“Why buying a house today is so much harder than in 1950” (Curbed) has some interesting numbers:
To understand just how unaffordable owning a home can be in American cities today, look at the case of a teacher in San Francisco seeking his or her first house.
Educators in the City by the Bay earn a median salary of $72,340. But, according to a new Trulia report, they can afford less than one percent of the homes currently on the market.
Despite making roughly $18,000 more than their peers in other states, many California teachers—like legions of other public servants, middle-class workers, and medical staff—need to resign themselves to finding roommates or enduring lengthy commutes. Some school districts, facing a brain drain due to rising real estate prices, are even developing affordable teacher housing so they can retain talent.
This housing math is brutal. With the average cost of a home in San Francisco hovering at $1.61 million, a typical 30-year mortgage—with a 20 percent down payment at today’s 4.55 percent interest rate—would require a monthly payment of $7,900 (more than double the $3,333 median monthly rent for a one-bedroom apartment last year).
Over the course of a year, that’s $94,800 in mortgage payments alone, clearly impossible on the aforementioned single teacher’s salary, even if you somehow put away enough for a down payment (that would be $322,000, if you’re aiming for 20 percent).
The figures become more frustrating when you compare them with the housing situation a previous generation faced in the late ’50s. The path an average Bay Area teacher might have taken to buy a home in the middle of the 20th century was, per data points and rough approximations, much smoother.
According to a rough calculation using federal data, the average teacher’s salary in 1959 in the Pacific region was more than $5,200 annually (just shy of the national average of $5,306). At that time, the average home in California cost $12,788. At the then-standard 5.7 percent interest rate, the mortgage would cost $59 a month, with a $2,557 down payment. If your monthly pay was $433 before taxes, $59 a month wasn’t just doable, it was also within the widely accepted definition of sustainable, defined as paying a third of your monthly income for housing. Adjusted for today’s dollars, that’s a $109,419 home paid for with a salary of $44,493.
I’m not sure that the author’s explanation of why houses are expensive today is right, but I think at least he is good at explaining that houses are expensive. (My personal view is that the U.S. is crazy bad at urban planning so there are only a few nice places to live and, with the population having quadrupled since the most recent batch of “nice places” were built (circa 1900), that puts a lot of pressure on prices.)
Readers: What do you think of this author’s arithmetic and, more importantly, his grand explanation?
Related:
Absent from the analysis is the working spouse, common today and rare in the 50’s. The 70K salary quoted is more likely 140K for the family. Also, houses are much larger and more luxurious.
While houses are commonly more expensive in the Bay Area, cheaper houses exist involving a tradeoff with some combination of crummier schools, higher crime, and longer commutes. Oakland, within commuting distance of San Francisco, has houses for under 400K. This, in what is perhaps the most inequitable real estate market in the country.
Personal characteristics needed are good credit, a working spouse, practice family planning and don’t get divorced and you can buy a house in most parts of the U.S.
@Brian enlighten us as to what personal characteristic will guarantee “don’t get divorced”?
Well, the author gets the history right. At least, it maps to my family’s experience in the early 50s when dad bought his first home with a VA loan in a brand-new suburb outside of Detroit. I can’t remember what he paid — several thousand, I think. And he was stretched to make the mortgage, while commuting to Detroit to work for many years. The only way then to “get ahead” was for the spouse to work, too, which my mom did (although that was not the norm in the neighborhood at the time). Now, the same house would sell for around $110,000 on that street today. Workers would not have to commute to Detroit (although they easily could), but might drive to other more commercial suburbs within a half-hour range. The monthly mortgage on that house today would be around $520, certainly affordable. So to Philip’s point, here is an affordable house (obviously updated), near plenty of commerce within a reasonable drive, but in no way by modern tastes would it be considered a “nice place to live.” That was not a significant factor in our neighbors’ thinking 64 years ago, when it seemed for most to work out just fine.
The total population in 1960 of the Bay Area was around 3.64 million, the total population in 2010 was around 7.15 million, so around double the amount. This would be a factor, there are twice as many people in the same area. The other factors are the productivity of the industry in the Bay Area. So lets look at the GDP of the San Francisco Bay Area from 2001 to 2016
In 2001 it was $245 billion and in 2016 $470 billion
https://www.statista.com/statistics/183843/gdp-of-the-san-francisco-bay-area/
Next the Per Capita Personal Income
1969 $5321 (~$35000 in 2016 dollars)
2016 $84675
https://fred.stlouisfed.org/series/SANF806PCPI?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=categories
Just looking at these figures, for a ball park estimate you would expect that a house in the bay area would be 2 to 3 as expensive (account for income) and be built on a lot half the size (account for increase population).
So what is causing the price to be so much higher, 10x or greater? The houses are bigger, so that is an additional factor, but they are built on smaller lot sizes, so this does not explain why an old shack in the Bay Area will sell for $5mil. The answer is in today’s world wide economy, back in 1950’s and 1960’s the average worker had to only compete with somebody else in the US. Europe was still rebuilding from World War II, and China was working on the farm. Capital can also move much more now than in the 1950s, so if there is great economic opportunity in the Bay Area, capital will flood the region and causes prices to increase. In addition today’s economy rewards highly skilled individuals that either contribute to the system or know how to game the system for their benefit very well, while leaving everybody else behind. Hard work is much less important than picking the right parents. A person today has very little chance of moving up the economic food chain even if they work hard and are intelligent. The economic divide is much bigger now than in the 1950s. The people at the top of the economic food chain with capital will seek investment opportunities, real-estate will be very attractive in an area with a very high GDP causing market speculation, which causes the prices to go to an economic level of the top, way beyond the average wage slave in the region. The property market then is priced at the level of the people seeking investment in the area and not of the people working in the area.
The teacher may have excellent benefits and a good salary, but compared to international capital, they do not even exist, the people on the top of the economic food chain will not even notice, to them spending $5 million on a house is spare change, something they will do for fun on a weekend.
This economic inequality will eventually lead to collapse of society
http://evonomics.com/science-flow-says-extreme-inequality-causes-economic-collapse/
Philg,
Why do you think the US is so bad at urban planning? I’d venture this is a product of a capitalist free market that emphasizes short term profits with little patience for the long term. Good Urban planning doesn’t pay off in the short term; it’s the long game. One example is located right in the heart of southern California: Irvine, one of the safest cities in America. Irvine owned a huge swath of land large enough to encompass a “master planned” city. Rather than cash out, they had the patience and forethought to carry out a multi decade development plan beginning in the 60’s. It’s been fascinating to personally watch it unfold in the last 30 years. Irvine Company continues to own and lease/rent most of the commercial/retail and apartment properties in the city. As the value of private properties in their master planned city steadily increase, so does their monthly, commercial income in perpetuity. Who knows how their current income would compare to having cashed out and invested in the stock market, but that wouldn’t have provided people a nice place to live and work.
First observation: article compares current “median” salary to current “average” home price. Why not compare medians to medians?
Second observation: article quotes current “average home price” for “San Francisco”, but then quotes 1959 “average home price” for the entire state. Why not compare the same region in both cases?
Looks to me like two apples-to-oranges comparisons chosen, no doubt, for an editorial purpose.
Houses in California (in good school districts) have always been expensive.
My neighbors purchased their house for $76,000 which was 1.65x the median price of a home in the US in December 1976 source. They sold it last month for $1.25 Million. That’s only a 6.7% annual increase. This is in Southern California, one of the best school districts in Orange County. By contrast the S&P 500 had a 12.5% annual return over the same period.
A friend of mine in Sunnyvale sold his house recently, he purchased it for $340K in the early 1990s and sold it for $2.25M ( 94087). That’s a 7.3% annual return vs. S&P500 annual return of 11.25%.
His neighbor purchased his house for $57k in 1974 when the median price of the home in the US was $35.7K. Again, 1.6x the median US house price. It’s probably worth the same as my friend’s, $2.25M. That’s an 8.3% annual appreciation vs. S&P 500 annual return of 13.51%.
Part of the increase in home values in California is due to Proposition13 which limits the property tax and the annual increase in the property tax, however, as I showed above, even before 1978 houses in California in good school districts already sold at a premium. Asset prices across the board have increased faster than inflation. House prices in California have trailed the S&P500’s annual return over similar periods.
Senorpablo: I would tend to agree with you. That’s why I put “Latin American-style Towns for the U.S.” into
https://philip.greenspun.com/non-profit/
for Microsoft and Silicon Valley billionaires (but they wanted to buy mosquito nets for Africans instead).
As someone who is basically libertarian I would love to say that the market is the answer to every question. But I also believe that, as a hedge fund manager friend says, “When the market gives you an answer you don’t like, declare market failure!” The U.S. market has given us hideous sprawl. This isn’t completely a market failure because suburban sprawl would work a lot better with congestion pricing for the roads, which would have happened already if the roads were privately owned.
If we’re determined to grow the population to 400 million and beyond (which I think we are, though I don’t know why), I think it would be nice to start dotting the landscape with new high-quality towns.
Got to keep expanding credit to keep the government funded. As soon as the next recession starts, they’ll kick the interest rate back to 0, launch more quantitative easing, & start the next leap.
There are other areas in the USA where housing is very expensive, even renting is expensive. But yet, you cannot find a house to buy or rent.
What I don’t understand is this: how are new home buyers / renters are able to buy / rent a house with student debt? In 1950’s there wasn’t any student debt to pay for. What’s more, in 1950’s a family owned at most 1 car (many none). Today, 2 or 4 cars per family is very common.
The high price of homes in San Francisco is due to crazy rent control regulations and also illegal immigrants! If we were to remove the 10% of California’s population we would have much more housing! If we removed rent control people would build more housing stock! Of course the voters seem to be swinging the other way. https://www.sfchronicle.com/bayarea/article/Bid-to-repeal-rent-control-limits-in-California-12852463.php
philg:
Another name for Latin America Towns, Car Free Cities
http://www.carfree.com/
In Europe, Venice would be an excellent example
http://www.carfree.com/ven/index.html
All you may have to do is to remove all the cars from the city and watch the transformation..
I think the market, with the heavy hand of government subsidy, gave us sprawl. Mortgage deduction, road building, etc.
It would be interesting to talk about what might have been if the government stayed out of it. I could envision a lot more mid rise and row houses in places like Dallas. Especially if they didn’t subsidize buses and light rail (And cars. Remember that consumer interest was tax deductible until the Reagan admin.). I also think that zoning that separates commercial activity from residential activity played a part. Nobody lives near work anymore.
My gosh there are all sorts of factors. We all will have our favorites and we all will apply different weights to them. I like some of what Pavel says, but don’t know that I’d weight it as heavily.
There are lots of really nice places in this country that have reasonable housing costs. You just can’t make any money in most of them.
jay c – that 76K house that sold for 1.25M…they likely put just 20% down, so call it 15K down…15K -> 1.25M over 42 years is a return of 11.1% not 6.7%.
Same goes for the 340K house…68K down -> 2.25M over 25 years is a 15.2% return.
I don’t think it’s fair to declare market failure with regards to Bay Area housing because housing in the Bay Area is not very much of a market. Any sort of development requires approval from local government on a case by case basis. No one can buy an acre of land in Palo Alto or Cupertino and build a 1000-unit high rise full of residences because this kind of market solution is illegal.
@Some guy, @jay c
For a common person, any percentage return on the house value means nothing when you take into account that buying a replacement house or moving to rental has gone up by far more percentage vs. the return percentage on the original price.
I’ll join in with the rest for ignorant commenting.
My take credit is too cheap due to US global policies, standard of living is incredibly high. (US is the only country in the world where teatchers “should” live in houses, everywhere else teatchers live in flats.) Mixed together you get high real estate prices.
Married couples with young children can still buy homes with family help and FHA loans, just like they did in the 1950s. Households consisting of a single individual had trouble buying homes in the 1950s and still have trouble doing so today. Not exactly a big change.
Couple of observations:
1) Trying to discuss US housing using an example of San Francisco is absurd. Bay Area housing is in *no way* representative of the US housing market.
2) I am not sure housing is that expensive. Rather, the US currency has become near worthless. 30 years of trade deficits and overspending on unnecessary wars is taking its toll on the value of the dollar. Try traveling overseas and see how far the US dollar takes you.