Rising Housing Costs Punish American Families

by | Feb 21, 2024 | Biden Administration, Blog Articles, Economy, Finance, Inflation, Monetary System, Politics, USA

Home ownership has been a foundation of the American dream for generations. Home ownership has been an attainable aspiration that has enabled capital accumulation and wealth preservation. It has traditionally facilitated both a comfortable retirement for homeowners and the ability to provide education and other goods for their children and grandchildren and to pass on wealth to future generations. Indeed, with most of their wealth found in the equity of their homes, no other sector of the economy impacts the working and middle classes as much as does housing.

However, in recent years, the dream of home ownership is becoming increasingly out of reach for more and more American workers and families.

According to data from the Federal Reserve, the median sales price of a home has risen by 52.7 percent since 2013, or 4.3 percent per year. This is nearly double the median nominal wage growth over the same period. Homes are less affordable now relative to income than they have ever been.

The interest cost of a typical mortgage has more than doubled in recent years, from below three percent in 2021 to around seven percent today. With the median price of a home now nearing $420,000, this increase represents an additional $15,000 in annual costs, or an additional 20 percent of the median household income ($75,000) in the U.S. This is not tenable in an environment in which all other costs, including energy, food, transportation, health care, and education, are also rising relentlessly.

With inflation running hot for three years now, inflationary “base effects” mean that all these categories of costs have risen in total at double digits rates since 2020. Despite the efforts of the Federal Reserve, the cheerleading of Wall Street, and the assurances of mainstream media, inflation has not been transitory, but persistent and stubbornly high. Inflation is not going away anytime soon. Headline CPI grew at 3.1 percent in January 2024 compared with a year ago. This figure substantially underrepresents the rising costs of housing. With a six percent annual increase in January, the Shelter CPI sub-category grew at nearly double the headline number. Looking back from the eve of lockdowns in January 2020, the costs of shelter (rent or owners’ equivalent rent) have risen by over 21 percent. This doesn’t include the double digit increases in costs of items such as homeowner’s insurance or at-home repairs. And it certainly doesn’t include energy used at home, where the cost of fuel oil and utility gas are up over 80 percent and 30 percent, respectively, since 2020.

Wall Street is crowding out Main Street

One of the most important factors contributing to rapidly rising home prices over the past decade has been the entry of institutional buyers into the market for single-family homes. With tens of billions of dollars of capital and ready access to more favorable financing terms than are available to individual homebuyers, private equity firms, pension and insurance companies, and hedge funds have been able to pay more for housing stock, resulting in higher prices overall and fewer options for homebuyers. Since the global financial crisis of 2008-09 (GFC), Wall Street has bought hundreds of thousands of homes in the United States. Institutional ownership has grown from an insignificant portion of the market to nearly 20 percent in recent years. According to some estimates, institutional buyers may own 40 percent of single-family homes by the end of the decade.

It was the easy money policies of the Federal Reserve that created this environment. Trying to shore up the severely damaged housing market after the GFC, the unintended consequence of excess liquidity has been to reinflate a housing bubble. Irresponsible monetary policy has made housing less affordable for ordinary Americans and lined the pockets of the same Wall Street firms who were rescued from bankruptcy by the U.S. government (using taxpayer money, eventually paid back) in the middle of the GFC. The ultimate result is nothing less than the immiseration of American working and middle classes who are increasingly forced to rent their homes from these enriched corporate and institutional owners. Without affordable access to the housing stock that has traditionally been American households’ primary path to capital accumulation, younger generations are saving less and risking greater future financial vulnerability.

I have argued recently that we are in the middle of a speculative bubble. This includes in the housing markets. When the bubble pops, as all eventually do, the housing markets will burst with it. This will again punish the working and middle classes, at least those of which have—despite all of the challenges I’ve outlined above—managed in recent years to acquire a home. The one silver lining is that a downturn in the housing markets might afford younger millennials and Gen Zers opportunity to enter the market as first time buyers. That is, unless Wall Street continues to compete against them.

Read this article on The Epoch Times

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