Why The Economy Isn't Working

One of the supply-skeptic positions I see is that housing isn’t really that much of an issue. It’s just that the economy is broken. Capitalism is creating income inequality, and so, of course the “have nots” can’t afford housing. That’s just one of many symptoms of the broader problem.

The IRS recently updated the estimates for average adjusted gross income, by ZIP code, through 2021. And, I have combined that with the Zillow estimate of median rent (ZORI), by ZIP code, for March 2015 through December 2021. (Here, my data set uses the ZORI estimates reported or revised in September 2022. And I adjust for inflation with the GDP deflator. All percentages are continuously compounded. This is data from the 30 largest metro areas.)

With this, I can estimate the change in reported incomes in each ZIP code and the change in incomes after paying rent in each ZIP code.

Figure 1 shows the change in incomes. This shows that there was a little bit of divergence in incomes from 2015 to 2021. The average income in the richest ZIP codes increased by about 12% more than the average income in the poorest ZIP codes.

The tricky thing about measuring the change in the real standard of living in a housing deprived economy is that the national CPI estimate of rent inflation hides a lot of variation. CPI does track prices in some individual cities. For a lot of goods and services, that might be helpful.

But, deprived housing supply is highly regressive. Wherever it occurs, rents go up more in poor neighborhoods than in rich neighborhoods. So, you would have to control for rent inflation at the very local level.

Fortunately, Zillow data allows me to do that.

Figure 2 is the real change in income, from 2015 to 2021, after paying rent.

After adjusting for rent, the typical household with less than $50,000 in income in 2015 became poorer over the next 6 years.

After subtracting rent, the average income in the richest ZIP codes increased by 50% more than the average income in the poorest ZIP codes.

The main reason urban and suburban families are feeling poor is housing.

If you care at all about the plight of working class and poor Americans, then “build, baby, build” is 90% of the work that needs to be done. Millions of homes of all types - any types - big, small, luxury, entry level, condos, apartments, duplexes, single family, owned, rented, mortgaged, private equity, small scale landlords. Yes. To. All. Of. It.

Just the lack of adequate building over 6 years sucked 30% out of the potential incomes of America’s poorest urban neighborhoods. That’s about 15 years of real per capita income growth over the long-term. That’s why they lost ground. The lack of housing is sucking their incomes away twice as fast as a growing economy can grow them.

And, this is really only half the story. The rise in rents has happened in spite of a sharp decline in the trend of housing consumption after 2008. Rents aren’t taking more of our incomes because we’re piling into fancy new homes. They are taking more of our incomes in spite of our downsizing and scrimping.