Affordability crisis

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.nytimes.com/2022/07/17/opinion/inflation-prices-…

**Inflation Has Unmasked the Depths of Our Affordability Crisis**
**by Ezra Klein, The New York Times, July 17, 2022**

**...**

**The numbers are startling. The median home price in 1950 was 2.2 times the average annual income; by 2020, it was six times average annual income. Child care costs grew by about 2,000 percent — yes, you read that right — between 1972 and 2007. Family premiums for employer-based health insurance jumped by 47 percent between 2011 and 2021, and deductibles and out-of-pocket costs shot up by almost 70 percent. The average price for brand-name drugs on Medicare Part D rose by 236 percent between 2009 and 2018. Between 1980 and 2018, the average cost of an undergraduate education rose by 169 percent. I could keep going.**

**We papered over the affordability crisis with low prices for consumer goods, soaring asset values that kept richer Americans happy, subsidies for some Americans at certain times and mountains of debt: housing debt and student-loan debt and medical debt that kept the working class semi-afloat. But none of this addressed the core problem. For far too long, the prices of the things we need most have been growing far faster than inflation....** [end quote]

Services that must be provided by local labor (construction trades, education, medical care, child care) increased dramatically in price. Goods that were produced by low-cost foreign labor or automation were suppressed in price relative to American labor-made goods (causing the loss of millions of U.S. production jobs).

This article has many examples of ways to reduce costs in many parts of the system.

But it doesn’t address the fact that any goods and services produced by American labor will be higher than globalized low-cost sources. And many services (e.g. elder care) can only be provided by local, hands-on labor.

The high inflation experienced by middle-income families is because so many necessary services are inflating rapidly.

Wendy

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Were all those numbers adjusted for inflation?

Also ignored is that AI controlled automation can reduce many manufacturing labor costs to below that of even foreign labor. Subsidizing (through tax incentives, etc.) a factory which doesn’t supply human jobs is silly and self-defeating for our society.

Jeff

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OrmontUS writes,

Also ignored is that AI controlled automation can reduce many manufacturing labor costs to below that of even foreign labor. Subsidizing (through tax incentives, etc.) a factory which doesn’t supply human jobs is silly and self-defeating for our society.

What are the odds that the average American understands that?

intercst

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“The numbers are startling. The median home price in 1950 was 2.2 times the average annual income;”

My parents bought their first home in 1948. I think it was about $16,500 for a 2 bedroom cape cod style house in NJ. One bathroom. About 800 square feet and a small one car garage.

Full but unfinished basement where the oil burner sat and hot water heater. Unfinished sloping attic. On a 50x70 foot lot that was a ‘commute’ into NYC in a ‘new’ suburb. Over the years, my dad finished off half the basement for a ‘family room’ and finished off the attic to make a third bedroom and some storage. Had a sloping roof in my bedroom and a ‘dormer’. Even with new area in attic, less than 1100 sq feet. Eventually built a half bath in the basement. My dad was handy. Houses all around were about the same. A few were two story with more bedrooms but still what would be considered ‘tiny’ today

Now.

“Average (mean) square footage for new single-family homes increased to 2,561. Since Great Recession lows (and on a one-year moving average basis), the average size of new single-family homes is now 6.3% higher at 2,537 square feet, while the median size is 10% higher at 2,312 square feet”

https://eyeonhousing.org/2022/02/gains-for-single-family-hom…

Over the last 42 years, the average new US house has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from the Census Bureau) to 2,687 square feet last year.

https://www.aei.org/carpe-diem/new-us-homes-today-are-1000-s…

In my burg, the average size of homes is well over 2300 sq feet and many have 4500 sq feet . Next subdivision over starts at 4,000 and goes up to 5500 sq feet.

New homes are at least 3 bedrooms, most 4 or 5 bedrooms, a couple bathrooms, 2 family living areas. No basements in north TX. two or three car garages.

When I bought this house in 1990 (4 bedrooms, pool, 3 baths, 2 car garage) it was about 2.3x my professional salary. For a couple it would have been even less of percent. It was 4x the ‘median family income’ at that time and now it would be “In 2021, the average annual pay of employees in Texas totaled to 65,976 U.S. dollars. This is an increase from 2001, when this value stood at 36,045 U.S. dollars.”
or more than 7 times the ‘average’ of TX salaries.

Of course, lower cost areas in TX bring it down. Lots of professionals here earning $100-150K/yr (and some more) and couples both working.

Home prices in Dallas and the rest of North Texas show no sign of moderating. Median-priced homes sold for a record $335,000 in March 2022, representing a gain of 19% year over year.

https://learn.roofstock.com/blog/dallas-real-estate-market

You won’t find too many 2 bedroom homes left from the 1948 era. The house I lived in NJ in is now probably 4000 sq feet. They built it up, they built it out…zillow says it would sell for $1.2 million today!

https://www.zillow.com/homes/250-berkeley-road,-river-edge,-…

What can you say? Our house in NJ didn’t have tile floors. Linoleum in the kitchen. carpets elsewhere. one bath. no fancy shower. washer machine downstairs in basement - solar dryer outside. 10 years later we got a new gadget - a microwave - sat on a small cart as there was no counter space. Of course, small eat in kitchen. No dining room. Grew up in that house and my parents sold it when they retired and built a retirement home 150 miles away.

Oh, and we had ONE car. Dad rode the bus/subway to work in downtown Manhattan.

t.

t.

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Questions to auto industry execs about “affordability”, as they push ATP ever higher, by both dropping their lower priced models, while making the remaining models bigger and more feature-laden, brings a response of “tell them to buy used”. Because Ford can make more profit on a big car, than a small one.

I have commented here before, in the area I live in, small condos, like I live in, and normal sized homes, have not been built in 30 years. Since the 90s, only McMansions are built, because Pulte can make more profit per lot by building a McMansion on it, than a normal sized home.

Thank MBAs, and their “analytics”, that show the route to higher profits is higher priced products. People who object to higher prices are brushed off with “get a second job”, or “learn to do without some of the luxuries you spend on”.

Steve

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The numbers are startling. The median home price in 1950 was 2.2 times the average annual income
—
Over the last 42 years, the average new US house has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from the Census Bureau) to 2,687 square feet last year.

And the standard amenities have changed. Consider air conditioning.

https://fee.org/articles/air-conditioning-costs-fell-by-97-p…
According to Measuringworth.com, in 1952 an average production (i.e., blue-collar) worker’s hourly wage was $1.72. Back then, as Michael Cox and Richard Alm found in their 1997 report ‘Time Well Spent: The Declining Real Cost of Living in America’, the average cost of 5,500 BTU air-conditioning unit was $350. That meant that a blue-collar worker had to work 203 hours to earn enough money to buy an air-conditioning unit in 1952.

Today, Walmart sells a far more efficient 6,000 BTU air-conditioning unit (with a remote control) for only $178. With the current hourly salary of a blue-collar worker standing at $32, it now takes just 5.56 hours of labor to buy such an air-conditioning unit. That means that the time price (the number of working hours needed to earn enough money to buy a product) of air-conditioning has fallen by more than 97% since 1952.

DB2

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Supply side economics was playing into our worst trait as nation, using people. While not slavery outright it is a massively abusive sharecropping.

We need to clean it up. The incentive is to create huge national wealth.

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factory which doesn’t supply human jobs is silly and self-defeating for our society.

The work in the factory is still on the inventory and shipping side, the design and engineering side, the business and sales side.

We either opt in or we opt out.

But in opting out we just have our corporations build it overseas. We just allow the flooding of our markets. We share the technology and in game theory we fail.

Most of all these factories are more efficient uses of capital. Meaning it is less burdensome to insist on environmental controls.

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“According to Measuringworth.com, in 1952 an average production (i.e., blue-collar) worker’s hourly wage was $1.72. Back then, as Michael Cox and Richard Alm found in their 1997 report ‘Time Well Spent: The Declining Real Cost of Living in America’, the average cost of 5,500 BTU air-conditioning unit was $350. That meant that a blue-collar worker had to work 203 hours to earn enough money to buy an air-conditioning unit in 1952.”

In NJ, we didn’t have any a/c from 1948 (house bought) until 1965 or so when dad bought an a/c unit for the living room. That was it there.

THeir retirement home in upstate NY didn’t have a/c. Mom finally added central air in the 1990 time frame when her arthritis was bad and she needed it just a few days a summer - maybe 8 or 10.

Houses in TX have usually two or three a/c units to cool 230-0-5500 sq feet. It’s 104 outside today and will be every day this week.

In the 1950s, not many here had a/c. Just beginning to start and mostly window a/c units. Most older apartments just have one , maybe two, a/c units in the wall.

Besides air, most houses here have 2, 3, 4 and sometimes five bathrooms or half baths.

t.

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This sentence from the piece is a bit illogical…

But none of this addressed the core problem. For far too long, the prices of the things we need most have been growing far faster than inflation…

Inflation is supposed to be measuring the cost of the things “we need most”, like food, shelter, transportation, etc. If the metric is still stuck on 4% and “actual” inflation is 9%, then something is wrong with

a) the basic calculation,
b) the mix of stuff in the theoretical basket of goods used to compute the index year to year
c) or the heuristics and tortured math used to try to provide a consistent indexed calculation when the very definition of a “good” in that basket is morphing exponentially.

In the 1970s, our interpretation of “housing” was a 1300 square foot house and non-enclosed car port for a Ford Country Squire wagon and VW Beetle. Today, “housing” to many means a 3500 square foot “master built” home with a man-cave, she-shed and a home theatre with more watts in the 7.1 surround audio system than Radio City. And a three-car garage with epoxy coated floor. Those are not remotely the same “good.”

As mentioned in prior posts, I think two factors behind the current inflation spike are

  • technology shocks and supply disruptions in the energy market
  • labor market supply dips due to covid deaths and infirmity and many Americans getting fed up with dealing with other Americans in the service sector in an age of vile public behavior

If housing is examined separately, much of the spike in housing can be traced to NIMBY restrictions on new construction or zoning restrictions blocking more efficient density developments. Restricting supply drives up prices for homes and rentals alike. That in turn highlights disparities in incomes and wealth because as housing prices in urban / suburban areas skyrocket, the only families that can afford them are those at the top of the income distribution. And for those in those brackets, what difference is there between a $500,000 home and a $590,000 home? Can we close this week?

There’s a great scene in the 1970 movie Little Big Man where Jack Crabb has returned to live with the Cheyenne that raised him as a boy. At that point, they are living on land granted to them by treaty of the US government for them to live on “as long as the wind blow and grass grow.” Despite that promise, Jack’s mentor in all life matters – Old Lodge Skins, who by now has lost his sight but sees in other dimensions – grows increasingly tense as he hears the tribe’s ponies begin whinnying and snorting. “The ponies are trying to tell us something…” says Old Lodge Skins, just as American troops appear in the distance to chase them off the land they were promised and massacre the tribe.

The ponies in the economy – these inflation numbers – are telling us there are pent up inefficiencies and uncompetitive forces in the economy – some decades old – that are reaching a breaking point for individuals. These pressures have been lurking for decades but there were enough degrees of freedom in the economy to avoid metal on metal contact throughout the entire engine. The current disruptions have zeroed out any flexibility that allowed the extent of those problems to be masked. The numbers are out of whack and will remain that way unless something breaks the chokeholds that are preventing communities from correcting these inefficiencies and distortions.

WTH

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Subsidizing (through tax incentives, etc.) a factory which doesn’t supply human jobs is silly and self-defeating for our society.

Do you then oppose the HUGE chip factory subsidy bill that is making its way through congress as we speak? (Semiconductor factories require relatively few humans)

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