The Unholy Triad Of Housing (Un)affordability
One of the distressing trends I have been keeping track of for the last several years is the “rental affordability crisis.” This is the moniker put on the trend by the Department of Housing and Urban Development for the fact that rents have been rising far faster than income among the lower quartiles, causing the median rent as a percent of income to rise to a series of new record highs, most recently in the second quarter of this year. For a quick refresher, here is the Census Department graph of “median asking rent:”
One reason for that crisis is certainly that multi-unit dwelling construction has not been keeping up with the increase in demand, causing rental vacancies to fall to 30-year lows in 2016:
Meanwhile, one trend I have wanted to explore further is, just how high can housing prices go before there is a breaking point? Which brings me to this: at one level economics is all about choices: how much does a particular good cost compared with the alternatives? In this case, maybe one reason that rents have soared so high is that housing costs have *also* soared in the last few years. We certainly know that the cost of new single family houses has hit new nominal highs, but that is only about 10% of the market. For 90% of home buyers, the relevant cost is that of existing houses.
So, below is the graph of the average selling price of existing houses (index, blue, left scale) with the sales price of new houses (nominal, red, right scale):
As you can see, the average price of existing homes bottomed in the 2011-12 time frame. New homes had previously bottomed, but did not begin their strong ascent in price until 2012. Meanwhile, if we go back to the first graph, we can see that rents followed a similar trajectory, beginning a steep ascent in 2012.
Between 2012 and the second quarter of this year, new home prices rose about 40%, while both existing home prices and apartment rents rose about 30%.
Needless to say, all of these increases far outstripped gains in income.
What this tells us is that part of the reason for the steep climb in both apartment rents and house prices is that the alternatives are also rising in price!
Which brings us to the final leg of the triad. Because if houses are unaffordable, and apartments are unaffordable too, then young adults may be forced into the alternative of continuing to live home with mom and dad.
While I have been unable to find any continuing data on this final alternative, it has been the subject of periodic press coverage. Most recently, a study done by the Pew Research Center found that across all educational levels, the percentage of young adults living at home with a parent had increased by roughly 50%:
This also correlates with the relative lack of total residential construction throughout this expansion:
As well as the fact that housing inventory for sale is at very low levels.
This is something I aim to explore further, and in particular, to develop some real, dollar comparisons for monthly rent vs. monthly mortgage amortization costs over a lengthy historical period. I am working on that, but it will be the subject of another post.