More than you think

by Art Woolf, on Davis Dewey is Rich

Ben Kinsley at Campaign for Vermont responded to my post about the benefits of economic progress with a “yes, but…”

The CfV caution focuses on two issues: housing and health care, which Kinsley argues are becoming an increasing burden on families. I’ll look at housing here and save health care for some other time.

Kinsley notes that in 1970 the median house price (in the U.S.) was 3.9 times median household income. Today it is 7.1 times higher.

But…

People don’t buy a house with cash. They finance it with a mortgage. In 1970 mortgage rates were about 7%. By the early 1980s they peaked at 18%. Today they are under 6%. In an old paper of mine, written just after the housing “crisis” of the 1980s, I calculated that financing a median priced Vermont house in the early 1970s cost a median income family about 30% of their income.[1]

Using a different measure of housing prices, in the late 1980s a median income Vermont family purchasing the median priced house would spend a little over 20% of its income servicing that mortgage. Today, the median income family buying the median priced home in Vermont would spend a little under 20% of its monthly income.

As the graph below shows, housing is much less affordable than it was just a few years ago, before the huge runup in housing prices, and when mortgage rates stood at 3%. When people look at housing affordability, they generally focus on the price of a house and the rapid increase in prices over the past three or four years. But rising mortgage rates have played an equally important role in reducing affordability.

Yet housing affordability today is the same as it was in the early 2000s and it is more affordable today than it was in the late 1980s when the baby boom generation was flooding the housing market. (For a more detailed, and national historical look at the cost of overall housing (not just financing a mortgage), see this article from a few years ago.)

The graph below shows that over the past four decades, the percentage of Vermont households who own their own homes has risen, not fallen. During most of the 1980s and 1990s, about 69% of Vermont households owned their own homes.

That share rose to the low 70% range in the early 2000s and then declined. But that decline started well before housing prices jumped, and it occurred while mortgage rates were low.

Since the pandemic, homeownership has risen despite higher mortgage rates and rapidly rising housing prices. And, although it’s not shown in the graph, the Census Bureau reports that Vermont’s homeownership rate in the first half of this year was 74.1%, higher than last year’s level. It’s hard to see a crisis in these numbers, however high housing prices are today.

It is important to note that none of this discussion is about cost burdens on renters, but when the homeownership rate rises, it means more renters are purchasing homes.

One more thing to remember. When we look only at housing prices and affordability historically, as I do here, and Kinsley does in his discussion, it ignores one important fact: A house in 1970 is not the same as a house today.

In 1970, new houses in the U.S. averaged 1,400 square feet. Just under one half of new homes had two or more bathrooms. Four out of ten new homes did not have a garage. Only half had air conditioning.

Today, the average new home is more than 2,100 square feet. That’s fifty percent larger than in 1970. Today, almost no new homes have fewer than two bathrooms and nearly one-third have three or more.

Fewer than 10% of homes today have no garage, two-thirds have two car garages and one in seven have garages that hold three or more cars. Or more likely two cars and a lot of stuff. Almost all new houses are air conditioned.

None of those quality improvements are factored into my measure of housing affordability or Kinsley’s ratios of price to income.

So, yes, housing prices are higher than they were in the past. But houses are bigger and have more amenities. Housing is not as unaffordable as most people think. Vermont, like most of the U.S., does have a housing problem. But not a housing crisis.

It’s refreshing to see the Campaign for Vermont provide a needed discussion to these issues, although I don’t agree with all of it.

Kinsley sees the glass as half full, but he believes that the halfway mark is not accurate and the glass may have less liquid in it than we think.

I think the glass is half full and getting fuller. Even more important, I think the glass itself is getting larger, and we are all able to enjoy a bigger drink.

[1] I assume a married couple earning the median family income and financing a house with a 20% down payment with a 30 year fixed rate mortgage.

Arthur Woolf taught in the economics department at UVM from 1980 to 2019. From 1988 to 1991 he was the State Economist for Governor Madeleine M. Kunin (when Richard Snelling was elected in 1991 he eliminated that position in state government). From 1991 to 2014 I co-edited and co-published the monthly Vermont Economy Newsletter with Richard Heaps. He also wrote columns for Vermont Magazine in the 1990s, a weekly column on the Vermont economy for the Burlington Free Press from 2011 to 2018, and a regular column for VTDigger from 2018 to 2020. He now runs the Davis Dewey is Rich blog on Substack.