Rents, Housing and Inflation

I played with the constant dollar adjustments in this post of mine some more, and it seems rents have done somewhat the same as real estate prices.  That only makes sense, given the relationship, if not a fully elastic one, between the two.

My first apartment was $225 a month plus utilities.  It was considerably larger than this one, and indeed would be as close to perfect for us as we could get.  I wonder if Ray Clark, my old landlord and all around good guy, is still around.  In that place, the smallest room was the size of the second largest room here.  The other four were larger.  It had a walk-in pantry that more than made up for the modest amount of kitchen cabinets.  It had an unfinished sixth room for entry and storage, that probably the size of our smallest room here, and an open porch/deck area.

Based only on inflation, the current rent for that apartment would be $477.  That’s less than $1000.  By sheer coincidence of numbers, converting this rent backward to then would mean paying $477 in 1981 money.  I’m sure there were large and luxurious apartments renting for that much then, as mine was a little low even for the time, but it would have been high end.

In current dollars, my income then would be about 24.5k now.  Indeed, once I started college in 1982, it took me until 1994 to get back to that kind of money and beyond, in real terms.

So for a person making my okay but still a relative newcomer to the job market income, rent in 1981 was , say 23-odd percent of gross income.  The same rent today is, say, 49% of gross income.  That is, actual rent today compared to adjusted for inflation income of a person at a similar stage of life, renting a comparable apartment.

It doesn’t compute.

This is one more reason I don’t “get” how the real estate market can carry on merrily as it has been.  I’ve long known a disparity existed.  I just never quantified it before.

It’s not intentionally a siphoning of money from younger to older the way social security is, but it tends to work out that way.  But why?  Based on inflation, a $300,000 house now should have cost $143,000 in 1981.  A $40,000 house in 1981 should cost $84,000 today.  Why the disparity?

Is it all due to the addition of women to the workforce?  Well, in the form of two-earner couples, anyway.  That seems a bit extreme, as unintended consequences go.  If there are kids, daycare eats most of it until government provided babysitting kicks in, and even then there’s part of the cost until they’re old enough to be on their own.  There’s extra taxes.  In our case, it would be a way to generate a couple hundred bucks a month in exchange for a far worse lifestyle.  Depends on the jobs, and I know it fuels things to a point.

It can’t all be due to the increases in typical home sizes and amenities, or the improvements in construction and technology.  After all, that would only apply to newer construction.

I don’t even think it can all be explained by population pressure with respect to where people want or need to live, though that may be the largest component of all.

So what’s the deal?  How long can we go on without the disparity coming to a head?

But I digress.  I didn’t intend to go off on the real estate bubble angle.

(I wrote the above yesterday and am no longer sure what, if anything, I’d meant to add, so I’ll post it and I can always pick up the topic in a later post.  Plus we need to start getting ready to go have dinner, and cake for my grandmother.)

Previous cost of living post:
Then and Now

Previous housing bubble posts:
Toil and Trouble
What’s the Real State of Real Estate?
Housing Bubble
Housing Bubble?
Housing Bubble?

1. are you figuring jimmy carter interest rates into your calculations?
   At 21% mortgage payments are high.
   They didn’t come down right away.

   Posted by  on  06/26  at  07:06 PM

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