Update: Thanks to the readers who caught my error. I’ve updated the post here.
A tale of two graphs. But before I get to them, I have to admit that this post by Amanda gave me the needed kick in the ass to write about the huge increase in housing prices relative to annual income. Amanda writes:
…above all, I’m concerned about this belief that housing prices must be maintained at the ridiculously high levels they reached during the bubble, no matter what… My feeling is that we’re taking a hit on the economy any way you slice it, so why can’t housing costs come down to a point where ordinary people working honest jobs could, you know, buy a house? Before the crisis really came to the forefront, I couldn’t even believe how high housing prices got, because it seemed impossible that there were so many people that were so rich that they could afford homes that cost a quarter of a million dollars or more. What we’ve learned now is there weren’t that many, and that loans were being extended to people who simply couldn’t afford them, and the housing market was artificially inflated. And now the common wisdom is that we have to keep the average price of a house way out of the range of what most people could ever afford to keep the economy from tanking. The flaw in that reasoning should be obvious—it’s a forest/trees problem, where everyone is concentrating so hard on the immediate problems that they don’t realize that not addressing the larger crisis just means putting off the problem into a future that will be here soon enough. If they prioritized the issue of affordable housing over the whinging of bankers, I suspect their decisions would be sounder….
It’s easy to moralize about people who borrow too much, but I have to point to the cost of housing and say that it’s not so much that we live overly extravagant lifestyles so much as just maintaining the basic standard of living as an American costs more than you make, end of story. If you want to own a house and you’re just making a middle class income, then you better be prepared to take on more debt than you could probably ever pay back, becauses houses cost that much now.
Which brings me to graph #1. Below, on the Y-axis, is the ratio of the median house price (not adjusted for inflation; from here) to the median income (not adjusted for inflation; from here and here). So a value of 1.0 means that the median house costs as much as the median income, a value of 2.0 means that the median house costs twice as much as the median income:
Here are the underlying numbers; obviously, median housing price is the higher line, and median income is the lower line:
(the figures stop at 2007 because I can’t find the right wage data for 2008)
I realize people can argue if the ratio in the first figure is the appropriate comparison: we don’t know the individual incomes of home owners and the worth of their house. Likewise, you might be getting ‘more house’ than before (i.e., houses are bigger). But I think the overall pattern is so overwhelming, it is significant. And keep in mind, until 1974, the median house price was lower than the median income. I’m guessing many, if not most readers, can’t believe that’s real–an entire generation of Americans (maybe two, depending on how you want to count) has lived in a country where housing has steadily become unaffordable.
That’s why I’m not optimistic about the Geithner/Obama plan: until housing becomes more affordable, Big Shitpile will still be big and shitty. This is only the start of a long overdue correction in housing prices. These assets are not undervalued in the long term.
In other words, median house price has skyrocketed; the median income has not. That’s the real crisis.
Related post: Atrios assesses the assumptions of the Geithner/Obama plan:
This might make sense if you truly believe the magic market you believe in fervently is genuinely incorrectly pricing the assets, perhaps because you genuinely believe that if you could turn around the economy fast enough that you could massively reduce expected foreclosures.
But if you genuinely believe that, I don’t think you’ve been paying too much attention to just what’s been going on in the housing market. I don’t think you paid too much attention 3 years ago when you didn’t realize that it didn’t quite make sense that so many people could afford $700,000+ homes in Orange County. I don’t think you paid too much attention to the degree of speculation and outright fraud that was happening in parts of the country.