Mortgage Affordability Since 1971

Mortgage interest rates are climbing quickly, while housing prices are still mostly high. These factors combined means that it is much more expensive to buy a home than in the recent past. But how much more expensive? And how does this compare with the past 50 years of history?

The chart below is my attempt to answer those questions. It shows the number of hours you would need to work at the average wage to make a mortgage payment (principal and interest) on the median new home in the US.

My goal here was to provide the most up-to-date estimate of this number consistent with the historical data. Thus, I had to use average wage data rather than median wage data, since the median hourly wage data is not available for 2022 yet. But as I’ve discussed before, while median and average wages are different, their rate of increase is roughly the same year-to-year, so it would show the same trends.

The final point plotted on the blue line in the chart is for August 2022, the last month for which we have median home price data, average wage data, and 30-year mortgage rates. Mortgage rates are the yearly average (or monthly average in the case of August 2022).

You’ll also notice a red dot at the very end of the series. This is my guess of where the line will be in October 2022, once we have complete data for these three variables (right now only mortgage rates are available in October for the three series I am using). I’m doing my best here to provide as much of a real-time picture as possible, given that rates are rising very sharply right now, while still providing consistent historical comparisons. If that estimate is roughly correct, mortgage costs on new homes are now less affordable than any year since 1990.

What do you notice in the chart?

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Home(r) Economics

Is it harder to buy a home today than in the past? Many seem to think so. Lately, some people have used the example of the fictional Simpsons family to make this claim. A recent Tweet with around 100,000 likes expressed the sentiment:

The unspoken implication is that today a “single salary from a husband who didn’t go to college” couldn’t buy a typical home in the US. Or at least, it would stretch your budget so thin that you would have to give up something else or need two incomes to support that lifestyle (famously dubbed “the two-income trap” by Elizabeth Warren).

And it’s not just a Tweet that caught fire. A December 2020 article in the Atlantic claimed “The Life in The Simpsons Is No Longer Attainable” and used housing as a prime example. And while a 2016 Vox article on Homer’s many jobs doesn’t mention the cost of housing, they draw a similar conclusion and implication: “Homer Simpson has gone nowhere in the past 27 years — and the same could be said of actual middle-class Americans.”

But is this an accurate picture of the Simpsons family over time? And does that picture accurately represent a typical family in the US? Let’s investigate. And let’s start by pointing out that as measured by the availability of consumption goods, the Simpsons do see rising prosperity over time. They have flat screen TVs now, instead of consoles with rabbit ears, as the late Steve Horwitz and Stewart Dompe point out in their contribution to the edited volume Homer Economicus. But with all due respect to my friends Steve and Stewart, I don’t think many would deny that TVs, cell phones, and computers are cheaper today than in the 1990s. The familiar refrain is “but what about housing, education, and health care?”

In this post I want to take on the question of housing, partially by using the Simpsons as an example. My main result is this chart, which I will present first and then explain.

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Home for a Millennial

We read a children’s book called Home for a Bunny. In springtime, a bunny wants to find “a home of his own. A home for a bunny.” The bunny goes around talking to other forest creatures and considers crashing with them. It keeps not working out. Finally, the bunny finds another bunny to pair off with and they live happily ever after in a hole. (The implication is that the interloper is male and he finds a woman who already has her own place.)

Judging by the current housing market, the country’s currently largest generation has decided it’s time to find a home.

According to Jerusalem Demsas on the Macro Musings podcast last month, part of the reason houses are selling so fast today is that many millennials want to buy their first home now. They are competing against each other, especially for starter homes near growing cities.

The problem with making blanket statements about millennials is that we are a diverse group. For example, we are majority-white like Boomers, but only 56% are white. We went to college at higher rates than previous generations, but still less than half of American millennials graduated from college.

Millennials who could afford to consume wanted experiences, not stuff. I never saw peers brag about owning a pricey watch, but I have seen many photos posted of soul-searching adventure trips to Thailand. As I said, one should not generalize because it’s only the wealthiest millennials who could afford such things. But the wealthiest millennials are the ones who could have become homeowners. Instead they sought out the next avocado toast served with a view of a hip city core. Covid restrictions forced a set of people who had always been on the run to evaluate their home lives, or lack thereof.

Where had the largest generation been living prior to summer 2021?

Here’s a link to an SNL skit “The Millennials Skit” that sums up the complaints I was hearing about my own generation when I was in my early 20’s. If you can believe this, I did something stupid in my early 20’s. With so much hyperbole surrounding us, many don’t have a good sense of the facts.

In 2000, most millennials were in their parents’ houses, right where everyone expected them to be. The US population overall grew substantially since 2000. Many local zoning restrictions didn’t allow for concurrent rapid growth in the housing stock in the places with job growth.*

As millennials aged into adulthood, they were not buying houses or forming families at the rate previous generations had. PEW reports, based on Census data, that millennials are more likely to live with their parents than previous generations.

The group of millennials who were most likely to be living with their parents were men without a college degree. Most millennials were not living in their childhood bedrooms pre-Covid. Once again, it’s hard to generalize. Almost half already owned a home. Many were renting along with a friend or romantic partner. Whereas a majority of Boomers were married as young adults, less than half of millennials currently are. College-educated millennials are more likely to be married.

Millennials have kids later, so that would normally be associated with not buying houses before the age of 30. Some of the causality runs from the high cost of housing to the decision to put off having children. There is a long-running debate over whether millennials are different because they have different preferences from Boomers or because they are relatively economically disadvantaged. The combination of low wages for some and high home prices for many is an economic explanation for the initial hesitancy to purchase a house. Despite what the SNL skit said about us, most millennials are working now. Slower household formation is not due to chronic unemployment.

The highest rates of living-with-parents were in expensive cities like New York and Miami. If you can live close to a good jobs hub without having to pay the high rent, then you can save money. With that personal savings, now that we are older, many millennials would like to jump into home ownership. 

This week I went into a local restaurant that is patronized by adults like me. On the chalk board was a poll “Backstreet Boys or NSYNC?” People were gleefully making chalk tick marks to vote for their preferred band. That’s just one of the subtle signs I have seen in the past year that millennials are in charge of the places I visit.

*Read Jeremy on zoning and the Horpedahl Zone of Affordability. Also see The Complacent Class on how America didn’t make it easy for a diverse set of millennials to thrive.

“Zoning Taxes” — The Cost of Residential Land Use Restrictions

Fascinating new working paper on why housing prices are so high in some markets, by Gyourko and Krimmel: “The Impact of Local Residential Land Use Restrictions on Land Values Across and Within Single Family Housing Markets.”

Key sentence from the abstract: “In the San Francisco, Los Angeles, and Seattle metropolitan areas, the price of land everywhere within those three markets having been bid up by amounts that at least equal typical household income.”

Economists, libertarians, and more recently “neoliberals” have long complained about land-use restrictions as a primary factor contributing to unaffordable housing. This paper provides some pretty solid data, at least for some housing markets.

Here’s a key chart from the paper, Figure 5. Notice that there is a lot of heterogeneity across cities. In San Francisco, land use restrictions add roughly four times the median household income to the price of housing. But in places like Columbus, Dallas, and Minneapolis, there is essentially no zoning tax. That’s not because these cities have no land use restrictions! It’s just that they aren’t currently binding.

The paper also notes that “zoning taxes are especially burdensome in large coastal markets.”

This is similar to what I showed in a very non-scientific map that I created (in about 5 minutes) for a Twitter thread that I wrote in January 2020 on housing prices. In that map and thread I pointed out that there are still lots of fine US cities where you can purchase homes for roughly 3 times median income (a commonly used rule of thumb for affordability).

Cities where you can buy the median house for about 3 times median income.

Will these cities continue to be affordable in the future? As demand increases, and supply-side restrictions remain in place, we would predict the same thing will happen to Columbus as happened to San Francisco. But probably not for decades.

So if you seek housing affordability, move to the Zone of Affordability! But let’s also work on reforming the rest of the country to make everywhere affordable.