Saturday, December 12, 2009

It's Never Been Better for Americans: Lower Monthly Payments and Bigger Homes Than Ever

About a week ago, JCarrol1948 asked me to comment about this article "America Without a Middle Class" by Harvard law professor Elizabeth Warren who presents a typical "gloom and doom" scenario of America's middle-class. Here's an excerpt:

The crisis facing the middle class started more than a generation ago. Even as productivity rose, the wages of the average fully-employed male have been flat since the 1970s. But core expenses kept going up. By the early 2000s, families were spending twice as much (adjusted for inflation) on mortgages than they did a generation ago -- for a house that was, on average, only ten percent bigger and 25 years older.

Professor Warren presents a chart claiming to show that household spending on food (-19%), clothing (-32%), appliances (-44%) and cars (-30%) went down between the 1970s and 2007, but that spending on housing, health insurance, and child care services all doubled during that period (+100% or more).  I'm still trying to find the Census Bureau data she used, but it's not easily available.  In the meantime, the charts above provide some alternative perspectives on historical housing costs since the 1970s.    

The top chart above shows inflation-adjusted monthly house payments (in 2009 dollars) back to April of 1971 based on: a) the median sales prices of new homes sold in the U.S. (data here) and b) the average monthly conventional, 30-year mortgage rate (data here), assuming a 20% down payment.   Except for a few years in the early 1970s, housing costs (by this measure) have never been cheaper, with the monthly payment on a new median-priced home purchased in October of only $906.13.  That's about $500 less per month (and 35% lower) than the $1,402 payment in April 2006, and less than 50% of the payments above $1800 in the early 1980s. 
And when you factor in the fact that the typical new home built today (average of 2,519 square feet) is more than 50% larger than the typical new home in 1973 (1,660 square feet, see bottom chart above, data here), Americans have never been better off when it comes to housing costs. 


At 12/12/2009 10:56 AM, Blogger jcarroll1948 said...

Professor Perry. Thank you for responding to my request.

At 12/12/2009 11:09 AM, Blogger Tom said...

Elizabeth Warren was correct about housing, using early 1990's figures. Since then, once the government-induced bubble in housing prices collapsed, prices have come back down.

Child care services spending doubled? Who was using daycare in the early 1970's? Nobody, relatively speaking.

Medical care more than doubled because medicine is vastly more advanced from the early 1970's. Medicine is also much more expensive because the market system no longer applies - 85% of medical payments are "free money" from the government or insurance.

Government has also ruined medical prices through state mandates (3X difference Utah vs. NY), state line limits on purchasing insurance, gigantic underpayment by Medicare and Medicaid (20%), about a 10% penalty from defensive medicine induced by jackpot justice, and the cost of rampant fraud in Medicare and Medicaid (10 to 20%).

Big government, working hard against us - in housing, medicine, energy, education, retirement savings, food prices, and finding a job. All the biggest items in the household budget.

At 12/12/2009 12:04 PM, Anonymous Jim Hlavac said...

Why on earth is census data hard to access? Shouldn't something like be so ridiculously easy to use that a child could find each and every report and data source that is collected, compiled and compared by the Census Bureau? Are the very "facts" about us a state secret? Or are they just not facts at all? What on earth are they hiding? And why? The climate folks hide the decline and the census folks hide the increase. Any thing at all to make the world look worse off. Amazing.

At 12/12/2009 12:38 PM, Anonymous Anonymous said...

What is the median square footage and median mortgage payment of the existing housing stock in both 1973 and 2007?

The square footage of a new house constructed and the mortgage payment carrying cost in any given year is not determinative of anything.

From Warren's HuffPo article referencing this HUD study, the data (Tables A-17 to A-20) is unequivocal that the median cost burden of renters and owners has risen from 22% to 29% and 15% to 19%, respectively. The more interesting data point is the percentage increase of renters (22.7% to 41.1%) and owners (8.1% to 21.6%) spending more than 35% of income on housing in the time period. The middle class has sure bitten off alot more housing than they can chew.

At 12/12/2009 1:10 PM, Blogger spencer said...

If things are so great why is the market responding by producing new homes at near record low rates?

At 12/12/2009 2:33 PM, Anonymous Lyle said...

Mark, why not go ahead and put together a cost per square foot metric on new houses, that does control for one of the quality measures the size.
We do see size of housing coming down right now due to the bust. Its a more interesting comparison (all be it longer term) to compare a new house today to one in 1948-1950. Obviously today is bigger, has more than 1 bathroom, AC, dishwasher, fancier hardware, counter tops etc.
BTW this looks like bls consumer expenditure survey data, but the web site only goes back to 1980 but based on an earlier post some data exists at least back to 1888, but a good bit is likley only at the BLS physical site.

At 12/12/2009 4:26 PM, Blogger brodero said...

Housing is an inventory problem
which is why new home production is low....but that won't last....

At 12/12/2009 4:54 PM, Blogger bobble said...

" . . . the monthly payment on a new median-priced home purchased in October of only $906.13. That's about $500 less per month (and 35% lower) than the $1,402 payment in April 2006, and less than 50% of the payments above $1800 in the early 1980s."

whoa, put the keypad down and back away from the cherry picker!

if you want to compare
" . . alternative perspectives on historical housing costs since the 1970s . ." maybe you should use 1970 mortgage rates.

you're comparing an abnormally high interest rate period, "early 1980s", to today.

mortgages in 1981-1982 were 16% +2 points. a mortgage in 1971-72 was 7.5 % +1 point).

the fed has driven treasury bill interest rates to zero (and below!) and purchased large quantities of agency securities. this has resulted in artifically low mortgage rates.

that being said, i agree that this is a great time to be looking for a home.

At 12/12/2009 5:11 PM, Anonymous Benny "Boom, No Doom" Cole said...

I think it is obvious that many materials things relatively cost less--cameras, TVs, houses etc. This is due to the wonderful productivity gains of the past 30 years.
But other services cost a lot more--education, healthcare, lawyers etc.
Maybe we are a nation of whiners. But people on the coasts say they cannot afford the houses their parents bought (due to solid appreciation for decades) and people in the Midwest say they cannot get the jobs their parents had (due to a collapse of industrial and rural economies).
Certainly, farmers and soldiers and Wall Streeters live better than ever.
The moral: Make sure you are in a government-run or subsidized industry.

At 12/12/2009 5:29 PM, Blogger juandos said...

"If things are so great why is the market responding by producing new homes at near record low rates?"...


Could it due to these people?

Could it be due to more socialist nanny state rules in the future?

At 12/12/2009 6:00 PM, Anonymous Dr. T said...

The improved value of today's larger houses is a myth, because house value is comprised of three factors: size, quality, and location. Today's houses are larger, but they are poorly designed and poorly built. (I'll spare you my long list of complaints.) Today's houses often have less valuable locations, typically within a development containing hundreds or thousands of cookie-cutter houses on land recently annexed by the nearest city. These newly bought, tightly packed houses come with high property taxes.

Buying a new house today is not a great bargain.

At 12/12/2009 6:30 PM, Anonymous morganovich said...

this piece makes a very skewed argument.

times may be good for a first time home buyer who wants a new home, but if you already own one and have a mortgage, this data means you have an excellent chance of being underwater.

if times are so great, why is demand for new homes so low?

this is really stretching the data to a conclusion it can't support.

anon 12.38 - that's a good link. thanks.

At 12/12/2009 9:17 PM, Anonymous Clint said...

Housing affordability measures have always been misleading. During the recent peak of house prices, the index was still above 100. If houses are "affordable" during the biggest bubble in history, there's something wrong with the index.

The index assumes a 20% down-payment. With the decline in household net worth, that's not feasible for most people. If the index does not measure the number of people who have a 20% down payment, it is meaningless.

Most people at the median income would not live in the median priced house because they are run down and in bad neighborhoods.

There are so many things wrong with the housing affordability index I'm surprised anyone but realtors talk about it. No one should take it seriously.

More than half of sales are in cash (speculators) or FHA loans (highly leveraged with government subsidy). This does not indicate that "normal" people are rushing out to buy homes.

At 12/12/2009 9:59 PM, Anonymous Anonymous said...

We need bigger homes.
We need big debt so we can claim interest deductions.
We need to borrow from China to buy these houses.


At 12/12/2009 10:11 PM, Anonymous Lyle said...

If you think about it todays society where one moves every few years is not one where home ownership makes much sense. Houses have a lot of costs to turn over, between 8 and 10% of value gets lost in fees in selling and the same in buying. If house prices are flat then you need to stay a significant number of years to save the cost of the transaction in rent and or psychic costs (the mythical value of owning your own home).
Rents are likley to be lower always than fully burdened home ownership because the landlord can deduct 3.75% of the price of the house as depreciation every year, but also add major expenses to his basis. Minor expenses such as paint etc, are also partly paid by uncle as they can be deducted against rental income.

What would happen to homeownership, if when you owned a home you had imputed rent added to your income and were allowed the full set of landlords deductions?

At 12/12/2009 11:22 PM, Blogger BxCapricorn said...

This is where you disconnect from the World of data and graphs...and think. Am I better off? Are my neighbors better off? Why do I pay so much for milk, while computers are so inexpensive? My housing costs were absurd and yet the NRA Economist David Lereah was telling me that they weren't (in 2009-2008) costs more...what can one do with gold? Why does everyone in the media lie to me?

At 12/12/2009 11:23 PM, Blogger BxCapricorn said...

Correction 2006-2008...I was standing on my head...

At 12/13/2009 2:53 AM, Anonymous Anonymous said...

I love the endless supply of graphs to show us what we don't know for ourselves.

I thought I was better off in the 80's when, when I could afford European vacations, but I was wrong, the graph shows I am better off today than in the 80's, silly silly me.

At 12/13/2009 3:31 AM, Blogger PeakTrader said...

There are many misperceptions about the U.S. economy, because the real economy is overlooked. Are too many houses better or worse than too few houses?

Over the past 25 years or so, the U.S. economy has been a "Black Hole" in the global economy, attracting imports, capital, and the foreign owners of that capital themselves, while the U.S. became increasingly more efficient, to continue the virtuous cycle.

Now, the U.S. government is the Black Hole "consuming" the U.S. economy. So, U.S. households and firms can expect higher costs of living and production. There will be fewer and smaller assets and goods.

Dr Perry's data reveal the real economy. The data show the quantity and quality of U.S. assets and goods have increased substantially in recent years.

At 12/14/2009 9:43 AM, Anonymous DrTorch said...

Thanks for some solid research to refute Warren's nonsense.

Housing is just one example of how an economy can improve when allowed to function.

If the middle class is struggling, it's becaue of high taxes and fees. Increased incomes have pushed people into higher tax brackets, where they pay disproportionally more in taxes than their parents.

Two income families exacerbate this situation, and then incur costs such as child care, which Warren then uses as some sort of metric that things are harder!

Warren's data really only prove libertarians wrong in one way: people don't always make rational decisions.

At 12/15/2009 4:39 AM, Anonymous Cousin Og said...

Elizabeth Warren is a complete idiot. She's a law professor who says she can't understand credit card terms and conditions. She ought to have her law degree revoked.

At 12/15/2009 11:11 AM, Blogger OBloodyHell said...

> I'm still trying to find the Census Bureau data she used, but it's not easily available.

Which makes it bogus. You should call her on that all by itself.

If someone interested in verifying claims cannot readily get access to the data used to make the claims, we need to start taking the position that the claims are inherently invalid right at the start.

This crap goes hand in hand with the Goebbels Warming garbage.

If you don't allow your veracity to be checked, you shouldn't be taken seriously.

At 12/15/2009 11:28 AM, Blogger OBloodyHell said...

> maybe you should use 1970 mortgage rates.

Uh, bobbie, you might actually want to stop arguing against cherry picking to answer cherry picking, for one.

First off, MARK's not even "cherry picking" -- HER cite is a comparison of
By the early 2000s, families were spending twice as much (adjusted for inflation) on mortgages than they did a generation ago -- for a house that was, on average, only ten percent bigger and 25 years older.
blatantly says "houses ca. 1980"

You can certainly go "very late 70s" (78,79) if you want. You really want to argue that much on THOSE inflation rates? I think you and I are BOTH old enough to remember that time frame, from other things you've said in the past.

The point is still valid -- people aren't paying that much more in constant dollars, and a lot of people are choosing to do so -- the house may have only a bit more square feet, but it's likely to have two baths, a two car garage, a much fancier kitchen, far, far more efficient appliances, and one HECK of a lot more built-in storage space. In short, people are paying for features that didn't exist before, either. So, "pound for pound" comparisons aren't even particularly apt -- and it really doesn't lose on that level, either.

You can no more compare today's houses on a dollar value than you can compare today's cars or "home entertainment products".

Go ahead, compare a 50" flat screen with 7.1 surround sound and a blue-ray DVD with a 25" console and attached stereo and a Betamax VCR...

The two just aren't the same, not by a long shot -- even if they are vaguely comparable in cost, which they generally aren't "worse" than.

This woman is a typical LIBTARD IDIOT trying to convince people that they are WORSE OFF than people 30 years ago -- mainly because people have short memories, don't actually have the capacity for critical thinking, and/or aren't old enough to recognize such claims as the ABSOLUTE BOVINE EXCREMENT that they are.

I would not trade places with ANYONE living in 1970 for a MILLION dollars in my bank account in 1970.

And if YOU did, you'd regret seriously it in a matter of DAYS. All the comforts you've gotten to expect so automatically that you don't even think about them would pile up in no time at all.


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