Warning: Do not try to read this if you are not wide awake and sober. The staggering number of statistics will cause mental short circuits. Author is not responsible for “fried brain” or other problems associated with excessive statistics.
Consider these sobering statistics. In 1960, a new house would cost around $16,500. Ten years later in 1970, a new house would cost around $26,500. The cost of a new house went up $1,000 per year. The national inflation rate ranged from 1.4% in 1960 to 6.5% in 1970. Unemployment ranged from 5.5% in 1960 to 3.5% in 1970. Obviously, the 1960s were a fairly stable decade with little change in most key indicators. The highest level the Dow hit in 1960 was 685 and the highest it hit in 1970 was 842. The average price for a gallon of gas in 1960 was .31 and in 1970 it was .36.
In 1960, the median household income was $5,600. To put these statistics in proper perspective; a new home would cost the average family three times its annual income. By 1970, the median household income had grown to $8,730 or 55.9%. Guess what? It would still cost the average family three times its annual income to get a new home.
In the ten years of the 1960s, the median household income rose 55.9% and the average price of a new house rose 60%. It is very interesting to note that the average price of new house in 1968 was also $26,500 compared to $20,500 in 1964. Thus, most of the increase in housing cost came in the middle four years when inflation was averaging around 3%.
By 1980, the average cost of new house had jumped to $76,400. This was a $50,000 increase in ten years. Remember the increase in the 1960s was only $10,000. The cost of new house increased 188% during the decade of the 1970s. Inflation ranged from around 5% in 1971 to an astounding 13.5% in 1980. Unemployment was fairly stable between 3.5% and 6%. The 1970s were racked with two separate oil crisis and the resulting double digit inflation that came with them. In 1974 and 75, inflation hovered around 14%. Between 1977 and 1980, inflation was between 11% and 13.5%.
Needless to say, the price of just about everything skyrocketed during the 1970s. A gallon of gasoline went from .36 per gallon in 1970 to 1.25 in 1980; a 247% increase. A gallon of milk went from $1.15 to $2.16, a 88% increase in ten years. The highest level the Dow hit in 1970 was 842 and the highest it hit in 1980 was 1000 which represents only a 19% increase. The stock market was not the vehicle to wealth in the 1970s but CDs and other set rate investments provided a huge windfall to those wise enough to invest in them.
In 1970 the median household income was $8730. By 1980 the median household income had grown to $17,700. Although this represents an increase of 103%, when compared with the 188% increase in the average cost of new house and the 247% increase in a gallon of gasoline; it is plain to see the average American family went backwards in the 1970s.
In 1990, the average cost of a new house had increased to $149,800. This was a 96% increase from 1980. To place these figures in proper perspective, a new house cost $123,300 more in 1990 than in 1970. A new house cost a staggering 465% more in 1990 than a mere 20 years earlier in 1970. Unlike the 1970s, inflation was fairly tame in the 1980s after 1983. The incredible 96% increase in housing costs cannot be explained by inflation as they were in the 1970s.
Unemployment ballooned during the recession of 1983 and 1984 to just under 10% but averaged closer to 7% most of the decade. The big thing that changed in the 1980s was the value of the Dow. Remember its highest close was 1000 in 1980. In 1990, the Dow hit 3000. Certainly the 200% increase in the Dow during the 1980s generated a huge new class of wealth in this country. Those who invested in the stock market in 1980 were rewarded with returns on their investments never before seen in history, even with the temporary dip in 1987.
The median household income was up to $29,943 in 1990 which is more than $12,000 more than 1980. The 69% increase in household income basically kept pace with the rate of inflation and was in line with the percentage of increase in the cost of a new house. Again, to keep these figures in better perspective, the median household income increased by $21,213 between 1970 and 1990. This represents a 243% increase. This sounds good until compared to the 465% increase in the cost of new house.
Here is a statistic to chew on. The price for a gallon of gasoline in 1970 was .36 and in 1990 it was only $1.16. The price of a gallon of gas went up 222% in 20 years even with two huge oil crises. By comparison, a gallon of milk in 1970 was $1.15 and by 1990 it was $2.78; an increase of 142% in twenty years. Both the price of gasoline and milk went up less in twenty years than the median household income.
In the year 2000, the average cost of a new house was $207,000 only a 38% increase from 1990. The 1990s were similar to the 1960s in that inflation was very low, averaging around 2.5% and unemployment was moderate in the 6% range. What bore no resemblance to the 1960s was the stock market. If the gains of the 1980s were impressive; the gains of the 1990s were phenomenal. The Dow hit 3000 in 1990. In early 2000, the Dow reached 11,723 an amazing 290% increase over 1990. One must remember that early in the year 2000 the Dow started dropping and didn’t get back to 11,723 until 2006.
The median household income in 2000 was $42,100 which was only a 40% increase from 1990. For the first time since the 1960s, the percentage increase in the cost of new house and the median household income were roughly the same. Of course when comparing actual dollar figures, the comparison takes on a whole new light. The average cost of a new house increased $57,200 while the raise in median household income raised $12,127. This is why actual figures are better for comparing differences than percentages of increase.
Here is your statistical food for thought of the day. A gallon of gasoline cost $1.38 in 1980 and in twenty years it still only cost $1.50. In twenty years, a gallon of gasoline only went up .12 on average. That amounts to 8% increase in TWENTY years. Amazingly, gasoline in 1999 averaged $1.17 or .21 LESS than in 1980. I do not believe we Americans have much to complain about just because the price of gasoline has finally caught up with everything else.
Finally we come to 2006. What has transpired in six years since 2000 is truly incredible yet horribly troubling. The median household income increased to $48,201 which is up all of 14% since 2000. The Dow finally managed to get back to where it was in 2000 and even went over 14000 before falling back to its current levels. Inflation had been pretty much under control until the last year, and unemployment has been very stable. From these perspectives all seems to be going well.
That gallon of gasoline that cost $1.50 in 2000 now ranged between $2.20 and $3.05 in 2006. We have seen pretty much a 100% increase in gasoline prices in the past six years. Keep in mind, we saw a 247% increase in gasoline costs in the 1970s. The average cost of a new home in 2006, just before the sub-prime crisis turned the housing market upside down, was an astounding $305,900. To say the cost of a new home increased 48% between 2000 and 2006 doesn’t do the comparison justice. The only way to really see what has happened is to realize the average cost of a new house jumped $98,900 in less than six years.
Here is the crux of the whole matter. A new house cost 1050% more in 2006 than in 1970. That means a new house in 2006 was 10 ½ times more expensive than one in 1970. By comparison, the median household income increased 452% between 1970 and 2006. The 600% difference between income and housing expense is why there is a crisis of monumental proportions plaguing this country.
In 1970, the ratio between income and new home cost was 33%. In other words, a new home cost about 3 times more than the median household income. By 1980, due to the horrific inflation during the 1970s, that ratio dropped to 23%. The new home was now 4 times more than the median household income. By 1990, the ratio had dropped further to 20% and was still at 20% in the year 2000. By 2006, the ratio had dropped to 15.7%. People can no longer afford new houses. The income is not rising nearly as fast as the cost.
Think about these statistics when you drive down the road and see the signs advertising “new homes starting at $300,000.” Who exactly can afford to move into a new home with that kind of price tag? Yet, every day in America someone signs their life away just to purchase a grossly overpriced piece of the American dream. Every day in America, tens of thousands of construction workers go to work building more and more houses with price tags that only a few short years ago represented the anticipated lifetime earnings of a worker.
America cannot handle what is happening in the housing market. The only way would be to hike wages dramatically. If that were to happen, we would be back to the days of 13% inflation. The only solution is for the housing costs to come back down to a level commensurate with income. This does not sit well with those building the houses and those who have already paid highly inflated prices for them. But, who deserves the break today? The few who through greed and shortsightedness grossly overpaid for their home or the rest of us who are fighting to stay in ours? I vote for us, how about you?
Everything with exact numbers, percentages is shocking. What you`ve tried to illustrate is really astounding but being an optimistic I`m waiting for even worse situation. Jumping from one employment to another it took me ten years to have a real estate in Toronto. Imagine, that`s a long time. The cost of housing is climbing but your salary remains the same…that`s the image of the 21st century.
Amazing! What a wonderful resource!
I’m a journalist covering the cruise industry. In 1990, the price of a one-week cruise was roughly $1500 per person (two to a cabin). Today it’s much, much lower. I can say that in the Caribbean in 2008, during peak season, a one-week cruise costs $550 per person. Today, $1500 per person gets you a suite.
The reason for this is economy of scale in ship building. The major cruise lines build enormous vessels because the price per/cabin decreases significantly: a ship carrying many more people has one set of officers, one engine, one hull.
So for in 2008, cruises are selling well. People book 6 to 12 months in advance, and a lot of inventory in Europe is gone. The reason this segment of the travel industry is holding up is because a cruise is a good deal. You pay for roughly 80% of your vacation costs up front …. your cabin, all the food and entertainment.
This is a very interesting article. I am a recent college graduate struggling to find a decent job with a decent wage and get on my feet. I find many of my peers in terrible financial situations despite their college graduate status. Many of my peers are waitressing, bar tending, or working in retail, yet all are relatively bright and hard working individuals. Most still live at home with their parents and struggle to pay back student loans, make car payments, pay car insurance, gas, food, etc. Employers don’t return calls, or offer wages that are unacceptable considering the cost of living (I live in south Florida, one of the most expensive places to live in the United States). The future looks bleak for me and my peers and I spend a lot of time wondering how I will ever be able to afford a home, to have children, and to retire.
Why are no politicians approaching the housing question from this point of view? By intervening to keep housing prices at their current high level, politicians are compromising the future of an entire generation for the benefit of those who bought overpriced houses 2004-2007, often with no money down. Raise interest rates and let the bubble pop! House flippers and real estate agents got rich, and millions of middle class Americans got ripped off; that was tragic, but keeping prices where they are through government intervention would be even worse.
I agree 100% with John. Use common sense and look at the historic figures and then you won’t get ripped off. I sold my house in 2006 and moved to rental property closer to work. Best decision I ever made. The only thing that can save this economy is to raise the interest rates, drop the house prices to 3X average salary, and watch what happens - economy will rebound fast.
I took your numbers above and plugged them into excel, then made a bar graph. I think that the visual representation of the differences between home values and incomes is easier on the brain than simply a series of numbers.
The dark bar is median household income; the light one is median home price, taken from your statistics above.
I guess either you are not married or your wife does not work.
Now a day, most partner or wife or husband do work. So a double income “family” is buying the house. If you consider this, then the housing price are more affordable then previous decade when one partner worked.
One consideration: while all the numbers are interesting, when you are trying to put housing costs into the mix it is misleading to use the home price itself as the indicator. Housing should be considered as a flow, or monthly expenditure. Using this number incorporates the cost of the money (normally) borrowed. As an example: when an individual is looking to buy a house the figure that is important to them is the monthly payment. This number is compared to their income rate to determine if the house is affordable to them. If money is cheap, as it was a few years ago, payments are lower, and people determine that they can afford “more” house. When more people look for “more” house, competition drives house prices up. When money is cheap (and readily available), house prices will go up. This is what has happened in the past few years. The upshot though, is that the price of the house is mostly only an imaginary number for purposes of these kinds of comparisons. It will fluctuate, in conguction with the cost of moeny, to price monthly payments in the competitive market. Better for your comparixons here is to say, for example, that an average house in 1970 would have cost the new homebuyer (i.e. someone who had just secured a loan at contemporary rates) $140 per month, whereas the average house in 1980 would have cost $700 per month.