A debate over the true financial condition of American families is driving pundits and economists to their elective corners. An odd consequence of a housing shortage explains part of the disconnect.
Are American families generally much better off than they were 30 and 60 years ago, as top-line data tells us? Or are they struggling to hold on, as the national “vibe” suggests? Yes.
How can it be both? Start where the home affordability problem first became obvious: coastal metro areas like New York, Los Angeles, San Francisco and Boston prior to 2008. Through zoning and other regulation, those regions permitted too few new homes to account for even their own young residents moving out of parents’ homes.
Under these conditions, rents rise much more dramatically in the poorest neighborhoods, until some households cry “uncle” and move away.
These neighborhoods are hardest-hit because housing is a combination of necessity and luxury (extra space, amenities, desirable locations, etc.). When home shortages increase prices across a city, wealthier people have the option to limit luxuries. A well-to-do L.A. couple moves to a new spot in a neighborhood that would otherwise house a family of lesser means; a middle-class Boston family stays put in its starter home; a promising graduate from Minneapolis takes a good job in Manhattan but rents a tiny studio apartment.
These compromises play out citywide. The poorest families with the fewest luxuries to sacrifice are more likely to swallow rising rents to keep what they have. If they have local ties to family, social services and employment, they might be willing to spend every last penny to remain in small, poorly located units. Others move to more affordable cities.
Not every family — not even the average family — is left worse off. But thousands give up on things they already had. Others pay a ransom in rent to delay giving up.
Economists call this “filtering.” Historically, homes filtered from wealthier to less-wealthy people. In the years before 2008, they started filtering “up” in those coastal cities — meaning when a typical unit changed hands, the new resident tended to be wealthier than the last.
After the 2008 housing crisis, the problem went national. The U.S. rate of new home construction became nearly as low as it had been in New York City. Homes started filtering up across other American cities and towns, creating the same grinding realities from coast to coast.
This has left families on a financial treadmill as they wonder whether their income will rise faster than their rent. When they trade down to keep rent affordable, it feels like losing. The families in the neighborhoods they trade down into also feel like they’re losing ground. Their rents rise, and they must choose between making their own trade or living around neighbors who seem to be outpacing them. Rinse and repeat.
Housing isn’t getting more expensive because families are outbidding each other for the best homes. If only it were so simple. No, a housing shortage means families are out-compromising each other. The worst houses in the neighborhoods with the fewest amenities become the most inflated. This also means tax dollars meant to set a floor on living conditions don’t go as far as they should.
Rents have increased in two ways since 2015. First, in line with general inflation, as we’d expect. Worse, upward “filtering” caused monthly rent in ZIP codes across the board to increase an additional $450. That tends to hit a lot harder for a family paying $900 per month than for one paying $3,000 per month.
For instance, among the 12 most-expensive Atlanta ZIP codes that Zillow has tracked since January 2016, rents have risen by 60%. Rents in the 12 cheapest have gone up by 114%.
Among the poorest 20% of families between 2015 and 2022, income growth after the rent was paid fell by more than 2% per year relative to the richest 20%. This is not picked up by the usual statistics. Not only do lower-income families spend a larger percentage of their budgets on rent, but rents have systematically risen more quickly on those families within every major city. Researchers at Harvard’s Joint Center for Housing Studies concur.
The fix is straightforward: more homes. Additional work needs to be done to make building apartments easier. Reversing high rents will also require more new single-family and other types of homes for both homeowners and renters.
Yes, the average American family is doing better than ever. And, yes, many otherwise-prospering families understandably feel as though they’re losing ground. And many families have really been doing worse and worse, year after year.
Americans aren’t just being nostalgic or discontented. This situation is historically unique and a direct consequence of the difficult game of “musical chairs” families have to play with existing homes when there aren’t enough new units for all of them.
Kevin Erdmann is a senior affiliated scholar at the Mercatus Center at George Mason University.
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