Further thoughts on housing affordability and the psychology of inflation

A large number of commenters on this morning’s post on this subject wrote something along the lines of “sure housing hasn’t become less affordable over the last 20 years if you don’t count places people actually want to live/where good paying jobs are.”

This is obviously false empirically speaking

First, a majority of Americans live in places in the US where the median house price is at or below the national average, since rates of homeownership are of course going to be higher in places where home ownership is more affordable. So the claim that housing is affordable only in places where nobody wants to live means the majority of Americans live where “nobody” wants to live. This sounds awfully elitist, which is something we surely want to avoid at LGM, right comrades?

Second, the implicit claim that local incomes closely track local housing prices, so the high paying jobs are where the high cost houses are, is also obviously false if you look at the actual numbers.

To use the two states whose housing markets I’m most personally familiar with for biographical reasons, Colorado and Michigan.

Median household income currently necessary in Colorado to afford a median-priced home: $152K

Median household income in Colorado in 2022: $90K

Median household income currently necessary in Michigan to afford a median-priced home: $66K

Median household income in Michigan in 2022: $67K

These are surely not the most extreme examples available, they’re merely the two I checked because of my own background in regard to this stuff.

What’s going on here, I think, is both the money illusion I described in the earlier post, and the strong tendency people have — even educated and statistically sophisticated people — to generalize from their own experience: housing is unaffordable where I live, so that means it’s unaffordable period, unless of course you include the places where the majority of Americans live and work.

All of which is to say that housing affordability, in terms of home ownership specifically, is a strongly regional problem, rather than a national crisis in some general sense.

Beyond this, the far more acute housing affordability crisis has nothing to do with home ownership per se, and everything to do with rents, since somewhere between 25% and 50% of the population (depending again on location) can’t realistically afford to be homeowners, which means they are subject to the whims of the rental market, which especially among the poor can be devastating in all sorts of ways. (I strongly recommend Matthew Desmond’s great book Evicted on this point).

I want to caveat all this by noting that I’m an extremely privileged person in terms of income and demographics — when I moved to Boulder in 1990 the average price of a single-family home in the city was $130,000, which you can double for inflation adjustment purposes, while now it’s around $1.2-$1.3 million. This is a huge problem for the university, which obviously hasn’t quadrupled the salaries of its entry level tenure track professor salaries — in fact they’ve barely grown in real terms — let alone those of the non-tenure track faculty, and the institution’s staff, who of course make up the large majority of the university’s employees.

I’ll have more to say about the underlying psychological dynamics of this in another post.