Who can afford to live in America? Apparently, most Americans cannot. With the easy-money-fueled asset bubble of the past two decades, home ownership—and the cost of shelter in general—has been one of the sectors most affected by inflation and rising prices. What happens to a society in which its citizens cannot afford to live comfortably? History has the answer, and it is an unpleasant one.
It would be easy to blame the rapid recent rise in mortgage rates for the decline in affordability, but that isn’t the primary culprit. With mortgage rates now in the 6 percent to 7 percent range, the costs of mortgages are not high by historical standards. Homes were more affordable during periods of even higher interest rates. The underlying issue isn’t the interest rate or even insurance costs—which are also rising at double-digit rates—it is the cost of the home itself.
Nearly three decades of artificially low interest rates led to the ongoing bubble in real estate prices. While price increases took a breather in the wake of the global financial crisis, they have since been growing above income for a decade and at an accelerating pace since the outpouring of stimulus funds during 2020 and 2021. The continued rise in prices since 2020 is squeezing more and more Americans out of the housing market.
We are creating a dual-tiered society between homeowners and the increasingly vast majority of Americans who cannot afford one. At the same time, we have watched as private equity and other institutional buyers entered the single-family home market for the first time in history. These firms now constitute almost 20 percent of the housing market. They were able to accomplish this because, at least until recently, they were able to borrow at low single-digit interest rates, often well below what any individual could obtain in the mortgage market. As a result, these firms have squeezed out first-time and other individual buyers and raised housing costs for everyone.
The United States succeeded so well as a nation in the 20th century because of its large and flourishing middle class. The backbone of the middle class was home ownership, made affordable by decent-paying manufacturing jobs and a monetary and fiscal policy regime that—for the most part most of the time—managed to balance the interests of labor and capital. All of this has been lost.
Home prices will not come down on their own without a crash and a recession. That would be bad for everyone, including those struggling to afford a home. If one has no job, it doesn’t matter that home prices are suddenly one-third less. What is required is that real incomes start growing again. That will only happen with a resuscitation of our manufacturing base, including the U.S. energy complex, and a restored trade balance with appropriate tariffs that make our goods competitive again—and, of course, a sane immigration policy and practice that doesn’t overwhelm the nation’s resources and squeeze U.S. citizens out of jobs on the lower end of the employment market.
The alternative is the continued immiseration of the U.S. working and middle classes. If history is any guide, and one needs to look no further than the French Revolution; this would be a terrible outcome.
