Inflation Adjusted Housing
Occasionally, when I visit my father-in-law I get into "converstations" about the state of the world, as tends to happen when people of two different generations come together. Unlike many people, we have a really good relationship and can go back and forth on topics we don't agree on, and in the end probably learn a thing or two and still like each other.
I tend to fancy myself a numbers guy. I like economics, and I like data. And while I admit that my world travels have probably skewed my views to the left, I try to back those up with hard facts. Charts can explain a lot of things in terms that it's hard to argue with.
My FIL is of the Boomer generation, I'm of Gen X, my niece is a Millennial (Gen Y) and my kids are Gen Z. Great Grandma, who just passed last year, was a Greatest Generation. So, when we get together, we pretty much run the gamut.
All of that to say that our conversations often run into topics like school affordability, housing affordability, gas prices, etc.. The sorts of topics that usually start with something along the lines of, "Well, in my day, when you turned 18..."
"...you could fill up your car for fifty cents."
"...you didn't take out a bunch of student loans so you could hang out with your friends and party all year."
"...you moved out of your parent's house, grew up, and bought your own house."
And after these conversations I go online, pull up some data, throw a few charts in an e-mail, and send it off. OR... maybe I find that my point of view was wrong, and I learn something new. Either way, a good back and forth conversation leads to some digging, and ultimately to some data.
Recently a conversation centered on my niece, and why at her age (25) she was renting a townhouse instead of buying a house. Grandpa's view was the hard line of, "You should always buy a house instead of paying rent to someone else who then gets to keep the appreciation."
My view was, "Have you seen what a starter house costs these days? How in the world is she going to buy a house? What bank is going to loan her that kind of money? And even if they did, would you even want her living in the neighborhood she could actually afford?"
Nieces take was simply, "Ha. I wish."
Later, I went digging around for data. Not just any data—INFLATION adjusted data. Because if there is one thing that older generations hate to admit—well, two things actually—it is that they are getting old, and that things might have been easier in their day. And this doesn't just go for Boomers. It literally happens as the counter clicks over to every new generation.
Looking at Data
This chart is one of my favorites. It's simple, and tells a story.
My FIL was buying his first house for $15,000 right around 1970. Adjusted for inflation, his house cost almost exactly the same as the house that his great-great-grandparents purchased in 1900. The only difference for him was that he was able to borrow almost the entire amount (VA loan). Back in 1900 great-great-grandpa probably needed at least 50% in cash, and was given maybe a five-year loan for the balance.
Over the next twenty-five years or so, as his financial position improved with age, he was able to sell his homes for a small profit, and move up to bigger homes on bigger chunks of land for only about 10% more than great-great-grandpa would have paid for them a hundred years earlier. I'd say that is almost the PERFECT situation. But... it wasn't perfect. It was about to be perfect.
Now in the 90s he had moved up to a very nice home, nice plot of land, in a nice neighborhood. He'd done this at historically low prices. Prices identical to the horse and buggy days, and yet he was driving a Porsche.
Over the next decade or so he watched as the home he had no intention of ever leaving, nearly doubled in value. At the top of what would come to be known later as the Housing Bubble, the average price of a home had reached just about double (adjusted for inflation, remember) what it had cost great-great-grandpa in 1900. Fortunately, for today's Grandpa, the bubble was meaningless. He already had his house and no intention of moving.
The bubble burst, and the housing market crashed. Remember that? Prices of homes became so cheap again. Right? Well, not really. They did fall sharply off of the peak, but they were still about 25% above the 1900 price.
Well, then, at least housing prices weren't so bad. 25% isn't great, but it's not terrible. And after that Housing Bubble I'm sure prices settled down again. Right?
Oh, boy.
Since the floor on inflation adjusted housing prices bottomed in 2012, at that 125% level, they have done nothing... Nothing but go straight up. It took a few more years, but we eventually exceeded the previous all-time-highs. In 2021 the average home, adjusted for inflation was well over 250% of what it had cost buyers back in 1900, 1975, 1985, and even 1995.
That starter home that Grandpa had gotten in 1975, for $15,000, would have cost him about $40,000 if it were equal to today's rates. So, the question posed to Grandpa becomes, would you have been able to afford that house if it had cost that much? Would the bank have loaned you that much money based on the paycheck you were bringing home at that time?
The answer, most likely, is no. He would probably have found himself in the same situation his granddaughter finds herself in today. He would have had to rent a house in a neighborhood not as nice as the one he'd grown up in. That's not a fun thing to admit.
More Interesting Data
The price per square foot of homes hasn't changed quite as dramatically since the 70s (depending on where you live). So, one might argue, just build a smaller house. The average size of a new home has increased from 1,660 sq/ft in 1975 to 2,491 sq/ft in 2020. A rise of 50%, even while the average family size continues to decrease. So, yeah, buying a smaller home seems like a logical solution. But that doesn't take in the reality of the situation. Builders are less likely to take the job or design that smaller house. Local building codes across the US are highly unlikely to allow you to build a 1,000 sq/ft home in a neighborhood filled with 2,500+ sq/ft homes alongside them. HOAs are simply not going to allow it. It's going to take a big change in the overall view of housing affordability to effect this cost-saving measure.
Grandpa might think, "Well, I was only making $4 an hour when I bought my first house. Kids these days go to McDonalds and get paid $18. They should be able to buy a house."
Fact is, wages have hardly moved, despite all the advancements in technology and increase in productivity. Wages are stagnant, adjusted for inflation. Whatever grandpa was earning in 1970, his niece is earning the same. Yet she has to take those wages and somehow stretch them to buy a house that cost more than twice as much.
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