By Dr. Jim Dahle, WCI FounderHousing is unaffordable. This is the new chief complaint of our society. It used to be that healthcare was unaffordable. That problem wasn't fixed; it's just that the housing issue became a bigger deal in the last few years. The price of housing soared due to low supply and a few years of very low interest rates, and that has now been combined with high interest rates without an accompanying decrease in prices. That, at least, is what most people think and most pundits say. I think they're wrong.
I mean, they're not completely wrong. The supply issues caused by builders not building at all for a few years after the 2008 Global Financial Crisis and the COVID-related supply shortages are very real. The demand issues caused by the ability to borrow money at ridiculously low, sub-inflation rates are also very real. But that's not why you're worried about where your kids are going to live. That's not why you can barely afford an average house as a doctor and a nice house as a two-doctor couple.
Where Will My Kids Live?
While Salt Lake City doesn't have the highest housing prices in the nation, the change from being a relatively low-cost-of-living area to a relatively high-cost-of-living area has been pretty impressive since we moved here in 2010. I won't use my own house since we've done a big renovation that skews things; instead, I'll use my neighbor's house which had about the same value as mine when we moved in 2010, just under $500,000. Perhaps it was $480,000—not bad for 4,000+ square feet just a few miles from world-class ski resorts, a good school district, a nice neighborhood, and a 100-mile view. It was expensive but affordable on a single doctor's salary (I was making about $200,000 at the time as a pre-partner emergency physician). Today, it's worth $1.12 million. That's with interest rates at 7%.
How much income do you really need to afford a $1.12 million house? About $500,000, according to my 2X rule. That's a two primary care doctor couple or one high-earning doc.
The median household income in Utah is pretty good these days, about $86,000. But that's a far cry from $500,000. Only 11% of households make $200,000+ here, but our average price of homes for sale is $502,000. You can't afford the average home on the average income. You can't afford the average home on twice the average income. Fewer than 11% of households can afford the average home. That's a real problem. As bad as it is in Utah, it's far worse in many coastal cities ($984,000 in Boston, $640,000 in Washington D.C.) and small ski towns ($1.9 million in Telluride, $2.2 million in Park City) throughout the West.
Why Housing Costs So Much
Sometimes people long for the 1950s. Dad went to work each day at a job that didn't even require a college degree, and that provided enough income to afford to buy a house just like everyone else's. Mom stayed home, kept house, raised the kids, and participated in the community. Some people today still see that as an ideal situation. There are two reasons that's mostly an impossibility now.
More information here:
Rates Are High and Demand Is Low . . . So Why Aren’t Home Prices Falling?
The Two-Income Trap
But what happens when EVERYBODY does that? We've just shifted the goalposts. Now, everybody wants a bigger house in the safest neighborhoods in the best school districts. So, they go buy them. But after a while, the natural economic effects are seen. Labor isn't worth as much as it used to be, because the supply of it is twice as large as it used to be. Now it takes two earners to get what you used to get with one. Heaven forbid you lose your spouse to disability, death, or divorce. Now the family is on the verge of poverty despite the fact that one parent still has a reasonably well-paying, steady job. Maybe that job pays $50,000 or $60,000 as a nurse. What house are you going to buy in Salt Lake City on that income? None of them. There aren't any affordable houses on that income. Maybe if you drive an hour and a half into the boondocks you can find a tiny townhouse in a small town, but any savings are just going to be eaten up by the tangible and intangible costs of that commute.
House Size and Quality Inflation
However, the main reason—and the one I want to talk about today after 800 words of introduction—is the fact that people simply aren't buying the same houses in 2023 that they were buying in 1955. The houses are bigger. In 1950, the average new home sold for $82,000 in today's dollars. It had 938 square feet. Again, that's 938. That's a single story that is 30 feet long and 30 feet wide. We're talking about the size of a single-wide trailer home here. I think my garage is larger than that, and there are two houses within a stone's throw of mine that have larger garages.
In 2023, the median home size in Utah is 2,800 square feet. (It's 2,014 overall in the US). That's 2-3 times the size of what a home used to be back in 1955. We live in bigger houses because we have bigger families now, right? Nope. The average family size in 1955 was 3.6. Now, it's 3.1. Sure, we're a little fatter, but that doesn't account for needing 2 1/2 times as much space per person.
In addition to size inflation, there is a massive difference in quality inflation. Homes are simply much better built now with far nicer amenities. We have hardwood floors and tile where there used to be linoleum. We have higher quality carpet. We have higher quality paint. We have baseboards and light fixtures and granite countertops and stainless steel kitchen appliances. It all adds up. A television was a prestige item at the end of World War II. By 1960, nine out of 10 homes had one and most of them were a foot wide. How many are in your home? We've got three, ranging from 4-10 feet wide. I bet your house has air conditioning, central heating, a dishwasher or two, and a washer and dryer that you actually keep inside, doesn't it?
My point is that houses are bigger and nicer than they used to be. No wonder most people can't afford them.
Let's say somebody decides, “Hey, we don't have much money. We don't even make all that much money and probably won't make much more than we're making now any time soon. We should just buy a little smaller house.” Seems logical, right? But where is that smaller house?
It's in a dumpy, crime-ridden neighborhood with terrible schools. Now, you're not just economizing, but you're sacrificing the safety and education of your children. Who wouldn't do everything they could to avoid that, including leveraging their lives to the hilt, working two jobs, staying in an otherwise bad relationship, and putting off retirement and college savings?
More information here:
Why People Mistakenly Think the US Economy Is Terrible
Your Crystal Ball Predictions for 2024
The Real Cause of Housing Unaffordability
The real problem here, the real cause of housing unaffordability, is that in many cities in America—perhaps even most—it is impossible to buy a small house in a reasonable neighborhood because those houses simply don't exist. Homebuilders aren't making them. Realtors aren't selling them. And people aren't willing to live in them anyway because they think they're entitled to nice stuff even if they can't afford it. There, I said it. But it's the truth.
Cities and Developers Will Have to Fix This
The only solution in most cities is to build more housing, usually smaller housing including higher-density stuff like condos, duplexes, and townhomes. The NIMBY crowd fights it, and cities get behind their biggest taxpayers. Even if developers wanted to help with the issue, they're stymied at every turn by bureaucrats, regulations, and homeowner associations. If cities want affordable housing, they have to make it easier and more profitable to build (or convert) it. Maybe it feels good to see the value of the house you already own go up in value (not sure why; it just means a bigger tax bill), but that rising value is a huge barrier to those who don't already own.
More information here:
Is Renting Better Than Buying? Why We’re Financially Independent and Renting
What You CAN Do
What should you do? Aside from supporting good policies and those working toward them, you still need to make sure that you and yours are taken care of in this horrible situation. Thankfully, most white coat investors have enough income that in most places they can still buy a reasonable house in a reasonable neighborhood. They'll likely be in far better financial standing than their neighbors who will have to use more leverage and dedicate more of their income to housing. The key, for your own personal finances anyway, is to just avoid doing something stupid.
Even in Salt Lake City, a single primary care physician household can afford the median house. Don't make yourself house-poor by trying to buy the 2% house just because you have a 2% income. If you spend 40% of your gross income on housing, you will be working until you have a stroke at 74 and you won't reach any of your financial goals. So, don't do it.
What about your kids? If you want them to live anywhere near or like you—presumably on less income than you make—you're going to have to help. That means you have a new financial goal. Maybe your old list of financial goals included college savings, retirement, and a down payment for your own house. Well, now it also includes some money for your childrens' houses. How much? I'll leave that up to you. But it's really the difference between what your kids can afford without you and what housing costs.
As an example, let's say you want your kids to be able to buy a $600,000 house in Utah. But between them and their spouse, they only make $150,000. If they can afford a $300,000 mortgage and can save up a $50,000 down payment, that leaves $250,000 from you by the time they're 30 (and you're 60ish). Got three kids? That's $750,000. If you start saving for that goal at age 40 and earn 5% real on your savings, that would suggest putting about $23,000 a year toward this goal for the next 20 years. In fact, I would suggest that this goal may be just as important or even more important than saving for college. You see, college costs what you are willing to pay. A similar education can often be had for 25% or even 10% of the price elsewhere. That's just not the case with housing.
The housing unaffordability crisis is real and multifactorial. But it doesn't have to be a crisis in the lives of you and your children,
What do you think? What do you think should be done about the housing unaffordability crisis? What is your housing plan for you and your children?
Grear that this is getting more attention as it is a huge factor in lower family formation and the inequitable intergenerational impact on the young (I’m Gen-X – not that young).
More of a crisis in Australia (my home country, US is my adopted country), NZ and Canada.
Elephant in the room (CTRL+F in article = no hits) is immigration levels both legal and illegal, as well as high levels of overseas buying (predominantly from China, also India and others) and institutional buying. Mainstream political parties just don’t care about the ordinary citizen.
Again, more dire in Australia etc. ,so much so that even the mainstream press has been forced to mention immigration and overseas purchasers rather than the tired old tropes of “not enough supply” and “young people just want luxury” (Jim correct to point out that simpler homes are just not available).
Again, thanks for covering Jim.
Grear that this is getting more attention as it is a huge factor in lower family formation and the inequitable intergenerational impact on the young (I’m Gen-X – not that young).
More of a crisis in Australia (my home country, US is my adopted country), NZ and Canada.
Elephant in the room (CTRL+F in article = no hits) is immigration levels both legal and illegal, as well as high levels of overseas buying (predominantly from China, also India and others) and institutional buying. Mainstream political parties just don’t care about the ordinary citizen.
Again, more dire in Australia etc. ,so much so that even the mainstream press has been forced to mention immigration and overseas purchasers rather than the tired old tropes of “not enough supply” and “young people just want luxury” (Jim correct to point out that simpler homes are just not available).
Again, thanks for covering Jim.
I think most undocumented immigrants are living 4 to a bedroom (or more), 20 to a house, some with a landlord who will get them deported before he repairs something. And if a doctor or business owner moves here legally, why shouldn’t they also have a decent home if they can afford it?
Good point Jonathan, though as the others pointed out it is probably not the illegal immigrants that are the issue. They end up on roofing and construction crews that lower the cost of homes, as well as other sectors of the economy that lower your cost of living. It’s people immigrating into your labor field that depress wages and make it hard to afford houses and the like. In my STEM field 2/3rds of grad students are foreign born. I’m now into my 40s with a PhD and just finally am breaking 6 figures despite working at one of the most prestigious universities in the world. Finding a house and starting a family are a luxury my fiancee and I can’t afford.
Don’t be afraid to buy a couple trailer homes and set them up on your lot so your kids can live near you. Break the mold. Be part of the solution and not part of the problem
I like the ADU idea. Has anyone seen a place where this has worked well?
With rules like 1/2 to 3 acre per home, no trailers, minimum 3 BR, etc. in many neighborhoods this might not be permitted.
In our cities in Northern Calif, that is definitely true. The homeowners associations are so restrictive I can’t even change the color of my paint or change grass to concrete without an application to the HOA and getting approval of two neighbors. No one here has an ADU and Google updates their skyview every year or two so it would be obvious.
If you live in CA in a single family neighborhood, I am fairly sure state law allows ADUs. HOAs cannot stop it. Check with your local city hall planning or building department.
Great article. Thanks.
Echo the comment about multi-generational living. ADUs are one way to go, but also the MIL suite. Why not put 2 or 3 MIL suites in your enormous doctor house and then the kids can stay close indefinitely? You could even charge them rent that you then return to them toward a down payment of their own.
That sounds like an incredibly tax-inefficient way to manage this relationship. Give the higher income person more taxable income without any corresponding deduction for the lower income person?
Very interesting article, and I’m tracking with you on most of this, Jim. The one thing that comes to mind though with your comment at the end about saving money to help your kids with the down payment, just seems like more of the same exhaustion. We’ve already sacrificed the livelihood of both parents potentially to the point of exhaustion to afford the neighborhood…now the suggestion seems to similarly sacrifice the life of the eventual grandparents as well and perpetuates more of the same inflationary factors. It seems to me that the market adjustments (I don’t mean housing collapse) could still be viable and not lead to even more work if people decide the frenzy is too much a toll. For example, changes that allow for higher density on one’s own property could be a great solution. I personally think a return to multi-generational living could be very beneficial to the society and allowing people to add small homes on their property in more municipalities could be a great option. I’m not sure that giving kids $350000, although I understand there’s really apparently no way to avoid if they’re going to buy the house you reference is the best solution for the satisfaction and contentment of the children or for moving away from this hamster wheel, crushing process that is now worklife in america for many. I think it will be interesting to see where our kids can “tolerate” living as they reflect on the stress and sacrifice of their two income parents.
Tragedy of the commons. What’s best for my kids might not be best for society overall. At the end of the day, we have to live in the real world.
I’m not at all sure I agree with the solution to this obvious problem. Part of our job as parents is to foster responsibility in our kids and teach them about hard work and delayed gratification. Not to continue to enable them and solve their problems with money. We should be teaching them about money.
We already pay for their private schools, pay for and transport them to their travel sports, pay for their tutors, act/sat prep classes, and college advisors. We review/write their college essays and pay for their expensive colleges and help them get their first job.
So now we’re buying them their first house and/or living within feet of them with their young families. When, would you suggest, should we finally let them grow up and start making their own decisions? At some point don’t we want them to be productive members of society? Who wants to live that close to mom and dad anyway?
What happened to providing a financial education? For instance, consider a lower cost college and having them put some skin in the game. Having them rent for awhile, saving for a down payment, eventually beginning with a small starter home with some commute. 80% of millionaires were not born on 3rd base. They started with small means and worked for their success/appreciate their success. The housing market will adjust with smaller more affordable housing, if that is where the demand is. Aren’t we just propping it up by buying our kids houses?
That works well when there are starter homes to buy that are affordable on the salaries they can obtain. What about times like now and places like many of us live? Average home in the Bay Area is $1.3M. In New York it’s $1.4M. In Salt Lake it’s $510K. That’s not even affordable on a $100K income.
As long as that multi-generational housing situation doesn’t require me to live with the in-laws.
Thankfully we live in a medium-sized college town an hour away from a desirable city. Houses are still affordable (average price around $300,000) and most of the new builds are under $400,000 with lots of inventory in the pipeline.
But you never know if things will change. We bought a cashflowing rental and I would definitely sell it if my kids need a downpayment to live close to us. My parents live in town near my work and I have coffee with them every morning. There is almost no price I wouldn’t be willing to pay to have something similar with my kids in 25 years.
Exactly my worries in my high cost of living city.
My financial goals added a down payment for a house for each kid in addition to college and car…
Perhaps the right thing to do is add the headache of rental properties to “buy in now”
I’m curious about the tax implications of gifting each kid $250,000 for a down payment. What’s the best way to do this?
Also, I know that mortgages don’t like to see a big gift of cash to fund the house, as it makes it look (rightfully so) as if the purchaser can’t actually afford the home.
More logistics on how to make this work would be helpful–thanks!
I buy Ibonds in the kids’ names and mutual funds in their UTMAs. This way I am not just gifting them some huge lump sum in the future, but smaller sums periodically and comfortably under IRS gift allowance. I’ll have less say in how and when they ultimately use it, but I guess we’ll cross that bridge when we come to it.
I am already meeting my max by funding their 529s, so I guess this strategy would only work before or after funding college for them.
True. I “only” max funded the 529s for a few years, but that was enough for them to project out to $250+K by college time, which seemed like more than enough to me (though what constitutes “enough” in a 529 is obviously a very personal decision). The point is, you are correct, I did not do UTMAs while I was juicing up the 529s, but that process only took 3-4 years.
Gift tax limit is 18k this year. So, a child can receive 36k per year from you and your spouse..If that child is married, then 72k in total per year.
Excess is taxable to the giver.
Start the trust when they are young.
The excess is not taxable to the giver unless they have exceeded their lifetime exclusion ($13.61M per person in 2024, double that for a married couple). If you exceed the annual limit, then you must file a gift tax return, but no tax will be owed (unless you have gifted your lifetime limit to that person.)
It just uses up estate/gift tax exemption, it’s not actually taxable until the exemption is used up. It’s pretty high right now such that most docs won’t ever have an estate larger than it, but it is scheduled to be cut in half in 2 years.
Easier fix than many of the above mentioned options…This assumes you have a good relationship with your children (which isn’t always a good assumption). Just buy the home with them and have your name on the loan/deed. Then gift it to them in your will when you die. The tax implications are entirely different in this scenario. Of course if they can’t make payments you are on the hook for either selling the house with them or making the payments for them. But it definitely helps avoid all the nasty tax implications of simply gifting them 6 figures.
That sounds like a terrible idea. Gifting six figures won’t cost most families any tax at all. Eliminating the step up in basis by co-owning the home between generations will.
Great article Jim. Just clarifying the average home in 1950 was about $8,000. When adjusted for inflation, the cost was $82,000.
Thank you, clarified.
FYI: My “What is a Dollar Worth” app (Fed Reserve Bank of Minneapolis Inflation Calculator) says that $8,000 in 1950 equals $101,284.58 inflation-adjusted in 2023.
Interesting article and well analyzed.
Just wanted to comment that I have a feeling that home costs especially for the 3,000sqft+ single family homes will be dropping soon. The demographics will be changing soon. The new generation (Gen Z and likely Gen Alpha) have a different mindset regarding large homes. While they will likely inherit a lump sum from their Gen X and old millennial parents, they are more about life quality, self care and satisfaction as well as preserving their mental health. Traveling and adventures are priorities than building a physical empire. They seem ok with small houses as long as those will be smart homes or provide the digital space they need. Co-habitations will likely skyrocket more so with the “DINK’ mantra (Dual Income No Kids) in the generation. With the future aiming to combine AI and Humanoid robots, they probably may not even need to catch the “hustle fire” just to afford bigger nice homes.
I have 3 Gen Z kids and that attitude seems to be the norm. Even those in the generation who make millions as social media figures are more about self care than trying to own mansions. I think condos and apartments will rise in costs with single family homes becoming more affordable as more boomers succumb to the unavoidable natural transition and the lights go off.
We don’t have children. I’ve been counting on the value of our home ($2 million) to eventually pay for moving to a retirement home. Now I just have to hope someone will be able to afford to buy it!
You almost understand the problem:
1. Printing money has degraded the purchasing power of the dollar and inflated asset bubbles (see stocks and real estate). Look at the current housing prices in relation to incomes, there is no hope for anyone after boomers to get on the escalator.
2. Dual income households have doubled the labor market, depressing salaries. While this should be a signal to the wage slaves to start their own business, the obscene level of regulation in almost every industry serves as a barrier to market entry. The brainwashing of the public education system that everyone should go to college, work, get married, have children and then pay other people (the state or state regulated) to raise them is absolutely insane.
We are unfortunately in a far worse place than you realize.
Nailed it. If you read between the lines, we live in a country that has been debasing people, propagandizing and lying to them in order to get control and do all it can to curb population, especially of certain groups.
Buffanole, while JD is honest about a lot of things and pretty sharp, he’s too legacy and locked into the family bubble (this is natural, just pointing this out) to really understand what you’re saying. Have a high net worth means he can afford to not look into a lot of this stuff, to boot.
“curb population, especially of certain groups” sounds like it belongs on the first page of a book rather than just being dropped into a random comment on a weeks old blog post. New criticism for me too “too legacy and locked into the family bubble”. Not sure what to make of that.
This is mostly nonsense. It’s easy to blame the government for all the world’s problems, and there are certainly lots of cases where harsh criticism is due. But the examples you gave don’t hold up to scrutiny.
Most economists agree that low steady inflation is a good thing. There are many reasons, but a big one is that nominal wages tend to be sticky – people hate having their nominal pay cut even by a little, even in deflationary times. So with no inflation, wages tend to ratchet up even when there aren’t good economic reasons for it. By building in a 2-3%/year real pay cut into everyone’s wages it counteracts this stickiness. People still get raises, but only when there’s an economic reason. It reduces friction in the labor market.
“Printing money” is not anywhere close to the full story on why housing costs have gone up – the point of this post is that there are many complicated reasons for it, including cultural changes and a dual-income arms race. Inflation by itself would raise both housing costs and wages so wouldn’t affect affordability. And most economists agree there is not a strong need to balance the budget. I’m more “conservative” in this regard and think we should have closer to a balanced budget, but the current deficit/debt is not the main cause of economic problems in the country. I don’t know your political affiliations, but it’s worth noting that the last balanced budget was under a Democratic president (Clinton) and the last two Republican presidents (Bush and Trump) greatly expanded the deficit with huge tax cuts. I don’t know why you think stocks are in an “inflated asset bubble” – the P/E ratio of the stock market has averaged around 20 for the last ~hundred years, albeit with some big excursions. As of today, it’s 23.
I disagree that “obscene level[s] of regulation in almost every industry serves as a barrier to market entry”. I started a business recently and all it cost me was a $100 license from my city. Can you give examples of these “obscene” regulations? I’m sure there are some excessive regulations and I would support changing them, but for every one excess regulation I can find 10 you would be glad are there. Do you really want to eat at a restaurant where there’s no oversight on where the food comes, how it’s stored and prepared, except whatever that owner thinks is best? While the owner is trying to compete with other restaurants on the street that cut corners on food safety? In fact, I’d argue that since Citizens United legalized effectively bribing politicians with independent expenditures, regulatory capture is a much bigger problem.
I was never “brainwashed” by public education into going to college, getting married, having kids, or putting them in school. My kids’s teachers don’t “raise” my kids, my wife and I do. There are problems with the public education system, but not what you suggest. Again, are you really suggesting that schools should be completely unregulated? That cure seems way worse than the disease.
I don’t have time to address all your irrelevant straw men, but you should probably spend some time over at https://wtfhappenedin1971.com
I’ll save other readers the trouble – that website is nothing more than a giant list of graphs, of everything from wages and the national debt, to the number of children each woman bears and the number of PhD’s conferred per capita, and it tries to show knees in the curve around 1971 (not all of them actually seem to show that). This is not a surprise! It’s well-known that there were major societal and economic changes in this country in the 60’s and 70’s. But hey, if you have policy proposals on how we can make things better, I’m all ears.
Your general “societal and cultural changes” is not unique to this time period, they are always happening.
Obviously we all know what happened in 1971. It had to do with money, gold. So I think solutions would be to restore monetary sanity by tethering dollars to gold once again, allow the market to determine interest rates rather than leaving it to unelected bureaucrats, and eliminate fractional reserve banking, so that the money supply cannot be so easily inflated. Then you will have price stability in assets.
And that is why I think the scope of the problem we find ourselves in is so big. Our leaders are not even talking about any of these solutions, and are in fact still digging the hole future generations may never get out of. BRICS countries are stockpiling gold and the US is doing our best to undermine the reserve status of the dollar. Articles like this pop up online all over the place and the authors fail to come to the correct root cause, but still propose solutions that don’t address them.
Price stability at what cost is the question. There are lots of benefits to being off the gold standard and having fractional reserve banking. Don’t just focus on the problems those changes introduced.
I think the majority opinion of economists is that we are better off with fiat currency and fractional reserve banking. It’s a fair discussion, but it’s going way too far to blame most social ills on monetary policy. Look up the Lead-Crime Hypothesis, for example.
I understand the desire to romanticize the good ol’ days, but I worry that view is distorted. People have a tendency to overlook problems that existed back then, and fail to appreciate the improvements that have taken place, like house size and quality going up.
When priced in gold, houses are less expensive. Here is a real example from my life. Same small 3 bedroom house on a 10000 sq ft lot:
1961: gold = $35 /oz. House = $35,000 ( in 1961 US $)or approx 1000 oz of gold.
2024: gold= $2000/oz. House = $350,000 (in 2024 US$) or approximately 175 oz of gold.
Priced in houses, houses are exactly the same price as they were 10,000 years ago. 🙂
I noted long ago that a doctor friend’s dad lived with 3 kids and working wife in a 2 BR 1 bath town house 5 blocks from the hospital where Mom worked as a nurse to pay Dad through med school and residency there in an immigrant going downward neighborhood, no car. But 40 years later my kids and I bet yours seem to need a 3+ BR 2+ bath home and 1-2 cars right when they graduate college and start their life.
My one kid disagreed with my recommendation she wait to buy the bigger nicer home she might want in her 30s. She argued convincingly that the booming housing market in her town made it so she ought to buy a house she can afford* NOW and it might provide the ability to actually afford a bigger better home later on, when both would cost much more. The nature of the town- college and lots of (nonmedical) internship opportunities- also let her rent rooms to those on a 3-6 month tour until she married and wanted the privacy. My other kid got into a co-op in college (and on the co-op’s board) and prefers that style of living- might join one once out of college for built in community.
*We gave her $11K she requested to have the down payment she needed/wanted. The mortgage company had us sign that it was NOT a loan so I shot down her promise to repay us. I just keep tabs that the younger one gets the same amount inflation adjusted when she buys a place or commits to renting forever.
The rise over the generations is certainly multi factorial and I do think our expectations for nice things in comparison to 50 years ago doesn’t get enough mainstream talking points. Technology has made many things because standard in a very short period of time. So many more costs in the average family that feel like necessities are really luxuries. What’s happened in the last 5 years is certainly a special anomaly. But I wonder if it will really ever correct? 5 years ago I could have afforded any house in my neighborhood. Now, most will be a stretch. And my income hasn’t changed. I do frequently wonder, who is able to afford these? Certainly not everyone is making 500k+? My guess is people stretching their budgets more than I’m willing combined with prior home equity which I don’t have.
It’s really a good question. A typical doctor can’t afford a house on my street now but there are five of us living here and I’m pretty sure we make more than most or all of the other folks!
It’s like deja vu really.
I remember saying all these same things in 2006 and 2007.
“The average person CANNOT afford the average home, or any home really.”
“This is not sustainable.”
“Reality will hit eventually and house prices will come down.”
And they did. And they will again this time. We are in an even larger housing bubble today than 2005-2007, but it’s anybody’s guess when it will pop. One thing is sure, current conditions are not sustainable long term. Either income has to rise dramatically over the next few years (which means massive inflation is happening) or housing prices will drop considerably.
I just don’t see this happening – in the housing market or the stock market.
In the “before times”, capitalism meant that reward was balanced by risk. You made an investment that went south, you took the loss. Somewhere along the way (LTCM, GFC, ?) that all changed. All bets became too big to fail bets, and the Federal Reserve & Treasury became all too comfortable riding to the rescue with endless “liquidity” and an alphabet soup of programs to shift losses from investors to the government.
Should asset prices ever have a significant tumble in the next decade, I have no doubt the powers that be will be there to prop up home prices & the SP500. These are society’s chosen assets. A major, prolonged price decline would be calamitous for seniors & pension funds.
There’s no constraint on the ability to deficit spend & provide liquidity to levered up gamblers. Why wouldn’t they step in yet again and bail out the system? Why wouldn’t you lever up, buy the biggest home possible and all the S&P shares you can – no matter the underlying fundamentals?
People think this is still capitalism, it’s not! Wake up.
Correct, our system is government propped-up crony capitalism, where risky behavior is encouraged and even back-stopped by the federal government’s repeated bailouts. Look at the national debt ($34.47T)!
The quality story is an interesting one, though the TV example didn’t seem all that well motivated. A 50″ screen TV now in real terms is essentially free compared to what a luxury like that cost in the 40s-50s, whereas houses went in the exact opposite direction. Too many TVs doesn’t even deem a footnote in the “why we can’t afford houses” story. I suspect a lot of the other amenities we like are similar.
Very interesting points about two incomes and size inflation. We were chatting with a sibling the other day who bought a rather large new house (nearly 4,000 soft) with a detached ADU for a parent to live in. As an aside, I thought the ADU idea was an interesting idea, especially for a parent with fewer resources.
Anyways, they could only afford this with two consistent incomes for the next 30 years (assuming not paying off early). Even with 4 bedrooms in the main house, they were already having buyers remorse over a supposed “lack of space” because they both “need individual home offices”, as well as separate bedrooms for each of their two children. Having more sometimes leads to wanting even more, too.
the question is always chicken or the egg. look at the vehicle market…
manufacturers, builders, realtors realized higher margin higher cost houses paid better. guess what they built? max house on a smaller lot…then people who went house shopping started liking luxuries like a large laundry room with a dog washing tub, 3 car garages, etc. well, people then started to leverage more to buy those houses. once this trend starts, its awfully hard to reverse, as houses don’t depreciate or age out as quickly as vehicles.
look at vehicles, they’re basically all suvs, average cost is in the 40s, all have large ipad sized screens, chargers, sensors, smart cruise, parking assist, led headlights. its what sells, and manufacturers have figured out how to churn out only higher margin vehicles.
Read “Building an Affordable House.” It offers the many things required to build a low cost, including land use strategies. Homebuilders have realezed there’s a market fir highly affordable homes without all the amenities.
Where have homebuilders realized that and where are they building these homes en masse? I’m not seeing it in my city.
I think home builders have indicated they are doing this.
For example, DR Horton’s 2023 Q3 earnings call:
“Our buyers are focused primarily on affordability. And for us, the way we deliver that affordability is through the monthly payment process. And that’s obviously been a big driver for the rate buydowns, but also introducing smaller product footprints, and de-amenitizing some of the homes a bit and letting people do things to improve their homes after the closing when their financial position perhaps has changed and they can afford a little more.”
I don’t remember the exact numbers but I saw data showing that the overall average square footage of new homes the past year has decreased compared to recent years.
Good!
From ny times
The Great Compression
Thanks to soaring housing prices, the era of the 400-square-foot subdivision house is upon us.
Probably can’t cut and paste entire article.
Here is the First few paragraphs
Many small houses sit side by side in the Elm Trails subdivision from Lennar Homes in San Antonio.Josh Huskin for The New York Times
Robert Lanter lives in a 600-square-foot house that can be traversed in five seconds and vacuumed from a single outlet. He doesn’t have a coffee table in the living room because it would obstruct the front door. When relatives come to visit, Mr. Lanter says jokingly, but only partly, they have to tour one at a time.
Each of these details amounts to something bigger, for Mr. Lanter’s life and the U.S. housing market: a house under $300,000, something increasingly hard to find. That price allowed Mr. Lanter, a 63-year-old retired nurse, to buy a new single-family home in a subdivision in Redmond, Ore., about 30 minutes outside Bend, where he is from and which is, along with its surrounding area, one of Oregon’s most expensive housing markets.
Great to see people experimenting with it, but what’s the ratio of tiny homes to regular homes being constructed right now? 1 to 10,000? Or lower?
Great topic. This may be unpopular given the audience, but I wonder a lot about the role of treating single family homes as investments in this crisis. In my area I see what I would consider “starter homes” (many built in the 1930s-1950s) being bought for cash or above asking offers (cooling down some with interest rates going up, but still happening) then converted into rental properties. I’m especially uneasy about large funds or institutional investments projecting high single- to low double-digit returns on single family investment. Small percentage of the single family market currently but growing. I worry about these continuing to grow and price new individual buyers/families out of buying homes.
The White Coat Investor community and other FIRE related communities are somewhat complicit in this, given the promotion of real estate investment as one of the paths to financial independence. Get enough doors under management and you can retire on the cash flow, right? Or invest in a real estate fund focusing on single family homes so they can buy up inventory and turn them into rentals!
As Dr Dahle points out, the crisis is multifactorial and so are the solutions. I’d be surprised to see any meaningful legislation come forward on this, so expect we’ll see more of the same with a higher proportion of young adults and families renting unfortunately.
I agree. And it’s not just individual and small time investors. Institutional investors played a large part in this as well.
The thing is that investors who got in at the during the bubble at the height of the real estate investment euphoria the past 2-3 years are in danger of losing their shorts. This is especially true for those who overleveraged or jumped into bad cash flow situations assuming rising rents/prices would rescue them.
Why are you uneasy about investors getting a reasonable return on their investment? What would you expect to earn on a SFH investment?
The idea that investors are to blame for the housing crisis is bizarre to me. Who do you think is paying to build the places where people live? Investors are far more a part of the solution than the problem, at least those doing long term rentals. You could make an argument that people buying second homes and short term rentals are part of the problem, but I don’t see how you can blame someone who builds an apartment complex or a house and rents it out for the housing shortage.
The housing crisis is not having someplace to live for a reasonable price, NOT just owning a home. Renting isn’t a bad thing, it’s completely appropriate for many people at many times of life.
Good points. Thank you for pointing that out!
Good point about bigger and nicer houses with more amenities being a big contributor to housing unaffordability. But I think even when accounting for this, there has been a huge increase in prices.
The best way to assess price increases over time is by comparing apples to apples as much as is possible. The Case-Shiller index does this because it compares the sale of used homes to the prices rhat same home previously sold at (apples to apples) while at the same time adjusting for inflation.
When you plot income against CPI and rents, you notice two things: 1) We are in another bubble similar to 2007 and the price increases for the same exact house are real, and 2) It is much more affordable to rent as compared to buying at this time.
Here is a chart for illustration:
https://cms.zerohedge.com/s3/files/inline-images/national%20rent.jpg?itok=7cEUKcpz
I’m not sure a bubble can be identified in advance. If it never pops, it wasn’t really a bubble was it?
The Case Shiller data should be a little more useful, but it’s not perfect. Consider my home for instance. I bought it back in 2010. Then in 2019 did a MASSIVE renovation. It’s not the same home as it was when I bought it in 2010. Can you really compare your home to what you bought 20 years now that you’ve put in granite countertops, better insulation, windows, and landscaping? Not really.
Good point about the renovations, and I do believe the Case Shiller index attempts to account for that by excluding homes with major renovations from the index. Now how they do that or how effective they are, I have no idea.
As for identifying a bubble, I agree you cant usually do that prospectively with many assets, but I think housing is a little easier because the prices are constrained by people’s income in the long run. When the prices buck that rule of thumb in the short to medium term, home prices versus income have to eventually find an equilibrium again. We are out of the historical equilibrium now. The last time that was true was the GFC.
I would say you can have a bubble that never “pops.” If median home prices drop 30% over the next 5 years, everyone will say we were in a bubble. What if inflation (not counting home prices) and wages both increase by 30% but your home stays the same value over the next 5 years? Or home prices increase 20% but wages increase 50%? Same drop in relative value of homes, but no “pop.” I would argue it was still a bubble. If inflation reignites in the next several years, we may see one of the latter examples instead of a drop in nominal home values.
I am absolutely saving to gift my 2 kids at least 100K each for downpayment on a nice house in a good school district within 30 minutes of my own. My parents plan to do the same for them. A quote I recently ran across, “we worry about making our parents proud when we should be focused on making our children proud, the responsibility of each generation is not to please our predecessors, its to improve conditions for our successors.”
I live in a desirable mountain town. Through the 1970s it was poorer than the rest of the state. It’s now extremely expensive. What’s ironic is that our affordable housing is being built at $600/sf-plus. Maybe more. So a lot of the older home stock, owned by people who bought in the 1970 through 1990s, is downright dumpy in comparison.
One of my pet theories is that our affordable housing is expensive to build because we’re a wealthy community. So in our wealthy community, we don’t actually know what’s it’s like to live on a budget. We think it’s reasonable/normal to have an architecture firm do a custom design, well done landscaping (one affordable complex has decorative boulders), triple pane windows, a certain aesthetic, etc., and then we bolt on a neighborhood review process, LEED certifications, and a ton of consultants and all of a sudden it’s bananas expensive.
Kind of like if you invited 6 investment bankers, a doctor, a tech bro, and a 2 cowboys and a teacher to a restaurant for meal. The bankers order the wine and everyone splits the check evenly. The cowboy spits out his Coors when he sees his share of the tab. Same principle when it comes to selecting a design plan.
Housing is expensive because the richest people in our communities set the norms and make the decision to always buy the nicest option. And since we often view housing as an expression of our individual worth, the rest of us go along with it.
FYI, I got here through a recommendation from Mike Piper’s regular round up of interesting investment related news.
Lots of variables here, but I think your analysis is spot on. Perhaps income inequality exacerbates the second issue: house size and quality growth. It means that, compared to 30 years ago, there is a large pool of buyers who are much less price sensitive, and a smaller pool (the shrinking middle class) to incentivize the building of somewhat less fancy but still nice housing. I’m speculating, but it seems consistent with what I’ve seen in my wealthy east coast community. It’s not worth it (or perhaps even possible) for home builders to build less expensive housing when they can make a much bigger profit on expensive housing, and then sell it to a larger pool of extremely wealthy buyers who may not even have existed 30 or 40 years ago (relatively speaking). We see this same phenomenon now in issues ranging from the trivial (sports and concert tickets prices) to the critical, like housing. Supply and demand get distorted when there are more people for whom price is no object.
Part of the reason “price is no object” for many people is that they were able to borrow money at very low rates for so long. All of a sudden at 7% interest rates, price is an object again!
Economic outpatient care for adult children?
Doesn’t the Millionaire Next Door cover this exact situation of artificially inserting your adult children into an economic neighborhood they couldn’t/shouldn’t otherwise afford?
I won’t paraphrase that section of the book, but it seems this may set them up for more issues down the road.
It’s a real dilemma isn’t it? Do you make them live in a homeless shelter while you put your feet up in your mansion? Or is there some amount you can give them without spoiling them?
The problem with the EOC view in the MND is that there is an underlying assumption that your kids can make it if you don’t give them too much. I’m not sure there’s true. For example, Utah is now the 8th most expensive state by average housing cost. The median house here is now about what I paid for mine 13 years ago. That’s not affordable on today’s median income. In fact, there pretty much aren’t any houses that one can afford on today’s median income. In high cost of living areas, typical doctors can’t afford the median house. A rheumatologist making $300K can’t afford the median ($1.36M) house in Manhattan without a monstrous down payment. If the docs can’t do it, how are your kids going to do it?
I want a nice place but not a large place. Impossible to find unless the neighbor is so close they bless you when you sneeze. My latest idea – buy my parcel and only build my MIL suite and pool. Let the next buyer build the big house.
Fascinating conversation and lots to ponder! My partner and I currently own 4 homes. Not sure this is relevant but just mentioning this because I do love real estate & fully recognize that real estate ownership is a path to wealth. 1 child has graduated from a private liberal arts college and is paying his own rent in DC – grad school is on the horizon & he is welcome to the remainder of his 529 but we will not cover this for him. Child #2 is a sophomore at a different LCA. Grandmother will gift $10K to each child when they purchase a home. It has never crossed my mind to gift them a substantial down payment for their first homes. I think the financial struggle for kids is important. It also helps them live in a way that they can maintain. It is unlikely that our children will have the same income as my partner and myself & I think living within your means is important. My son living in DC recently received a raise and said he can now “eat and pay rent.” That was a proud day in our house! We congratulated him and we did Venmo him $100.
Apparently the average size of newly constructed houses is lower now than anytime since 2010.
Source: https://wapo.st/4c8AjGM
That’s almost surely a good thing.