Pluralistic: The housing crisis considered as an income crisis (24 Oct 2024)

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Originally published at: Pluralistic: The housing crisis considered as an income crisis (24 Oct 2024) – Pluralistic: Daily links from Cory Doctorow



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The housing crisis considered as an income crisis (permalink)

A paradox: in 1970, everyday Americans found it relatively easy to afford a house, and the average American house cost 5.9x the average American income. In 2024, Americans find it nearly impossible to afford a house, and the average American house costs…5.9x the average American income.

Feels like a puzzler, right? Can it really be true that the average American house is as affordable to the average American earner as it was in 1970? It is true, as you can see from Blair Fix's latest open access research report, "The American Housing Crisis: A Theft, Not a Shortage":

https://economicsfromthetopdown.com/2024/10/23/the-american-housing-crisis-a-theft-not-a-shortage/

Fix also points out that is even more true of rents than it is of house prices. The ratio of rent to average income has actually fallen slightly since 1970. Rents are also, in some mathematical sense, "affordable."

Now, those of you who are well-versed in statistical card-palming will likely have a pretty good idea of the statistical artifact at the root of this paradox: the word "average." If you remember your seventh grade math, you'll recall that "average" has more than one meaning. Sure, there's the most common one: add several values together, then divide the total by the number of values you added. For example, a nonzero number of people have one or zero arms, so the average human has slightly fewer than two arms.

That average is called the "mean." The mean US wage is pretty robust: $73,242/year:

https://fred.stlouisfed.org/series/A792RC0Q052SBEA/1000

But the majority of Americans are not earning anything like $73k/year. Since the Reagan years, the number of Americans living in poverty and extreme poverty has climbed and climbed. And while their declining income sure drags down that average, it's dragged way, way, way up by another group of Americans – the ultra-rich.

You see, as Fix writes, back in the Reagan years, America initiated an experiment in redistribution. Reagan enacted policies that moved most of the nation's wealth from the great majority of working people to a tiny minority of people who ended up owning pretty much everything. Throw their income into the mix, and the average American's income is sufficient to finance the average American home, with plenty to spare.

In other words, this isn't an "average human has fewer than two arms" situation, it's more like a "Spiders Georg" situation. Spiders Georg is a Tumblr meme about a guy who eats 10,000 spiders every day and is thus single-handedly responsible for the (false) statistic that the average human eats two spiders a week:

https://en.wikipedia.org/wiki/Spiders_Georg

The American rich – Reagan's progeny – are the Spiders Georg of house prices. By hoarding the great mass of American national wealth, they create a statistical mirage of affordable housing.

Now, that's interesting, but where Fix goes next with this is even more fascinating. If the average price of housing (relative to average income) has stayed fixed since 1970, then it follows that the price of housing isn't being driven up by a problem with supply. Rather, these numbers suggest that America has enough housing, it's just that (most) Americans don't have enough money.

If that's true – and I have a couple of quibbles, which I'll get to in a sec – then the most common prescription for solving American housing (building more of it) is somewhat beside the point. For Fix, using public funds to subsidize cheaper housing is like using public funds to pay for food stamps for working people whose wages are too low to keep them from starving. Sure, we should do that: no one should be without a home and no one should be hungry. But if working people can't afford shelter and food, then we have a wage problem, not a supply problem.

Fix – as ever – has a well-thought through, painstakingly documented "sources and methods" page to back up his conclusions:

https://economicsfromthetopdown.com/2024/10/23/the-american-housing-crisis-a-theft-not-a-shortage/#sources-and-methods

And while acknowledges that reversing the mass transfer of wealth from working people to their bosses (and their bosses' idle offspring) is a big lift, he rightly wants to keep the question of wages (rather than housing supply) front and center in our debate about why so many of us are finding it hard to keep a a roof over our heads. We need progressive taxation, higher minimum wages, protection from medical and education debt, and hell, why not a job guarantee?

https://pluralistic.net/2020/06/25/canada-reads/#tcherneva

I love Fix's work, and this report is no exception. He does it all in his spare time. Some nice progressive think tank should give him a grant so he can do (a lot) more of it.

That all said, I do have a quibble with his conclusion about the adequacy of the American housing supply. In California, we have a shortage of 3-4 million homes, a number arrived at through the relatively robust method of adding up the number of California families that would like to have their own homes and subtracting the number of homes available near those families:

https://en.wikipedia.org/wiki/California_housing_shortage

How to explain the discrepancy? One possibility is that the price of housing is artificially low, because more than 181,000 people are homeless here. Hundreds of thousands of more people are living in overcrowded housing, with multiple families inhabiting spaces intended for just one (or even a single person). If all of those people were competing for housing, the price might rise even higher.

Think of the people who have given up looking for work – because they're not in the workforce, wages go up. If they were competing in the labor market, wages would fall. Maybe all those people would prefer to have a job, but they're missing from the statistics.

That's one theory. Another is that we're getting tripped up on averages again here. California does have some towns with many vacancies, extra supply that is pushing down prices; it's also got many places with far more people who want to live there than there are homes for. It's possible that there's enough supply on average across the states, but – as we've seen – averages are deceptive.

Ultimately, I think both things can be true: we have a wage problem and we have (many, localized) supply problems. Both of these problems deserve our attention, and neither is acceptable in a civilized society.

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I love your blog and I find this post very interesting, but I would like to add something. I think that in the discussions about the housing shortage, we shouldn’t omit Airbnb. It’s only one of the culprits when it comes to the housing shortage, but an important one. Perhaps in the USA, except for a few cities most popular among the tourists, Airbnb is not a big problem, I’m not sure. But in lots of other places in the world they caused a disaster. I live in Montreal (Quebec) and here it is a true plague. It’s very much because of them that finding an apartment to rent is harder and harder, and the rent prices have climbed to impossible heights over past few years. But it’s not only about rentals. People who want to buy a house or an apartment to live in it, have to compete with speculators (individuals and corporations alike) who buy properties only to put them on Airbnb. This drives property prices up to crazy levels, and it’s getting worse and worse. So one of the things we could do to dramatically improve housing situation, at least in some places in the world, would be to ban Airbnb.

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This seems to be less clear than your usual writing, and I feel compelled to whine about it.

There are two issues on the income side here. The first is that starting around 1980 wages stopped scaling with inflation plus productivity and started scaling with just inflation. The second is that it is possible to abuse measures of central tendency by using mean when median would do a much better job.

In the example you cite mean income is a terrible measure because it considers total income, not how income is distributed. This neatly covers up the fact that all the productivity growth of the last forty years has gone straight to investors. Since distribution is exactly the problem reporting mean income is a wonderful way to sweep it under the carpet. This is distressingly effective because many people don’t understand the difference between mean and median.

One thing that would help would be linking to two pages on FRED. If you scroll down a bit on the mean income page under related data there is a median income page, which gives us $42,220. That gives us a much better idea how much of the problem is income.

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Yeah, I wanted to check that out too. If we look at the median house price and median income datasets, from 1974-01-01 to 2023-01-01 (the complete overlap between the two) we can see that house prices rise from $35,200 to $429,000 (12.2x growth), while income rises from $5,335 to $42,220 (7.91x growth). Another way of putting that is that the median house price has gone from being 6.6x the median wage, to 10.2x.

And, given how much worse the 50th percentiles (median) are from the mean, the difference at the lower bands (e.g. 10th percentile income/house price) will have even greater inequality than this.

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«Reagan enacted policies that moved most of the nation’s wealth from the great majority of working people to a tiny minority of people who ended up owning pretty much everything.»

This is not the first time that Cory Doctorow repeats the standard right wing propaganda that “we are all in the the same boat” except for a tiny minority of people who are doing very well, and it is highly politically misleading.

What has actually happened is that a large, not tiny, minority of people, the middle class, around 20-40% of voters, have made a lot of money from upwards redistribution (housing, DB pensions, union wages) and have been voting steadfastly for more upwards redistribution since Reagan. The middle class are the solid supporters of reaganism either the “woke” Democratic Party variety (Clinton, Obama. Kerry, Gore, Biden, …) or the “trad” Republican Party variety (Bush, McCain, Romney, …) and without changing the allegiance to reaganism of the middle class no political change will happen in the USA etc.

«the mass transfer of wealth from working people to their bosses (and their bosses’ idle offspring) is a big lift»

In small part to their bosses (who become very rich by taking a little from very many), but in most part to their managers, doctors and other professionals, landlords, incumbent owners, …

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There is no housing shortage overall: there is a what is wrongly called a housing shortage only in the few remaining places where there are “good jobs” (or in a very few naturally nice places).

A better description of the situation is that there is an excess of jobs in some places and then rents and prices explode, and there are too few jobs in other places, and then rents and prices collapse.

The case of Montreal probably is that the Quebec government tried to attract “good jobs” in tech to Montreal after the language laws caused many businesses to leave, they succeeded, and now people like you have to compete with tech professionals for the existing housing.

«Airbnb. This drives property prices up to crazy levels»

That would have happened with or without Airbnb, if the demand exists. Consider this obvious case involving one of the few naturally nice places:

“Tucked in the far southwest corner of Colorado is the historic city of Durango. Built in the 19th century at a railroad junction, it’s nestled in a bend of the Animas River as it flows through the magnificent San Juan Mountains. Stunning scenery and copious amenities helped attract 460 new residents to the town of 19,000 during the pandemic. That may not sound like a lot, but it was enough to juice median home prices by 50% in just three years, with them soaring from $500,000 in 2019 to over $750,000 by 2022.”

That is a common reading of the situation but I think that it is elite propaganda: I reckon that the situation is much worse and physical productivity largely stopped growing in the 1980s and the increase in GDP and investor profits since then has been mostly on paper with Federal Reserve and government policy pumping up book (on paper) asset prices and profits, fueled not by rising productivity but a flood of credit.

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