For most of 2022, house prices increased at a faster clip than ever before in U.S. history - and whether you’re happy about that or not likely depends on whether you rent or own a home. Of course, how expensive it is to buy a house is the primary determining factor in the decision to buy or rent itself (and affects rents as well). Higher home prices tend to mean more people renting, changing the pool of who exactly benefits from the increase in prices. For many homeowners, 2022 has provided a massive influx of wealth to what is in all likelihood their most valuable asset. For many renters, it represents a larger chunk being taken out of their monthly budget and increased difficulty in finding housing in urban areas where stock remains limited.
S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPINSA], retrieved from FRED, Federal Reserve Bank of St. Louis; Note: Both lines are indexed so that Jan 2000=100
U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Rent of Shelter in U.S. City Average [CUSR0000SAS2RS], retrieved from FRED, Federal Reserve Bank of St. Louis; Note: Both lines are indexed so that Jan 2000=100
Just as important as the effects on current homeowners is how rising rents and house prices change who is able to transition from being a renter to becoming a homeowner. In this article, I’d like to break down the differences between the groups that compose homeowners and renters and the implications of the historically high cost of owning a home for both groups. Doing so can reveal which groups specifically are benefiting from rising real estate values and which groups may need support as they miss out on the financial gains - and how such support may be provided.
Who is the typical homeowner?
The demographics of the average homeowner have changed greatly in the past several decades as the cost of buying a home (or renting) has vastly outpaced the growth in median income. Simply put, homeownership has increasingly become a privilege to the most well-off and already established economic winners, rather than an attainable goal for anyone with a stable, middle-class job. In 2019, the median income of homeowners (~$72,000) was nearly 80% higher than that of renters (~$40,000). Other long-run trends, like the increase in educational attainment and the increased cost of higher education, also delay the lifetime earnings peak and thus push back the timeline for purchasing a home. More debt, lagging income growth, and delayed peak earnings all at the same time that homes are more expensive than ever - the result is that homeowners today are older and come from positions of greater wealth than in the past.
We also see that homeowners are much more likely to have been men than women over time, though that gender disparity has reduced in recent years. This difference reflects many trends in the U.S. economy and labor market - over the 20th century men were more likely to be employed and particularly in higher income jobs than women, and men had much greater access to financing to purchase a home (not-so-fun fact: women couldn’t open a credit card in their own name without a cosigner until 1974). These disparities reflect similarly along race categories - homeowners were much more likely to be white than black over the 20th century. Unlike the recent balancing out in the gender ratio, however, these racial disparities remain today. African Americans and other minorities have faced many additional barriers to owning homes, such as redlining and segregation, that remain obstacles today. Thus homeownership remains a hurdle itself in reducing the racial wealth gap, even given converging incomes.
There are, of course, a million dimensions you could divide the data on to show how homeownership is concentrated among select privileged groups, and how that imbalance has remained into the 2020s. I would like to highlight just two more: education and age. These are often discussed attributes of homeowners: they are either highly educated (and thus more likely high-earning) or from an older generation. Focusing on education, we see that the proportion of both homeowners and renters with at least a bachelor’s degree has gone up over time, as more Americans in general attain degrees. However, we also see a disparity actually opening up over time - higher education has become more of a marker of homeownership status in recent decades. We also see that the average age of homeowners has gone up over time. Interestingly, so has the average age of renters - partially a reflection of America’s aging population (and people living longer), but perhaps also a result of the increased time people spend as renters while they attempt to save the required amounts to transition to homeownership? With just this data we can’t identify the cause, but the increasing difficulty of affording a home without substantial wealth is hard to ignore.
The main takeaway from these charts is to reinforce with data what is already well-known: owning a home is an increasingly difficult goal to achieve and despite gains in equality in other areas of the economy, the focus of the American Dream remains out of reach for many Americans.
What happens when prices outpace income
By nearly all measures, it is more difficult for the average American to purchase a home today than at any time in the past century. Due to the rapid increase in prices (and rising interest rates causing new mortgage payments for a home to go up even at a fixed price), the situation has become particularly dire in recent years. The National Association of Realtors has, since 2019, compiled a housing affordability index that captures the relative ease with which a family with the median income can qualify for a median-priced home purchase. In the most recent data released for October 2022, that index hit its lowest point. Importantly, the index is now below 100, meaning the median family does not earn enough to afford a home at prevailing prices and fixed mortgage rates. Even more worryingly, research has shown that increased housing costs disproportionately burden low-income and low-education households.
At the same time, as I showed in the chart at the beginning of this post, average rents are rising even faster than home prices. Since renters typically earn less than homeowners, this leads to a devastating poverty trap: rising rents reduce renters’ ability to save, so they can’t afford to purchase a home, so they continue to rent, which eats up a greater share of their income as rents rise faster than earnings. Rising rents eat into other portions of the budget too. When families and individuals are spending upwards of 50% of their income on rent alone, they are unable to purchase better food and healthcare, to go on vacations or take time off from work, or to save for the future. After temporary spikes in the savings rate (mostly thanks to the government transfers during the COVID pandemic), the personal saving rate for Americans fell to a record-low and dismal 2.7% in Q3 of 2022. Americans have never been particularly great at saving compared to other wealthy countries, but this is an especially worrisome level. No savings means no possibility of eventually owning a home, among other things (record low birthrates suddenly starts to make sense…).
An Argument For More Housing
As I’ve said, the causes for these disparities in homeownership are plentiful and have long histories. The good news is that there is a simple solution to increasing homeownership for all groups: build more housing. The economic laws of supply and demand are relevant here. Increasing the supply of homes will reduce their prices over time and allow more people access to owning one. Given a large enough supply, this will also reduce the number of renters, lessening rent prices and benefitting even those not yet looking to purchase a home. Research has shown that building more homes generates loads of positive spillover effects - from reducing local crime and homelessness to actually increasing property values in low-income neighborhoods.
Only when the housing supply is massively increased, particularly in the cities and locations where current supply is in greatest shortfall compared to demand, can we start to reverse the challenges highlighted in this post. And once housing is more affordable, the many other crises facing the nation - homelessness, crime, inequality - can properly be addressed. Trying to solve these issues without tackling their root causes, of which housing is a major piece in each, is policy doomed for failure. Related to directly building more housing is also addressing the rules and regulations that prevent construction of dense housing in the places they’re most needed to relieve pressure on prices - strict land use and zoning laws in city centers and along transit lines in particular.
While house prices have recently reversed some of their steep rise, homes have not become any more affordable due to rising interest rates. Current mortgage rates leave homeownership out of reach for large swaths of young professionals and families. Waiting for both interest rates and prices to drop is not an option - housing supply needs to be increased dramatically and immediately. California has recently heeded this call and the state government has (still much too slowly) been opening the door to finally meet the state’s critical housing shortfall. For the American Dream to become a reality again, other states and the federal government will need to follow suit.
Final Notes
Charts not pulled from FRED in this post were made in R using the tidyverse, readxl, and ggthemes, and RColorBrewer packages. Data was downloaded from IPUMS and cleaned using R.
IPUMS Citation: Sandra L. Hofferth, Sarah M. Flood, Matthew Sobek and Daniel Backman. American Time Use Survey Data Extract Builder: Version 2.8 [dataset]. College Park, MD: University of Maryland and Minneapolis, MN: IPUMS, 2020. https://doi.org/10.18128/D060.V2.8
If you have questions or constructive feedback, feel free to email me at troded24@gmail.com, submit an inquiry on this website, or leave a comment on this post! Thanks for reading.