The price of housing, whether buying or renting, is rising, or so say many recent news reports.
Some skepticism is in order—and was, in some cases, provided (though it was the rising prices that largely led). Broader reporting on housing economics would help.
July housing prices went up at their fastest rate in seven years, as The Washington Post reported on September 24 (though the piece also noted that “economists say there are signs the housing market is beginning to cool.”) Prices may be “on track” to recovery, as The New York Times reported the same day (the Times also indicated “some analysts are worried [the housing market] may slow down in the months ahead.”) Housing prices may be slowing, is how USA Today had it.
No news report about housing prices is complete without some discussion of incomes. In the long run, housing prices must reflect the incomes people have to finance their residences—a basic economic fact neglected in these stories. And of the above pieces, only the USA Today report got at that (albeit very briefly):
Price gains need to slow even more to be sustainable, given flat incomes, says Stan Humphries, Zillow chief economist.
Elsewhere, Catherine Rampell’s Oct. 6th piece in The New York Times Magazine included some important insights—too often missing in routine coverage of housing prices—especially that “half of all homes that went into foreclosure between 2007 and 2012 were actually in the lowest price tier when they were purchased, and most were located in middle- and lower-income areas.”
Rampell’s line refers indirectly to how the worst mortgages during the era of inadequate-to-no-underwriting were sold to people who were unlikely to be able to pay the money back, especially when interest rate resets and additions to principle made the cost more than the borrowers could bear.
And, Rampell noted, “the boom-bust-flip phenomenon is just one of the most obvious ways that research suggests the financial crisis has benefited the upper class while brutalizing the middle class.”
But then Rampell writes, “Rents have risen at twice the pace of the overall cost-of-living index” and quotes an expert as saying landlords can raise rents “with impunity.”
Below is the graphic I created at the St. Louis Federal Reserve website—graphics can easily be created using economic data at the site—which shows that the official data does not support what Rampell wrote. The red line is the monthly consumer price index, the most widely used inflation rate measure. The blue line is the monthly imputed rental value of owner-occupied housing, excluding the cost of utilities, a proxy for rents.
As the graph below shows, rents rose—and fell—but they did not grow at twice the rate of inflation. For short periods rents, and housing prices, can grow, or shrink, at very different rates than the overall economy, but in the long-run housing prices have to relate to real incomes.
A better piece than Rampell’s, because it looked at the issue from the perspective of would-be homeowners, ran appeared the same day by Pete Carey, the Pulitzer Prize-winning San Jose Mercury reporter (and my desk mate 45 years ago).
Carey looked at how many first-time buyers cannot afford a house in the San Francisco Bay Area, with data for four counties, and noted how high housing prices force people into the rental market, which, in turn, puts upward pressure on rents. He ended with this telling quote from the chief economist for the real estate website Trulia: “Rents are rising faster than incomes, and home prices are rising much faster than incomes.”
Again, housing prices cannot over the long run rise faster than incomes. And to the extent that they do, it depresses other spending, which means a weaker economy overall.
Every income group made significantly less in 2012 than in 2007, and all but the top one percent of the top one percent made less in 2012 than in 1999, analysis of tax return data by Professors Emmanuel Saez and Thomas Piketty shows.