Tuesday’s news of the Dow hitting a record high and the Census Bureau announcing that real median home values increased 32 percent in five years made me exclaim, “Boy, old Irv was a pretty smart guy.”
Irving Fisher is the U.S. economist who argued a century ago that excessive growth of the money supply can pop out as inflated stock, real estate and consumer prices.
The Census Bureau tracked real median home values between 2000 and 2005. “Real” means adjusted for inflation. So the dollar amounts people are writing on checks rose all the more because the Consumer Price Index increased by 13 percent during that same span. More expensive housing and stagnant earnings means that Americans are spending higher proportions of their income on shelter. Poor people, particularly minorities, are especially squeezed.
Let’s look at housing prices first. The Census Bureau’s American Community Survey is so rich in data that pulling numbers for a particular town or county is difficult. And it is so new that for most areas, including Minnesota counties and cities, annual data are only available since 2002.
Still, there is a clear national trend. Median home prices have risen sharply for most of the nation. Monthly housing costs — both for renters and owners — have increased compared with household income. In many communities, the proportion of households spending more than 35 percent of their income on housing has risen sharply.
Comparing 2005 with 2002 in Minnesota as a whole, median monthly owner costs as a percentage of income rose to 20.9 percent from 18.7 percent. For Ramsey County, the increase was sharper, to 21.9 percent from 17.9 percent. Dakota County homeowners paid the highest proportion in both years, but their increase was smaller — to 22.2 percent from 20.3 percent.
As is the case elsewhere, many Twin Cities renters pay more of their income for housing than homeowners do. The portion of their budgets going to rent also has increased. For all of Minnesota, rent compared with income increased to 29.2 percent from 27.3 percent in the three years cited. Ramsey County had a sharper increase, to 31 percent from 27.4 percent. Dakota County saw a small increase, going to 30.1 percent from 29.6 percent. The margin of error on county numbers is wide, so the Dakota County increase might not reflect any real change.
One must remember that a median house price or apartment rent in 2005 is not the same as the median in 2000 or even 2002. New houses and apartments continue to grow in size and features. Some of the growth in Ramsey County median rents might stem from the addition of pricey upscale developments rather than landlords boosting rents on existing units.
Homeowners, especially well-educated professionals, also could be forking over more of their income for housing simply because they are so flush that they have money to burn and are putting it toward luxury living.
But this is not true for the population as a whole. Most of the increase in per capita incomes over the past 30 years has gone to the richer rather than the poorer members of the population.
For example, the real median income of households in the middle 20 percent of the population was $46,301 in 2005. Thirty years earlier, it was $38,384. The annual increase was 0.7 percent a year. For the highest-income 20 percent, the increase was 1.7 percent a year — to $159,583 in 2005 from $96,188 in 1975.
Part of this uneven growth results from faster increases in income from owning assets — rent, interest, dividends and capital gains — than from wages and salaries. Men who had full-time jobs earned $41,386 in 2005. Adjusted for inflation, that was nearly a $1,500 drop from the $42,877 they earned per year in 1978. That was during the Jimmy Carter administration, often reviled by Republicans as the epitome of economic ineptitude. (In fairness, similarly high years occurred under Republican presidents Ronald Reagan and Richard Nixon. Moreover, the increase in earnings for women was significant even while those for men stagnated.)
Back to Irving Fisher. Housing prices have risen 32 percent above general inflation since 2000. Homeowners generally like that, but it has made buying that first house harder for the younger and the poor, especially minorities. Rental costs lagged housing prices for a while, but now are rising.
This boom in housing prices was not a random event like a tornado. Rather, it resulted from the Federal Reserve increasing the money supply faster than the overall economy grew. This caused some consumer inflation. The decrease in real earnings many experienced from 2003 to 2005 was not due to smaller paychecks — it was due to paychecks that did not increase as fast as consumer prices.
While some excess money went into consumer prices, even more went into prices of houses and corporate stocks. We greet such asset value increases as good news, but it is not free. Someone eventually has to pay the piper when the party ends.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.