Who Can Afford to Live in America?

by | May 20, 2024 | Biden Administration, Blog Articles, Economy, Finance, Inflation, Politics, USA

Apparently, most Americans cannot. With the easy money fueled asset bubble of the past two decades, home ownership, and the cost of shelter in general, has been one of the sectors most impacted by inflation and rising prices. What happens to a society in which its citizens cannot afford to live comfortably? History has the answer, and it is an unpleasant one.

Just how bad is it? According to the Atlanta Federal Reserve’s Home Ownership Affordability Monitor, since the second quarter of 2021, when inflation first started to appear in consumer prices, the median household income has been insufficient to cover the annual costs of owning a median-priced home. Today, a median priced house would cost 40 percent of median income, compared with the 30 percent (or less) the index deems sufficient to be affordable. The index is now at the lowest affordability level since the real estate bubble that peaked in 2007, which bursting triggered the global financial crisis (GFC).

It would be easy to blame the rapid recent rise in mortgage rates for the decline in affordability, but that isn’t the primary culprit. With mortgage rates now in the six to seven percent range, the costs of mortgages are not high by historical standards. Homes were more affordable during periods of even higher interest rates. The underlying issue isn’t the interest rate, or even insurance costs—which are also rising at double digit rates—, it is the cost of the home itself.

Since 1995, when the easy money era began under Federal Reserve Chairman Alan Greenspan, the Consumer Price Index’s measure of average shelter costs in U.S. cities is up 140 percent. By the same measure, shelter costs have risen 22.4 percent since 2020 alone. Looking at house purchase prices, the S&P CoreLogic Case-Shiller U.S. National Home Price Index shows that prices have more than tripled since 2000. Household incomes have not kept up across any of these timeframes.

Nearly three decades of artificially low interest rates led to the ongoing bubble in real estate prices. While price increases took a breather in the wake of the GFC, they have since been growing above income for a decade, and at an accelerating pace since the outpouring of stimulus funds during 2020 and 2021. The continued rise in prices since 2020 is squeezing more and more Americans out of the housing market.

A recent study using data derived from the MIT Living Wage Calculator shows that for an American family of four to “live comfortably,” they would need income of over $300,000 in some of the more expensive states in the Northeast and West Coast regions. Even in the less expensive states in the South and Midwest, that same family would need around $200,000 in income.  With U.S. real household income of less than $75,000 and declining, fewer and fewer ordinary Americans can pursue the traditional American Dream of home ownership. This is a tragedy. And it is deeply un-American, in conflict with the very values and ideals that made this country great in the first place.

We are creating a dual-tiered society between homeowners and the increasingly vast majority of Americans who cannot afford one. At the same time, we have watched as private equity and other institutional buyers entered the single family home market for the first time in history. These firms now constitute almost 20 percent of the housing market. They were able to accomplish this because, at least until recently, they were able to borrow at low single-digit interest rates, often well below what any individual could obtain in the mortgage market. As a result, these firms have squeezed out first time and other individual buyers, and raised housing costs for everyone.

America succeeded so well as a nation in the twentieth century because of its large and flourishing middle class. The backbone of the middle class was home ownership, made affordable by decent paying manufacturing jobs, and a monetary and fiscal policy regime that—for the most part most of the time—managed to balance the interests of labor and capital. All of this has been lost.

Home prices will not come down on their own without a crash and a recession. That would be bad for everyone, including those struggling to afford a home. If one has no job it doesn’t matter that home prices are suddenly one-third less. What is required is that real incomes start growing again. That will only happen with a resuscitation of our manufacturing base, including the American energy complex which has been hobbled under the Biden administration, and a restored trade balance with appropriate tariffs that makes our goods competitive again. And of course, a sane immigration policy and practice that doesn’t overwhelm the nation’s resources and squeeze out jobs from U.S. citizens on the lower end of the employment market.

The alternative is the continued immiseration of the American working and middle classes. If history is any guide, and one needs to look no further than the French Revolution, this would be a terrible outcome.

Read this article on The Epoch Times

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