though (taxes, ability to refinance in the future at a lower interest rate, etc.). [0] https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate-chart https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate... [1] https://www.usinflationcalculator.com/ https://www.usinflationcalculator.com/
- AnimalMuppet 6y ago
  Exactly. Since most people buy houses with mortgages, the demand curve for houses is not set by the price, but by the monthly payment.
ianhorn 6y ago
tl;dr Cheaper credit and inflation. The monthly payments today are actually 40% lower on an inflation adjusted basis. Only the down payment is more expensive, by 30% after inflation. I’m going to go with 1990 for a specific date. According to their source, house prices have gone up 2.6x since then. In 1990 the prevailing mortgage interest rate was a little over 10%. Today its about 3%. For a house that costs the exact same amount, the payments today are 2.1x less. Conversely, the same payments today let you afford a house that costs 2.1x more. Additionally, as far as I can tell, that figure isn’t adjusted for inflation, which is 1.99x since 1990. Combining inflation and more affordable payments, an equally affordable house would today cost 4.2x what it did in 1990. Seeing “only” a 2.6x increase, the inflation adjusted monthly mortgage payments are almost 40% lower today. For the down payment, however, the easy credit doesn’t help you, only the inflation, so a median inflation adjusted down payment is still 30% more expensive today. That’s my best guess for macro explanation. Cheaper credit and inflation.

by jl6 6y ago

Veen 6y ago

Inflation. The average wage is also a little over twice what it was in the mid-90s. https://en.wikipedia.org/wiki/Average_Indexed_Monthly_Earnings https://en.wikipedia.org/wiki/Average_Indexed_Monthly_Earnin...

Miner49er 6y ago
I believe the article is using inflation adjusted vaules.
- skeeter2020 6y ago
  Why do you believe that?
  - Miner49er 6y ago
    Well I'm wrong. It's not for the housing prices, but it's still comparing to an inflation adjusted salary. The point is that if you make the same as Homer did (inflation adjusted) you have far spending power than he did.
darksaints 6y ago
Those things have significantly outpaced inflation, and inflation is an entirely fallible metric in and of itself: you can literally game it in one extreme or another based entirely on the things that you choose to index, how you account for them changing over time, and how heavily you weight things within the index. Furthermore, with things like housing, we get major distortions of real world meaning that are completely obscured by macro trends. For example, the average housing price across the country has outpaced inflation metrics by a little, but if you narrow it to places of economic opportunity, it has drastically outpaced inflation. Any new growth in economic opportunity has been accompanied by even more severe growth in housing costs. The end result is that average housing prices appear flat-ish relative to income, but it has stayed that way due to massive emigration of economically disadvantaged people away from areas of economic opportunity. What has really happened is that America fell in love with dysfunctional markets. Free market prices, but with significant regulatory capture. We've got cartels on housing via hyper-localized land use regulation that decreases the relative supply of housing.

skeeter2020 6y ago

This seems roughly inline with inflation, which is about 2x over 1995-2020. Health and eduaction outpace this likely because of the extra focus on their importance. Meanwhile a lot of things have gotten significantly cheaper on a relative basis and the markets have done closer to between 5x and 7x returns. Talking about this in absolute terms is pointless and I believe the author knows it, but it doesn't help his narative.

nradov 6y ago

The US population has increased 24% in the past 25 years but the country hasn't gotten any larger. More homes have been built on existing land, but we still essentially have a larger number of people competing for a fixed supply of land. The median house price doesn't appear to have been adjusted for inflation or median income. So the factor of 2.4 times isn't quite as high as it might first appear. The size of a median single family house has also grown. Most people prefer to have more space, and are willing to pay more to get more. https://www.statista.com/statistics/456925/median-size-of-single-family-home-usa/ https://www.statista.com/statistics/456925/median-size-of-si... Health care expenses have increased for a variety of reasons. Baumol's cost disease is one factor: most healthcare work can't be automated (yet) and we have to pay the providers more every year. Americans on average are getting older, sicker, and fatter. New treatments have been developed which can extend the lives of some of the sickest patients but at an extremely high cost. In the past 25 years we've improved the 5-year cancer survival rate by around 8% but spent a fortune to accomplish it.

Exmoor 6y ago

With regards to housing prices, I would argue that the decrease in interest rates over time. Mortgage rates were apparently about 10% in 1990[0], so borrowing $100,000 for a home would cost you about $877/mo for a 30 year loan, which equates to $1,746 in 2020 dollars according to an inflation calculator [1]. Assuming interest rates around 3% currently, you could borrow $420,000 but still have roughly the same monthly payment in 2020 dollars. So, for the sake of argument, if an average workers salary had stayed exactly in-line with inflation, house prices could've gone up 4.2x and they would have spent about the same amount of their monthly expenses on the loan per month. Lots of caveats that make this not as true in practice though (taxes, ability to refinance in the future at a lower interest rate, etc.). [0] https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate-chart https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate... [1] https://www.usinflationcalculator.com/ https://www.usinflationcalculator.com/

AnimalMuppet 6y ago
Exactly. Since most people buy houses with mortgages, the demand curve for houses is not set by the price, but by the monthly payment.

ianhorn 6y ago

tl;dr Cheaper credit and inflation. The monthly payments today are actually 40% lower on an inflation adjusted basis. Only the down payment is more expensive, by 30% after inflation. I’m going to go with 1990 for a specific date. According to their source, house prices have gone up 2.6x since then. In 1990 the prevailing mortgage interest rate was a little over 10%. Today its about 3%. For a house that costs the exact same amount, the payments today are 2.1x less. Conversely, the same payments today let you afford a house that costs 2.1x more. Additionally, as far as I can tell, that figure isn’t adjusted for inflation, which is 1.99x since 1990. Combining inflation and more affordable payments, an equally affordable house would today cost 4.2x what it did in 1990. Seeing “only” a 2.6x increase, the inflation adjusted monthly mortgage payments are almost 40% lower today. For the down payment, however, the easy credit doesn’t help you, only the inflation, so a median inflation adjusted down payment is still 30% more expensive today. That’s my best guess for macro explanation. Cheaper credit and inflation.