Tuesday, January 23, 2024

Why You Can't Buy a House

 Why You Can't Buy a House

You can't afford to buy a house because the Home Price to Median Household Income Ratio is at the highest level ever at 7.56. Historically that ratio has been around 4. Things are even worse, much worse, if you are in California.
Many of the small, medium and large cities in California are into the double digits. Are you a young family considering moving to Santa Barbara, CA? Good luck. With a median household income of $89,000 relocating to this beautiful city with a median home price of $2.4M results in a HP2MHIR of 27!
California is so bad because of the effects of Proposition 13 which has allowed a singular generation to capitalize on the real estate market by essentially capping their taxes while simultaneously allowing for unlimited upside potential. This law has kneecapped future generations. 

Historically real estate has been an IDEAL investment (Income, DEpreciation, Appreciation, Leverage), but with a HP2MHIR at 7.56 (or worse) what is a young, ambitious gainfully employed American family to do?

Well, first it helps to have 2 incomes. Ever since more women have entered the workforce rather than raise families the HP2MHIR has steadily risen. This makes sense. Money will chase good housing, and only those who have more money can get into better housing.

This brings up the next point; it is far better (from a housing standpoint) to have no children. Children are expensive, and the cost of childcare, either directly or indirectly, is tantamount to LOSING one income. Good housing incentivizes childless couples, while penalizing families with children.
All of these factors has lead many young families to be "trapped" in a never-ending renting loop that shows zero signs of abating. These families can afford to rent in a area that has good schools perhaps, but there is little to zero chance of them ever being able to purchase in these very areas.
As the population grows there hasn't necessarily been in a growth of good places to live, or housing for that matter; demand is increasing, but supply is not. By definition, prices will continue to march higher as demand outstrips supply. Naturally the demographics will also change. Santa Barbara is a good example.
What has historically been a sleepy surf town just two hours from Los Angeles, Santa Barbara has now become a large open air retirement enclave with many East Coast urban transplants along with many from the Chicago area whose politics fit neatly in their new home. The result of this migration has been the establishment of the owner class and the servant class. This scenario is playing out daily throughout coastal California.
What is a young family that wants to have children to do? Immediately, probably the best course of action is to prioritize the best schools for your kid(s) even if that means renting. Alternatively, you could also look to a 2nd or 3rd tier area to live which may not have everything you want, but it may have everything you NEED.
The United States is vast, so there really should be no housing shortage. Over the longer term, the best way to absorb the excess demand is to create more housing. There is plenty of room for multiple entire cities to spring up across the country. Creating more housing will lower the HP2MIHR.

The most obvious, and impactful, solution would be to increase productivity in the United States with a combination of monetary and fiscal policy that is pro-growth; the impact of this would be to significantly REDUCE inflation.

Inflation has bee the true scourge on the economy, causing prices to rise over 50% in the past 3 years alone. Couple that with dilution in the value of American Citizenship and we have some serious problems. The road ahead for potential home buyers is a slog. Unless there is a meaningful drop in prices, an increase in income, or both we have a polarized future of owners and renters who can never own.