In the good old days, a quarter of income went to food

I’m not normally a believer in the state of the economy, but the media has been so exaggerated in pushing the economic doomsday narrative during the Biden presidency that I feel the need to portray some reality.

One of the central lines among the doomsayers is that we spend a larger part of our income on housing and that this has become completely unaffordable for many. I agree that housing is a serious problem. In fact, I recently wrote a piece in a new collection on this topic that I would encourage everyone to read. We need to build more housing and especially more affordable housing.

But recognizing that housing is a serious problem is not the same as saying it is an unprecedented crisis, and many of the things that have been said in the media are simply not true. For example, it is not true that homeownership is no longer part of the American dream for young people. In fact, the homeownership rate among young people is above pre-pandemic levels.

It’s true that the rise in mortgage rates since the Fed began hiking in March 2022, coupled with rising home prices, has made the cost of buying a home unaffordable for many first-time buyers, but few expect rates to remain unchanged for long. will remain that high. .

Mortgage interest rates are very cyclical; it goes up when the Fed raises rates in an attempt to slow the economy. The current numbers of almost 7.0 percent are high compared to the 3.0 percent we saw during the pandemic, but they are not high by historical standards. In 1981 they peaked at over 18.0 percent.

I don’t remember journalists writing pieces at the time as if the 18.0 percent mortgage interest rate would continue indefinitely. I’m not sure why they feel the need to write that way about the current 7.0 percent rates.

Another aspect of the story of the manufactured housing crisis is that we are spending a greater share of our income on housing, with record numbers of people spending more than a third of their income on housing. This share is called a crisis point by some.

It’s certainly true that we’re spending a much larger share of our income on housing than in previous decades, but a big part of that story is that we’re spending a much smaller share on other things. The graph below shows the share of disposable income going to food, clothing and home furnishings since the late 1940s.

Source: National Income and Product Accounts, Table 2.3.5 and author’s calculations.

As you can see, there has been a sharp decline in the shares of all three. This is especially noticeable with food. In 1947, we spent 23.0 percent of our income on store-bought food. Last year this had fallen to just 7.1 percent. The share of income going to clothing fell from 10.3 percent to 2.6 percent. The share for purchasing home furnishings fell from 5.5 percent to 2.5 percent.

These declines freed up revenue to go to other areas, and one area where the additional revenue went was housing. The houses we live in today are, on average, much larger than the houses we lived in 75 years ago. They are also much more likely to have air conditioning and relatively clean heat sources. (Coal furnaces were still common in the late 1940s.) They are much better protected against fire and are less likely to contain harmful chemicals such as asbestos and lead.

Due to lower spending in other areas and the higher quality of housing we live in today, the share of our income going to housing now averages more than 34.0 percent. (This figure includes the “owner equivalent rent,” the money a homeowner would pay to rent the house he lives in.)

Since the 34.0 percent figure is an average, it is difficult to consider the one-third level as a crisis. Instead, we should probably recalculate what share of income going to housing costs represents an unmanageable burden.

None of this should be taken as a sign that we don’t need to do anything to make housing more affordable. We must relax the restrictions that block both new construction and the transformation of vacant office space into housing. And we need to ensure that a significant portion of these new units are affordable.

We can also take short-term steps to improve affordability, such as limiting vacation rentals and enforcing moderate rent controls. A vacancy tax is also a good way to get more homes onto the market. It will also be good if Jerome Powell and the Fed overcome their inflation fears and start cutting rates.

We have a serious housing shortage in the country due to a sharp decline in construction in the decade after the housing bubble burst. When the pandemic broke out, we gradually returned to a more normal level of construction. If we can sustain higher construction levels for a number of years and renovate many of the offices that are currently vacant due to the explosion of remote workers, we can reduce housing costs.

But it helps to look at the issue with clear eyes. The biggest reason why housing has grown as a share of our income is that we spend so much less on other necessities. That’s a good thing.

This first appeared on Dean Baker’s Beat the Press blog.