Property: Follow the money (or the lack thereof)

A couple of days ago, I posted an article titled 'The Washington bubble continues to ignore fiscal reality'.  In it, I pointed out:

I already know that every dollar in my pocket today buys about half - sometimes less than half - of what it did in the year 2000.  I can go out right now, and go shopping, and compare what I get for my money today with what I got for it seventeen years ago.  Forget the "official" rate of inflation, and look at actual expenditure.  You'll find the same thing I do - your money today is worth less than half what it was then.  What's going to happen if that continues, and gets worse?

One of the things that's going to happen - is already happening, in fact - is that fewer and fewer people are able to afford to buy their own homes.

Fifty-two of the 100 largest U.S. cities were majority-renter in 2015, according to U.S. Census Bureau data ... Twenty-one of those cities have shifted to renter-domination since 2009. These include such hot housing markets as Denver and San Diego and lukewarm locales, such as Detroit and Baltimore, better known for vacant homes than residential development ... A 2015 report from the Urban Institute predicted that rentership would keep rising through 2030, thanks to demographic trends that include aging baby boomers who downsize into rentals.

. . .

Most low-income families don’t rent by choice, said Nela Richardson, chief economist at Redfin. And plenty of higher-income households rent because they can’t afford to buy. “We don’t have enough affordable supply in either rental or for-sale markets,” said Richardson, adding that cities interested in promoting renter-friendly policies can rethink their zoning policies to encourage more construction.

There's more at the link.

Housing prices are a problem, to be sure, but it's not so much the supply side that's preventing home ownership.  It's that average disposable incomes have declined in purchasing power.  As I said in my earlier article, the money in your pocket buys about half - sometimes less than half - of what it bought in 2000.  Your income hasn't doubled in that period, unless you're exceptionally fortunate.  Since housing costs have to come out of the same money every month that feeds and clothes your family, you simply have less money available to buy a house.  Q.E.D.

Miss D. and I faced this dilemma two years ago.  We wanted to buy a house of our own, but were price-restricted in Nashville, TN, where we lived at the time.  We were in the fortunate position of being able to move anywhere we chose, and we had good friends in a smaller Texas town, so we changed states.  By doing so, we were able to buy a relatively modern three-bedroom house, in very good condition, for approximately half what the same house would have cost us in a similar suburb in Nashville.  What's more, we deliberately bought a smaller home, one we could afford to pay off in a maximum of fifteen years, and took out a mortgage loan for that long only.  God willing, we'll pay it off in less than ten years, because we're making that a priority.  If we succeed in doing so, we'll instantly boost our disposable income - or, to look at it another way, we'll drastically reduce the disposable income we need to pay our bills every month.  It'll take a lot of financial pressure off us.

I know we're very lucky to have been in a position to do that.  Many people today aren't.  I fear that home ownership will become a pipe dream for them, just as it is for many people living in cities where housing prices are so high they're out of reach for most middle-class couples.  (It's not just US cities, either:  Australia is another good example.)

Another factor is that, with stock and bond market jitters as high as they are, many investors have turned to property as a "safe haven" for their funds.  Consider these headlines:

• Investors dominate housing market
• Behind the Rise in House Prices, Wall Street Buyers
• How Wall Street Has Turned Housing Into a Dangerous Get-Rich-Quick Scheme—Again
• Your New Landlord Works on Wall Street
• Desperate Chinese Investors Flood US, Canadian Housing Markets, But Real Numbers Are Taboo

This institutional, investor-driven wave of purchases has actually prevented housing prices from dropping as far as they should have, following the 2007-08 collapse of the housing market.  That's all very well for investors . . . but it means many people like you and I, already struggling with declining personal purchasing power, can no longer afford the housing they want to buy.  They're reduced to renting it from the investors, instead, sometimes at a monthly cost equal to or even greater than what they might otherwise pay on a mortgage.  (Miss D. and I are paying about the same every month to service our home loan as we were paying to rent a much smaller duplex in Nashville.)

The housing market is going to remain very difficult for the average American until such time as our purchasing power is restored . . . and the odds are against that for the foreseeable future.  Batten down the hatches, hold on to what you've got, and don't buy property at inflated prices, is all I can suggest.  It's going to be a long and bumpy ride.

Peter