Today I want to revisit the world of housing. As an (almost) 30-something, buying a house is something that I have spent significant time thinking about. If my Facebook feed is any indication, then I am not alone in this.
Specifically, I want to explore the idea that it was more affordable for our parents to buy houses. Is this actually true? And if so, how does it square with the (previously-discussed) fact that the value of your house generally only grows at the rate of inflation?
Millennials aren’t buying
Millennials aren’t buying houses at the rate previous generations did. Home ownership among 18-34-year-olds is at a 30-year low.
The easy answer is to blame student loan debt. And sure, maybe that is part of the problem. But as someone with six figures of student loan debt (and not low six figures) this doesn’t seem like it could be anywhere near the full cause.
Some have speculated that Millennials just don’t want to own homes and that we are “experiencing a cultural shift.” However, Nerd Wallet, using actual data instead of just making things up, found that Millennials “look upon owning a home just as favorably as previous generations.”
Time suggested that maybe we’re “just too picky.” I think being picky may be justified when making the biggest purchase of your life, but maybe that’s just me. Anyway, I haven’t seen any data to back up the idea that “being picky” is leading to a 30-year low in home ownership.
So maybe some of these factors play a role, but let’s see if we can find anything more solid in the cost data.
In December of 1975, the median new home sale was for $35,700.
That in itself doesn’t tell us much, given that we are terrible at calculating inflation in our heads.
What does help is knowing that in 1975 the median household income was $11,800. This means that it took just about 3 years of gross household income to purchase a house.
In 2015 it took 5.3 years of household income to purchase a new house.
When compared to income, a house in 2015 was 77% more expensive than in 1975.
Why are houses more expensive?
“But wait, Matt,” you may be thinking. “You told us that home value appreciation barely beats inflation! Did you lie to us?”
I would never lie to you, dear reader. At least not intentionally, I suppose.
Homes do only appreciate at right around the rate of inflation. And they are much more expensive than they used to be.
This chart from AEI shows the price per square foot (adjusted for inflation) for new homes in the US.
As you can see, the price has gone up and down over time, but the 2015 price is pretty close to the 1975 price.
The cause of this discrepancy, it appears, is that houses have gotten significantly larger over time.
According to the U.S. Census, the median new home in 1975 was 1,535 square feet. By 2015, this number had jumped to 2,467 square feet.
Our houses have gotten 60% larger over the past forty years!
This change looks even more drastic when you consider that family size is on the decline as well.
In 1975, the average household was 2.94 people. This figure dropped to 2.54 people by 2015.
So what does it mean to get rid of 40% of a person?
For one thing, it means that the remaining 2.54 people have a lot more space.
In 1975, there would have been 522 square feet per person if the average family lived in the median home. This number jumped by 86% to 971 square feet per person in 2015.
I don’t know why houses have gotten so much bigger over the years. It could be a case of keeping up with the Joneses run amok. It could be out of control hedonic adaptation. It could be any number of reasons that others have speculated.
The important takeaway is that houses are getting more expensive mainly because we are buying much more space for smaller families.
So if you’re looking to find a more affordable home, maybe think about how much space you actually need. A smaller option might just work for you. Your parents would have been fine with it.