Home Prices Have Been Getting Less Affordable. For a Long Time.

As we approach 2024, it's becoming common knowledge that home prices have become out of reach. Certainly in expensive coastal markets such as Los Angeles, San Francisco, New York and Washington D.C. But increasingly across the United States as well.

The California Association of Realtors reported that only 16% of California households could qualify for a median priced home in the state in the second quarter of 2023. And qualify just means obtaining the home, not being able to comfortably afford it.

Across the country, average home prices of more than $400,000 are now well over five times the average incomes of American households. Way above the 2.5 times your income rule for buying a home that was common in the second half of the 20th century.

But now that agreement is rising that there is an imbalance in the housing market, a good question is...when did this problem begin?

If it started just a few years ago, then it is feasible that this is all a bubble that will burst in a housing market crash like the Great Recession.

On the other hand, if the situation is longer term, it suggests housing unaffordability is a much bigger trend. Something that is defining our times.

Price to Income Ratios Over the Years

Most older adults will stick by the 2.5 times your income rule for houses. According to that standard, American homes should average close to $200,000, not the double that across the nation (or quadruple that in California).

I always took that rule as the time-honored normative for housing.

Until a year ago.

At the start of 2023, I purchased a poster with facts about the world in 1923, designed for office parties celebrating centennial anniversaries. (My workplace was planning a 1920s party).

Being interested in economics, I was drawn to the facts about what things cost.

And I noticed something surprising: A new home (presumably costing more than an older average home) cost about 1.75 times an average income.

Think of what that means.

A century ago, it would probably be possible to get a decent used home for 1.5 times one's income (or less)!

Doing some more research, I discovered this is known as the price-to-income ratio, and it has risen from 2.1 in 1960 to 3.6 by 2010. And of course, in the past five years, it has soared well above that.

Most data extends only to the 1960s. But it appears the price-to-income ratio was even smaller in the early 20th century. Meaning homeownership was more within reach for what people made back then.

No wonder America was famous for the American Dream in which homeownership was a given and even buying a commercial property would be in reach for many people.

So why has housing become so out of reach?

No doubt there are many factors.

And the emphasis on using a home as an investment in recent decades is certainly a major reason.

Though since the ratio has been widening for generations, the full story is evidently more complex than what we usually hear.

More research is clearly needed.

If you are an economics of finance professor, I'd suggest this as a research topic in 2024.

For the rest of us, we need to face the reality that home prices becoming more and more out of reach isn't a trend that's likely to be reversed. It might be less acute in some places. But it seems to be synonymous with modernity.

Need proof? Look up the price of housing (in U.S. dollars) in sub-Saharan Africa, where internet access is still not widespread and automobile ownership is a very small minority. In other words, the modern world has not yet arrived.

And you'll discover that housing prices are drastically lower than in almost all other parts of the world. Way lower than in an out of the way Heartland metro in the U.S. And a lot more like how things must have been a century or more ago. (Example: Lomé, Togo). And keep in mind, capital cities are likely much more expensive than more rural or mid-sized communities, where simple apartments start at the cost of a monthly phone bill in the U.S.

Granted, that's hard for many people in those places to afford, but by Western standards, it's unheard of.

A pre-industrial society of course has many problems. There is less access to quality medical care. Many people live long lives, but others don't. Infant and maternal mortality is much higher than what we expect today. Food insecurity is more commonplace.

But we should ask ourselves: Is unaffordability the eventual outcome of the modern lifestyle and economy that most nations have been experimenting with over the past century or two? If so, there is probably no turning back and capitalism as we know it may not be a future but a season that eventually ends when the average person can't afford to live in the modern world.