Dissecting the housing crisis
Greetings patrons,
It’s time for another research update. In this letter two things:
Thanks for your patience
They say that academics must publish or perish. And of course, science blogging is no different. If you want to build an audience, you need to publish a steady stream of new content. Which brings me to the (relative) silence of 2024.
Until this year, I’d been regularly posting about 100,000 words of content to Economics from the Top Down. But this year, I’ll be lucky if I hit 50,000.
The reason is that for me, 2024 has been a year of grueling manual labor. Things got rolling last January with what I thought would be some modest touch-ups to the rental suite in a our basement. But the project quickly ballooned, in terms of both cost and time. I won’t bore you with the details. But suffice to say that I spent a large portion of 2024 learning new construction skills.
The work has given me new respect for the trades. But it’s also made me reflect on how scientists fund their research. Prior to the spread of universities, scientists regularly funded their work through property income. Darwin, for example, relied on family wealth. And the anti-capitalist radical Friedrich Engels was (ironically) the son of a wealthy textile manufacturer.
The point is that science itself is rarely profitable. And so absent government funding, science was largely done by those born into wealth. This is not a system that I endorse, but it’s one that I’m now reckoning with.
Today, universities are essentially creating a new class system, in which a small group of academics are lavished with research funding, while a large group of contingent faculty do the underpaid work of teaching. The result is that most non-tenured researchers are constantly hustling to make money.
For me, a rental suite is an important part of this hustle. Aside from up-keep, rent is essentially passive income that, as Henry George would put it, is completely ‘unearned’. Yes, I’m aware of the irony. As I critique the ills of property income, I nonetheless earn (modest) income from property.
Perhaps I’m just selfish, but I feel no shame. Sure, I could take my PhD and ’earn’ a sizable income as a business analyst. But then I wouldn’t be able to do science.
With that in mind, I consider 2024 a year of ‘investing’ in future research. The months of grueling manual labor will hopefully pay off with a steady passive income that will help fund my work. All of which is to say, thanks for staying with me during the relative silence.
The roots of the housing crisis
Now to actual research. In my last post on house prices, I concluded that the on-going (US) housing crisis could be solved in large part by redistributing income.
Predictably, many people scoffed at this idea. And in hindsight, the criticism was probably justified. The topic of how housing affordability relates to income inequality is complex, and deserves its own post. And so I’m in the process of writing one.
Here’s a sneak peak at the results.
The crux of the forthcoming piece is to look at the housing crisis through the lens of a counterfactual world. In this world, US house/rent prices remain the same as in the real world, as does average income. What changes is the distribution of income. Instead of a modern America plagued by rampant inequality, we imagine that the US somehow kept income inequality at levels found in 1970. Then we return to the housing crisis and see what we find.
Surprisingly, the result is that the housing crisis vanishes. On this fact, the data is unequivocal. The post-pandemic housing crisis is being driven almost completely by the collapsing incomes of the American poor.
Here’s a taste for the data. In the figure below, the blue line shows the percentage of (real-world) Americans who have a monthly income that is less than the median US rent. Notice the dramatic spike in the number of rent-poor Americans in the last few years. This surge, in a nut-shell, is the unfolding housing crisis.
Now, many commentators blame the current crisis on a housing ‘shortage’ — a shortage that is pushing up rent. But I think this idea is mistaken. What’s really going on is that post-covid, the poorest Americans have seen their incomes collapse. When we remove this collapse — by imagining a counterfactual world with constant, 1970 levels of inequality — the housing crisis vanishes. That’s the story told by the red line — a world in which rates of rent poverty remains essentially unchanged since the year 2000.
In my upcoming post, I’ll explain this thought experiment in more detail, with many more charts. So stay tuned.
Until next time
That’s it for this update. Thanks for supporting my work through the relative silence of 2024. If all goes as planned, frequent posting will resume soon.
Best,
Blair