A recent note from Brookings on the nature of the ongoing housing crisis in America has opened up with a bombastic statement:
"Over the past five years, median housing prices have risen faster than median incomes (Figure 1). While that’s generally good news for homeowners, it puts additional pressure on renters. Because renters generally earn lower incomes than homeowners, rising housing costs have regressive wealth implications."
It sounds plausible. And it sounds easy enough to understand for politicos of all hues to take up the claim and run with it. There is is even a handy chart to illustrate the argument:
Except the claim is not exactly consistent with the evidence presented in that chart.
For starters, Case-Shiller Index covers 20 largest metropolitan areas of the U.S., which is a sizeable chunk of population, but by far not the entire country. And rents, as the Brookings article correctly says, are rising across whole states (the article, for example referencing California, which is way larger than the largest urban areas of the state alone). Second point, the article is completely incorrectly uses nominal house prices inflation against real (inflation-adjusted) income growth figures. If the converse of the article claim held, and real incomes exceeded housing price inflation, it would mean rising purchasing power for American households shopping for houses. However, that is not what the housing markets are historically, longer-term about. They are more about hedging inflation. The third, and more important point is that the article refers to the last 5 years. Why? No reason provided. But even a glimpse at the chart supplied in Brookings paper is enough to say that the same problem persisted prior to the Great Recession, was reversed in the Great Recession, and then returned post-Great Recession.
What's really happening here?
Ok, let's take four time series:
- House prices 1: Median Sales Price of Houses Sold for the United States, Dollars, Annual, Not Seasonally Adjusted;
- House prices 2: S&P/Case-Shiller 20-City Composite Home Price Index, Index Jan 2000=100, Annual, Seasonally Adjusted (same as in Brookings article);
- Income 1: Real Median Household Income in the United States, 2017 CPI-U-RS Adjusted Dollars, Annual, Not Seasonally Adjusted (same as in Brookings article); and
- Income 2: Nominal Median Household Income in the United States, Current Dollars, Annual, Not Seasonally Adjusted
Observe that we have data only through 2017 for the last two measures due to data reporting lags.
Now, compute annual rates of growth in all four and plot them:
Blue line is the reference point here. Notice that the grey line (real household income growth) is really underperforming house price growth over virtually all periods, except for one: the Great Recession. Yellow line, however, is less so. Nominal incomes have more benign relationship to nominal prices than real incomes do to nominal house prices. Why would that be surprising at all? I am not sure. It did surprise folks at the Brookings, though.
Let's compute some average rates of growth for all four series and calculate the difference between:
- Real Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points; and
- Nominal Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points.
Instead of using an arbitrary 5 years horizon, consider instead the business cycle and longer term averages. Here they are:
Historical averages are, respectively, -3.71 percent and -1.31 percent. Across the last Quantitative Easing cycle, -2.94 percent and -1.60%, ex-QE cycle, -4.05% and -1.19%.
So what does the above tell us? Things are not as dramatic, using nationwide house prices, than the Brookings claim makes it sound, and, more importantly, there is no evidence of a significant departure in the current QE cycle from the past experiences. When it comes to property prices, hoses inflation seems to be much less divorced from real and nominal income growth rates in the last four years (the recovery period post-Great Recession) than in the periods prior to the GFC.