Housing is certainly more expensive than in the past. I have written about this several times, including a post from last year showing that between about 2017 and 2022 housing started to get really expensive almost everywhere in the US, not just on the West Coast and Northeast (as had previously been the case). I don’t think the housing affordability crisis is in serious doubt anymore, and it can’t be explained over the past few years by increasing size and amenities, since those haven’t changed much since 2017 (though it is relevant when comparing housing prices to the 1970s).
But why did this happen? Knowing why is crucial, not merely to blame the causes, but because the policy solution is almost certainly related to the causes. I and many others have argued that supply-side restrictions, such as zoning laws, are the primary culprit. The policy solution is to reduce those restrictions. But a recent op-ed titled “Why your parents could afford a house on one salary – but you can’t on two,” the authors place the blame for housing prices (as well as the stagnation of living standards generally) on a different factor: Nixon’s 1971 “severing the dollar’s link to gold.” The authors have a book on this topic too, which I have not yet read, but they provide most of the relevant data in this short op-ed.
Does their explanation make sense? I am skeptical. Here’s why.
First, some of their numbers are just wrong. For example, they state that: “A median home cost just $23,000 – four times the average household income – in 1970. Now, that ratio has exploded, with homes costing eight times what most families earn.”
Median family income in 1970 was $9,867, so a house was 2.4x income — not 4x as they state. This number has certainly increased, but it is not eight times family income! It’s more like 4x income in 2024. That increase is worth investigating further, but the op-ed wildly overstates the ratio (perhaps more details are in the book of how they arrive at these ratios — maybe they are using single incomes even though they say household/family in the op-ed?).
And as we can see in the chart below, the early 1970s were a bit of an anomaly: the ratio was around 3x in the late 1960s, and it’s about 4x today. That’s more, but not dramatically more. Some of the increase in family income is undoubtedly related to more earners in the family, but some of the increase in housing prices is due to houses being bigger and better. Exactly how much each of these factors are influencing the two figures in the ratio is worth investigating, but the authors of the op-ed don’t seem to have done so (based on the op-ed alone).
So the increase is not as dramatic as they claim. But it is an increase. Can we blame it on Nixon’s abandoning of the last remnants of the gold standard?
National housing prices and incomes are useful as a first look at data, but especially when we are talking about housing we know there is dramatic variation in housing prices across the US. Incomes vary too, though not quite as much. If the delinking of the US dollar from gold is the culprit, we should expect to see housing prices start to increase everywhere in the 1970s. But we didn’t. Relative to family income, some states like California and Massachusetts, saw huge increases in the home price/income ratio between 1970 and 1990. For others, like Iowa and Arkansas, it barely budged.
I only showed 4 states in the chart so that it was readable, but I’m not cherry-picking the two states that same little increase: there were still 20 US states as of 2023 that had home price/family income ratios below 3.0, including several large states such as Texas, Ohio, and Pennsylvania. Of course, for a complete analysis we would want to drill down to the MSA or even city levels, and certainly some cities in those states now have unaffordable housing. But the point of my chart is to show there was no take-off in housing prices generally across the country in the two decades after 1971. And to the extent that Iowa and Arkansas (and the 18 other affordable states) saw an increase in housing prices relative to income, it has only come in the past 5-10 years.
Why would some states take longer to see housing prices increase? Didn’t almost everywhere already have zoning restrictions and other supply-side constraints in 1971? Yes, it is true that there have been a lot of new restrictions since 1971 (though environmental review has become increasingly burdensome), as most of the zoning laws were already in place. But the zoning restrictions in some states in the 1970s and 1980s weren’t binding enough to cause housing prices to increase. There was still plenty of vacant land near city centers and other desirable locations, such that new construction could keep up with demand.
By the time we get to the most recent decade, this is no longer true in most places. Even in places like, say, Conway, Arkansas where I live, the land available for new home construction is now significantly far enough from desirable locations that the prices of housing of existing houses are now commanding a significant premium (also, places like Conway have partially served as exurbs for larger cities, like Little Rock in this case, and the core cities are facing the same binding supply constraints now).
Supply-side restrictions (and the extent to which they are binding) provide a much better explanation of rising housing costs than severing the dollar’s link to gold.
Note on sources: Google’s Gemini Pro was extremely helpful in locating the income and housing data by state. I did have to prod it along occasionally, by suggesting better Census sources than it could initially find, but Gemini was great at quickly searching through PDFs, extracting the relevant data, and putting it into a convenient table. The data in this post comes exclusively from Census sources, such as the Decennial Census for much of the older income data, the Census of Housing, and the ACS for more recent years.
Economist Writing Every Day 