While inflation has declined, Americans remain unrelieved from any reported declines in costs. Why? The answer is housing.
Housing is a primary cost and one we consumers cannot readily bargain our way through. If the price of chicken or eggs rises, I can try to find a substitute. I can also choose not to go out to eat at a restaurant. (However, it is obvious some restaurants have taken advantage of inflation to profiteer and raise prices higher than they need to be, while ostensibly making inflation or the government the bad guy.) Still, I can stay home and eat. I don’t have to pay $20 for a glass of wine. Of course, wealthy persons are not impacted by this.
When it comes to housing costs and rent, moving is not an easy decision. Besides the costs of moving, seeking a lower price often requires drastically downsizing or settling for a less desirable location. Unlike visiting a grocery store, where I can select from a variety of items and take advantage of sales to balance out higher prices on preferred products, moving does not offer such flexibility. I am left with no desirable options.
Where would I even move given the historic lack of housing supply? Few homeowners are selling since, according to Redfin, 91.8% of U.S. mortgaged homeowners enjoy a rate below 6%, with 82.4% benefiting from rates below 5%. This is certainly cause for increased frustration and anger.
Just consider your own experience over the years. Do you know anyone who ever had their rent lowered? It used to be in a loan mortgage application that your housing costs should not total more than 35% of your gross income. Keep in mind this 35% total is supposed to be inclusive of property tax and home insurance. This also does not consider your other debts, such as car loans or credit cards—”a debt to ratio” of your gross income. No wonder young adults live with their parents at increasing rates.
Economists seem aware of these loan requirements and the economic strain for young adults, but only give lip service to the dilemma. Parents are fully aware of the economic dynamics because they deal with the impact of their young adults who still live with them. Maybe this is like having an academic economic theory that does not match the reality of those who have to go out in the world and face reality. In the larger picture, economists seem in denial about the magnitude of the impact of housing costs on inflation.
So, let’s take economic data then. From June 2022 to March 2023, annual CPI inflation in the U.S. decreased from 9.1 percent to 5.0 percent. In June 2022, housing costs were one fifth of that amount and contributed 1.7 points. By March 2023, that contribution rose to 2.6%. This is slightly more than half of the 5.0 percent annual CPI inflation.
Now economists will wax and wane and tell you about the complexities—geography/location, the pandemic, decline in supply—all true but still missing the human impact that demands action and makes us very surly. That is, after you pay your housing costs, you have little left for anything else. Thus, an increase in gas, eggs, and chicken really hurts and makes you angry when you leave the grocery store.
The government should try to do something about housing costs if they want to help people and reduce street-level anger. The experts, politicians, and the economists don’t really get it. To paraphrase 1992 Clinton Presidential campaign strategist James Carville’s provocative slogan against incumbent George H.W. Bush: “It’s the housing costs, [silly].”
Written by Dr. Jay Slosar
Good article. I have been in the housing finance industry for 50 years and have never seen anything quite like today's housing market. Mortgage rates have returned close to a median range and yet home sales are at lowest levels since 1995. Who's going to sell when the vast majority of homeowners have rates below 5%. I can't imagine a scenario where rates will fall below 5%. So it is going to take "life events" to cause existing home inventories to rise. What a time to be a builder.
The cost of housing will be the major financial issue for Gen Z and beyond. It wasn't that long ago - 2002 - when my wife and I started off our married lives. We were both elementary school teachers and found a starter home for $89,000! Granted, this was a smaller, two-bedroom house but was perfect for us. Where can someone find a house for that price right now? I am the father to a college sophomore and a high school junior and have come to realize that both of my girls will more likely than not live with us while starting their careers. I think this is something that parents should start planning for.
The link to the full article is in the description.
People are struggling all over the country due to inflation and increased costs on everything besides rent or mortgage rates. Default rates are increasing on credit cards, auto debt, and all types of mortgage debt (both residential and commercial). We just highlighted the top 25 most financially distressed cities across the country that you might want to take a look at because many of our top cities were on the list and that came as a surprise to me. Check it out at https://youtube.com/live/nOyyrA21448
I think housing cots is an extremely important issue, but not the central issue of the presidential election. For the Left it will be the ability to continue to take the ives of the unborn in the wake of the SCOTUS ruling on Roe v Wade. For Conservatives it will be the border. Just my opinion.
This is a great article Dr. Jay Slosar, thank you. There are a number of factors affecting affordability. While buyers are not able to control the market and many of the costs, they can educate themselves on the market and the options they have available to them currently. Purchasing your first home and potentially your second and third may have to be move up properties over time to get to the property they really want. Many of the costs of owning are increasing rapidly. Insurance, energy, water even sewer costs are out pacing inflation in many areas. Now is the time for homebuyers to educate themselves on the total cost of homeownership so they are not caught off guard. Budgeting is more important today than it has ever been. The government should move to lower energy costs as quickly as possible in order to stem the rising tide that is the root cause of inflation. Government intervention in the housing market is not always the solution. Government spending needs to be reined in to lower inflationary pressures as well.
Great point doc. The growth in housing costs continue to prevent well meaning people in getting a home, having warm water, and a good nights rest. We must do better as a society.
Foreign investors have artificially raised the cost of housing by over paying for homes , renting those homes out at a high price making it nearly impossible to become a home owner. The USA may want to consider eliminating foreign real estate investors and make home ownership a reality again. The alternative could be making Americans succumb to inflation, foreign control and release of freedom. It’s very real to me and my community. Our neighborhood is owned by more investor’s than families.
Large corporations have bought up too many single family residences, forcing up the price to benefit investors. Perhaps protecting such properties from this kind of investing would be helpful. As for restaurants, the “Mom and Pop” model is hard pressed to support a working family anymore. The cost of employment (beyond the set minimum wage) is tough to navigate, especially if the space is leased, rather than owned. This is a complex problem, requiring cooperation at many levels, to solve it.
As a business loan broker, this normally is not my area-residental housing but Dr. Jay asked me to comment. So this is my take on inflation and real estate investment. Inflation can have both positive and negative effects on real estate investments from a loan broker's perspective. On the positive side, real estate is often seen as a hedge against inflation, as property values and rents tend to increase with rising prices. This can potentially lead to higher returns for investors. However, inflation can also lead to higher borrowing costs, which may impact the affordability of taking out loans for real estate investments. Additionally, inflation could erode the purchasing power of rental income, potentially affecting the profitability of real estate investments. As a loan broker, it's important to consider the complex interplay between inflation, interest rates, and real estate values when advising clients on investment decisions.
This post is spot on and we are seeing the effects of the housing crunch here in Jacksonville, Florida, where rent prices have increased 46% over the last 5 years and a large proportion of homes are investor owned. Jax was a very affordable city compared to the usual metro areas people fled during the pandemic. But in the span of only a few years, soaring home/rental prices, high interest rates, low housing stock, and investor-owned properties have squeezed the market considerably.
I'v been a homeowner for 24 years. I think of moving but my mortgage is less than most people's rents here for the same size house. Rents are out of control. So many houses and apartment buildings r owned by large corporations with no relationship to communities or people. With a holistic approach we could have affordable housing. It's in the interests and adds value to the community. Homelessness in my city is beyond belief. Many homeless people work, but still have to live in cars, vans etc. A high rate of mental health issues and addiction contribute to thousands of people living on the street, and high crime rate. Businesses close, people move and their houses are vacant, & in disrepair which invites, squatting, rats, etc. Build more housing, and less bombs, and weapons. Build more housing for everyone and housing with services for people with mental illness, more recovery homes for people with addictions. More government subsidized. housing for seniors and low income (the waiting lists here take years). How many houses, treatment centers, etc. can be built for the price of one bomb. We need more programs for lower income and seniors to make repairs on their homes which would keep people housed.
Love this article. Housing is such a significant need and such an integral part of living in a safe and secure environment that it will become a more significant conversation in the years ahead. I have not seen a tremendous amount of success with government attempting to solve this problem, however I believe with advent of alternative technologies and solutions, this is a solvable problem. Any thoughts Alexander Cartwright?
I have stage five renal failure. I am on dialysis, and am not able to work (ghostwriter) like I once could because of dialysis 20 hours a week (treatment and travel). Once I'm home, fatigue takes over and I can't work, or can only work limited hours. Health issues can impact anyone, but the worst part is, they impact our ability to pay rent. I'm facing eviction soon if I don't make up my rent ($2,500), from where I got behind because of hospitalization in January 2024. It's a race to stay ahead. Housing costs and help for the homeless, needy, elderly, and those impacted by severe health concerns still rise. The reason no one is talking about housing costs is no one wants to upset the landlords who are raking rents in hand over fists. Greed is our new national God. The government isn't going to step in with rent controls, or even tax advantages to landlords who lower rents because it's not sustainable. Low-income housing attracts the dregs of society (drug dealers, addicts, domestic violence, criminals) because a majority of those who live in low-income housing tend to be those who can't maintain high-paying jobs because of a lack of education, effort, culture, thug life, whatever. It's a clusterfuck on every level of government.
The reason any country builds bombs and goes to war is not ideological, but economic. Wars make money for the corporations who support them. If the "elite" had their way, wars would be never-ending. The only problem is they run out of people to train and kill who actually go to war. We could END homelessness and addiction if we threw the same money at housing, health, addiction, and mental health that we've thrown at Ukraine.
I went to a conference last year in Nashville, and the economist put it out very much as you said in this essay about how Gen Z‘s are staying home longer because of the increasing prices across the diaspora to live. As they are upcoming consumers, they are more socially aware and continue to push back on our narratives that doesn’t push the strategic plan forward as a whole. Unpopular opinion, they truly do care about quality of life and obtaining every goal that their parents sold them. Family, 2.5 kids and a house.
The cost of housing is indeed a major issue in the U.S. it is one of the major factors that contributes to generational poverty and widens the gap between the wealthy and everybody else. I’m glad we’re talking about it being an election issue for whoever is voted into office gets to decide how everybody lives, for richer or for poorer.
This is a dynamic and complicated problem, and not one with an easy solution that will satisfy tenants or landlords equitably. Government intervention will solve the high housing costs without creating other issues. Several cities in the US have agencies that regulate the cost of housing. NYC has the Rent Stabilization Association, commonly called the RSA. The RSA limits the amount of rent a landlord can charge for an apartment. Government-controlled rent rates sound like a good deal for tenants, and in many cases they are. But in NYC not all units are subject to RSA for a myriad of reasons and complicated factors. This means that non-RSA units can be rented at fair market rates. Regarding single-family homeownership, the pendulum of cost has swung from historically low rates to generationally high rates in a short amount of time. First-time buyers will struggle if they seek space, reasonable commute times, and quality public education. Existing homeowners are also challenged as there is little to no incentive to upgrade to a larger home. Unemployed professionals are also at a challenging crossroads if a new job requires relocation. There are solutions, but none are easy. Will the market self-adjust?