Inequality and housing inflation

At Café Hayek, Russ Roberts is still arguing that there is no problem with inequality or social mobility.

Russ says that real (in economist-speak, “real” means adjusted for inflation) income for families in which there are two spouses and both work rose from $50,000 in 1970 to $74,000 in 2000 (presumably that’s in 2000 dollars). An increase of 48%, that doesn’t sound so bad. (I agree with Russ that comparing two wage earner families is the correct comparison to make.)

But let’s look at the price of housing. My parents bought a house in the Staten Island, one of New York City’s four outer boroughs, for $27,500 in 1968. Today they can sell that house for around $425,000.

Now let’s convert that to real dollars so we can make a comparison. According to the BLS, the CPI-U is 194.6 today, 172.8 in July 2000, and 35.3 in October, 1968. So my parents’ current house value in 2000 dollars is $377,390. But the purchase price in 2000 dollars is $134,618. That’s an increase of 180%.

So we see, during the time frame in which real income increased by 48%, the price of a house in Staten Island increased by 180%.

Considering that being able to afford a house is the key criterion that people use to determine how they are doing, the couple earning $50,000 in 1970 is better off than the couple earning $74,000 in 2000. The first couple can afford to buy a house, the second couple can’t.

(Of course this is only an anecdote, and the increase in prices of houses in Staten Island may not reflect other housing markets.)

Comments

[Michael H.]

Hi Half Sigma
Housing inflation has happened accross the country. My parents bought a small house in California in the mid 1960's for $25K that now would sell for $500K. But some of this inflation reflects the growth of the major population areas. Our parents bought houses that were in the outer suburbs but would be in the inner suburbs today. I'm hoping the same thing will happen with my house.

[Reader]

It is insufficient to just compared house prices when comparing standard of living. While it is true that the housing prices have gone up faster than inflation, various other goods have becoming more affordable due to technological advances (e.g., the consumer electronics in general). Housing in places in NYC is argubily influenced by immigration. This is specially true on the lower-middle end of the market. If immigration completely overnight, one would expect signficant stagnation in the NYC housing market.

[Half Sigma]

Reader wrote: "various other goods have becoming more affordable due to technological advances (e.g., the consumer electronics in general)."

This is why absolute comparisons between time periods are difficult. One could argue that life is meaningless without high speed internet and DVD players and Tivo, so we are all better off today even if we live in a 300 sq foot apt in a lousy neighborhood.

What non-economist people mostly care about is how they are doing RELATIVE to other people today. Thus the change in "real" incomes is actually meaningless, so long as people aren't dying from starvation or not having a place to live (the latter reason being why the cost of housing is MUCH MORE important than the cost of TV sets).

[The Unknown Professor]

I'd have to chime in with "reader". I don't know how many items go into the CPI, but I'll bet there's hundreds. With that many items, you can "cherry pick" invidual ones to show pretty much anything you want. Some will be higher over time, and some lower. However, the "average" smooths all that out.

Like I do every semester, I recently asked my Managerial Finance class the question "Has America gotten more or less wealthy over the last 30 years?". The 20 year olds mostly said "less wealthy". The non-traditional ones (i.e. those in their 40s) almost to a one said "more wealthy". At that point, we'd already had four students' cell phones go off (despite my telling them to shut the damn things off in my class). Then, we "old farts" talked about how in the 70s, we didn't have microwaves, many TVs were black and white, and a cell-phone like device was only seen on Star Trek. And I'm not that old!

However, it's ironic - as our standard of living increases, our general level of satisfaction goes down.

[Half Sigma]

"However, it's ironic - as our standard of living increases, our general level of satisfaction goes down."

It's not ironic at all because people's satisfaction is based on relative comparison to others, not an absoulte comparison to the past.

Maybe it's irrational that we're all not deliriously happy because we have electricity and running water, but that's just not the way the human brain is wired.

(And yes, I remember when I was a kid and my parents bought their first color TV. And now I have two color TVs, both with remote control [as if they sell any without this very important feature these days] and I live by myself. But they had their own house even though they didn't have much money.)

[Reader]

The increase in the general level of dissatisfaction with our lives should surprise no one given the fact how fast things change.

This is not a new observation, these rapid changes have unforseen consequences. impacted our ways of live more than anyone could imagine. When people are changing jobs and/or moving every two to three years, it becomes significantly difficult to maintain deep and meaningful relationship. Casual observation suggest there appears to be a positive correlation between hapiness and connections with others in lives.

The increase pace of life also force many of us to work longer hours to afford those $400k houses in the burbs.
You just got to love progress.