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Shop Talk - The Real Estate Agent Podcast

Real Estate Agent Podcast Episode 65: Housing Affordability

Episode 65: Housing Affordability
April 7, 2021

From policy to population and supply and demand, there are many reasons why American housing has become so expensive.

Since 2001, we’ve seen a lot of inflation, around 2.2% per year. A house that would cost you $500,000 in 2001 would now cost you $780,000.

Anna Seibold

About This Episode

The average house in 1963 would have cost you $19,300. Today, that number is $393,300, and even adjusting for inflation doesn’t help. No matter how you cut it, modern American housing is expensive. This episode explores why, and what you can do in the meantime.


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Episode Transcript

JON: According to the U.S. Department of Housing and Urban Development, the average cost of a house in America back in 1963 was $19,300. Adjusted for inflation, a dollar in 1963 would be equal to $8.57 today, meaning that if the average cost of a house had remained consistent as inflation rose, the average cost of an American house in 2021 should be $165,401.

JON: I don’t know where you’re listening to this from, but my guess is that the average house in your market is not as low as $165,401. If in fact that is the average price around you, then wow your market sounds really nice. I imagine you have some very happy buyers in your region.

JON: For the rest of us, though, $165,401 could maybe buy a condo, or perhaps a plot of land with nothing yet built on it. And that’s because that figure is far below the national average. The average American house in Quarter 4 of 2020 went for a far higher number of $393,300, over twice the inflation-corrected value of a home in 1963.

JON: Hello and welcome to Shop Talk: The Real Estate Show. I’m Jon Forisha, and on this episode we’re talking affordability, inflation, and just why the average house costs so much more than it used to.

JON: According to Zillow and Business Insider, the cheapest state for homes is West Virginia, where the median list price is $166,488. On the other side of the spectrum is Hawaii, with the highest median list price at $635,000. In between lie all the other states, most of which have their pricey areas and their cheap areas, and that part is the same as it’s always been. No offense to West Virginia, but I think we can all agree why real estate in Hawaii is so expensive.

JON: The big question, though, is why do houses cost so much more than they used to? One important element is that houses are a lot bigger than they used to be. According to PropertyShark, homes nationwide have increased in size by 74% in the last hundred years. Obviously, with bigger homes come more material costs and larger lot sizes, which will surely run the bill up, but not by quite as much as we’ve already discussed.

JON: As you likely remember from your Pre-Licensing coursework - and probably your basic economics course - real estate abides by the same rules as all other material goods. Supply and demand rule the game of real estate, and if there is low supply, as there is right now practically everywhere, then prices go up. When there’s low supply and high demand, which is currently plaguing red hot markets like Austin Texas, then your prices are shot into the stratosphere.

JON: The low supply is partially due to homebuilders still not fully recovered from the Great Recession, and also because the houses that are being built aren’t the starter homes that are in such high demand. Add to that the ongoing COVID-19 pandemic and the restlessness that many people have turned into a desire to own their own home, and you get stressful situations that have probably made you pull your hair out a few times over the last year.

JON: On the topic of demand, it’s also important to look at how America has grown in these last hundred years. The booming cities of the 1910s were a very different list from those inspiring corporations to move today. Back then, the entire American population was 92 million people. Today, it’s more than 332 million. Add in various laws that have tried to lower the barrier to entry to homeownership, such as the Fair Housing Act of 1968 and the G.I. Bill, and having a threefold increase in residents while maintaining the American Dream of a white picket fence on some land you can call your own becomes a difficult proposition.

JON: To make matters worse, add gentrification and overly-strict land use regulations to the mix, and now you’ve got enough ingredients that you could make a really nice stew. As a real estate agent, all this unprecedented demand translates to a nice commission check, but it can be heartbreaking to see your clients lose out on what could have been their dream home.

JON: And that still doesn’t quite get to the original question: why has housing become so expensive? In personal finance, there’s a generally-accepted rule that says you should spend no more than 28% of your monthly gross income on your mortgage payment. The median income in America is $31,133, so someone earning that much should spend no more than $726 each month on their mortgage. With today’s interest rates, on a typical 30-year mortgage, that means the median earner in America could afford a home that costs about $154,000, assuming they could afford the down payment.

JON: That’s about $11,000 less than the median price of our cheapest market in West Virginia, and is even less than 1963’s blessedly affordable house, after adjusting for inflation. That $154,000 price tag is so far away from our current national average of $393,300 that it’s speaking a different language. Like so many topics in real estate, this one gets trickier the more you dig in, because when you come down to it, the housing market is convoluted and consists of so many factors and regulatory bodies both at the national and local levels that pointing the finger at one thing is very difficult. The reason our houses cost so much is because we’re building too few of them, and because there’s more competition for them, and because developers have gotten greedy and politicians haven’t kept up with policies that would help lower that price.

JON: So while it can be stressful to find your clients their dream home, it’s not hopeless. It’s important to be able to communicate with your clients about the insanity of the present situation, and to tell them to be patient while you look. Multiple offers are likely to pile up, and Episode 22 of this podcast is full of tips on how to navigate a hot market. It’s linked to in our show notes, along with several other sources I’ve already cited.

JON: After the break, Anna Seibold joins me to talk about what half a million dollars can buy you across the country, and how we stack up against other countries.

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JON: Joining me now is Anna Seibold, Content Coordinator at The CE Shop.

JON: Hey Anna, thanks for joining me. Thanks for coming on the show,

ANNA: Hi, Jon. Thanks for inviting me to be here.

JON: Yeah, I'm excited to have you. So you recently wrote a blog post about what kind of house $500,000 can get you in different areas around the country. What did you learn from writing that?

ANNA: Yes, I did. So I've learned a lot from writing that post. It's fun to see the different prices around the U.S. I've learned that housing prices really vary across the U.S. We have a lot of large studies to compare as well as our smaller up and coming cities that are pushing themselves into the picture. It's interesting to see all markets across the U.S. can vastly differentiate depending on what's going on in their economy and what their housing inventory is looking like. So there are just many different aspects that we have to look at.

JON: Yeah, definitely. I mean, it's complicated figuring out the real estate market in a given place. So why did you choose $500,000 as your benchmark?

ANNA: Yeah, I chose $500,000 because I think it's a good medium price. You can easily see the variance between different regions in the U.S. What you can buy from new builds in some places, from condos in the middle of a city to apartments. It just depends. So I think 500,000 was a good starting point.

JON: Yeah, for sure. So in what region of the U.S. would a buyer get the biggest bang for their buck?

ANNA: Yes. So you're going to find the biggest bang for your buck is going to come from the Midwest region. We find that people tend to flock to larger cities driving the housing prices up. So the Midwest isn't home to as many large cities as the coastal states. And so there's just more space and more room for more housing.

JON: Yeah. That makes sense. And generally, what makes one place more affordable than another one?

ANNA: Yes. So I found that affordability correlates to supply and demand. So people tend to move towards larger cities driving those prices up because there is less supply and more demand for them. While on the flip side, there are less people moving to the smaller cities and that keeps their prices lower.

JON: Yeah. And how do housing prices in 2021 compared to those in 2001?

ANNA: Oh man. So since 2001, we've seen a lot of inflation around 2.2% per year. So we're seeing that a house that would cost you $500,000 in 2001 would now cost you $780,000. So we're just seeing a huge inflation rate that continues to rise.

JON: Ouch. That's, that's a huge change. So we've talked on the show quite a bit about low inventory lately, which is a problem all across the country right now. How does low inventory contribute to rising prices?

ANNA: Yeah, so we are seeing a lot of that low inventory. When anything is in short supply, you tend to see the demand rise. This is true with housing. This is true with many other products. You'll see bidding wars start more often. We're seeing less houses for sale. So buyers are looking to purchase, and that's just an issue that we've been dealing with.

JON: And is there any hope of inventory catching up to demand in the near term?

ANNA: You know, it's tough to know what's going to happen in the future, especially one year into this pandemic, not knowing what's going to happen. We are expecting demand to stay high housing prices are going to continue to rise possibly at a slower rate than they've been rising. The U.S. is having a tough time keeping up with building new construction. And so with high demand and low inventory, we just don't know what's going to happen.

ANNA: We obviously don't know what will happen in the future, but we will likely see less demand among homebuyers for multiple reasons. Mortgage rates have been very low, but they're expected to start rising again. Home prices are of course continuing to rise, but at a slower rates and inventory will most likely remain low.

JON: Okay. Yeah. So more or less the same. Well, all of that was about the American housing market. How does America compare to other countries right now?

ANNA: Yeah, so although we've seen U.S. home prices rise significantly. Um, these prices are still relatively low compared to other developed countries. While the U.S. dealt with the recession in 2006, other countries weren't dealing with that recession. So their home prices continued to rise above the U.S.'s. The U.S. as a whole is also underbuilding while a lot of foreign countries are overbuilding, producing more construction. As an example, I guess the median home value in Sydney, Australia is $1.1 million while the median home value in New York city is still only around $652,000. So we're just seeing, although we think the U.S. is expensive, other countries tend to still be more expensive.

JON: Wow. That's crazy in Sydney. All right. Well, thank you, Anna.

ANNA: Thank you, Jon.

JON: That’s it for this episode, thanks for listening! If you enjoyed the talk, please subscribe to us on your podcast player of choice and leave a nice review while you’re there. Shop Talk is a production of The CE Shop.