While all inflation is bad, why is the housing inflation the worst?

Over the last few years, talent availability has become critical for economic development. But wherever we go, from the largest cities to the most remote towns, we hear communities struggling to meet that need because they lack housing. They are short staff in schools, hospitals, child care and local governments. These essential employees all too often can’t find nearby housing they can afford.

--Tom Barkin, President of the Federal Reserve Bank of Richmond

In a speech before the 2023 Virginia Governor’s Housing Conference, Barkin became the second Fed Bank president in the past couple of years to acknowledge that the 7 million unit housing shortage is not only a burden on lower income workers who can’t afford to move where most of the job growth is occurring but employers as well who can’t find enough of them to fill positions leading to labor shortage in the broader economy. As I mentioned in The Truth About the Labor Shortage back in March, Patrick Harker, the president of the Fed Bank of Philadelphia also acknowledged this very problem as a major road block to continued job growth in a 2021 Speech before the Economic Club of New York.

“There is evidence, in fact, that high rents may be affecting the labor market and hindering efforts to get us back to full employment. That’s because many workers can’t afford to live where jobs are. It’s tough to ask somebody to work in a restaurant in San Francisco, for instance, when the nearest place with affordable housing may be in, say, Fresno. This not only hinders attempts to fill jobs, but, ultimately, it degrades the economic performance of areas with expensive housing. Expensive metro areas are not achieving their full economic potential because millions of would-be participants simply can’t afford to be there.”

--Patrick Harker, president and CEO of the Philadelphia Federal Reserve

Anyway, as Barkin succinctly notes in his speech that even the average middle school teacher making the median salary of 60K a year would be unable to afford the median priced starter home that now goes for 300K, if he/she could even find one.

Take teachers for example. The math all too often just doesn’t work for them. In 2022, the median middle school teacher made just over $60,000. With that salary today (and without becoming cost-burdened), that teacher can afford a $228,000 house with a 20 percent down payment. But the median price for a new starter home last year was $299,000, and that’s on the off chance you could even find one.

And as he mentions afterwards renting has become just as cost prohibitive. In 2019 that same teacher would have faced a median rental price of $1,643 per month. Today it would be over $2,000 per month.

Fed Bank presidents aren’t the only one’s to notice the disturbing trend of rent hikes in particular and housing costs in general out pacing wage growth. As I noted in How The Fed Reserve System Has Screwed Renters Both Ways, Robert Dietz, Chief economist of National Association of Home Builders, has estimated that the post pandemic cost of new construction is 30-40% higher just in the past few years laying the blame on every input including the cost of acquiring land, a very overlooked input. In 2021, Moody analytics estimated that land costs alone consumed an estimated 55% of the price of median priced homes nationwide and upwards of 70% of median priced homes in large metros like Seattle and San Francisco. Of course, as I pointed out in Rack-Rents in The U.S. Since 1960, this trend predates peak suburban sprawl in 2005 by half a century and goes back to the first few decades after this nation made it the default housing policy in the wake of the New Deal and WWII, but it didn’t become quite as salient until after pandemic when the average cost of financing a house purchase (principal plus interest) rose 60% or $871 per month in a couple of short years pricing out would be home buyers and creating a captive market for landlords of tenants with incomes that would have been sufficient to own in prior years. This makes rent hikes all but inevitable and often makes moving to areas with the highest labor demand unaffordable altogether for people who would otherwise have the talent and credentials to fill that demand. The reason why housing inflation, which is really real estate speculation in hyperdrive, is so much worse than say inflation in food stuffs or even gasoline is that it can literally cause economic paralysis and bring the machinery of capitalism to a halt.