by Art Woolf

If there’s one thing that Vermont’s politicians, pundits, and journalists all agree on, it’s that Vermont has a severe housing affordability crisis.

Is there anyone who disagrees with this? Well, me, at least to some extent.

In an inflationary time like we have experienced for the past five years, the price of just about everything has gone up. The U.S. consumer price index is up 24%, food is 26% more expensive than it was in 2021, and gasoline is one-third more expensive.

The price of a Vermont house, according to the Federal Housing Finance Agency, is up 57% since 2021, rising more than twice as fast as prices overall and nearly twice as much as the 33% growth in housing prices nationally.

It’s clear housing prices have escalated dramatically. But that’s not the only factor affecting affordability. People have to buy houses, and they need income. Incomes for the average Vermont family have risen by 35% in the past five years—not as much as house prices, but they have gone up, making the rise in house prices more tolerable.

People don’t pay $360,000, the median price of a residential house sold in the state last year, by writing a check. They finance it with a mortgage. And mortgage rates have risen over the past five years, contributing to the affordability problem.

For nearly a decade before the pandemic, mortgage rates were at record low levels, generally below 4% for a conventional 30-year fixed rate mortgage. And in 2021, they dipped below 3%, an historic low. That was a great deal for homebuyers, especially millennials who were buying their first homes.

To get a true picture of affordability—or unaffordability—we need to consider all three of these elements: house prices, incomes, and mortgage rates.

I create a hypothetical Vermont family to look at how affordability today compares with past years. Incomes come from Vermont Tax Department data on every Vermont family who filed as married couples filing jointly. I assume that family buys the median priced Vermont house each year and finances it with a 30-year fixed rate mortgage and a 20% down payment.

My measure of affordability is how that family’s share of monthly income needed to pay that mortgage has changed over time and is shown in the graph below.

Over the past four years, housing has been much less affordable than at any time between 2009 and 2021. But during the decade of the 2010s, housing was extremely affordable by historical standards.

But, as the graph also shows, housing is just as affordable—or unaffordable—as it was during the housing boom just before the financial crisis of 2008. Two decades ago, Vermont had a housing problem similar to today’s and people were complaining about Vermont’s housing affordability problem.

Comparing affordability back farther in time, housing is more affordable today than it was in the late 1980s. At that time Vermont was experiencing another housing boom and people complained about our unaffordable housing market.

If we go back even earlier, housing was even less affordable in the late 1970s and early 1980s than it was in the late 1980s or today. At that time, when the baby boomers were buying their first houses, they faced mortgage rates of as much as 17%.

But, you might ask, who can find $70,000 for a 20% down payment on an average-priced house today that costs $360,000? That’s almost 60% of a typical Vermont family’s income. Ten years ago, a typical Vermont family “only” needed 47% of its income for a down payment. In the late 1980s housing boom, potential homebuyers also needed 60% of their income for a 20% down payment so the problem of a high down payment is nothing new.

Yet somehow, Vermont families found ways and continue to find ways to finance the purchase of a house and become homeowners. Financial institutions have come up with a variety of financial instruments to deal with this problem, for example lower down payments and adjustable rate mortgages.

Despite this seeming unaffordability, today 74% of Vermont households own their own homes. That’s near a record high and a much higher share of homeowning households than in the 1980s and 1990s.

Are housing prices in Vermont high? Yes. Is there a housing crisis? No. But housing is a problem that can be solved through thoughtful policies.

The solution is to increase the supply of houses. The state does not have enough resources to finance the construction of enough houses to solve the problem. Thoughtful regulatory reform at the state and local levels can help make it less time-consuming and less expensive to develop land and build new houses.

And the more new housing units that are built—at any price—the less upward pressure there will be on prices. Fast-growing Austin, Texas, is a good example of how building more houses lowers housing prices.

Will affordability improve in the future? Look at the three elements of affordability: Vermont families will continue to see their incomes rise, as they have in the past. Housing prices will likely rise, but if we allow builders and developers to build, price rises should moderate, or even fall.

What about mortgage rates? Never ask an economist to forecast interest rates, but my best guess is that mortgage rates will not return to their historically low levels of the 2010s. We are likely to see upward pressure on all interest rates, including mortgage rates, nationally because of our high and rising national debt.

There is little we can do in Vermont about the level of mortgage interest rates, other than elect people who see the high federal deficits and rising level of the national debt as a problem that needs to be dealt with.

Pro-growth state and local economic development policies translate into higher income levels for Vermont families.

Increasing the supply of housing mitigates against rising housing prices.

How much each of these changes in the future will determine if housing becomes more or less affordable in the future.