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The Federal Reserve‘s preferred measure of core consumer price index inflation has fallen to its lowest point since the start of former President Joe Biden’s time in office. Grocery price inflation has fallen below the central bank’s 2% maximum target, and the national average for a gallon of gas has fallen below $3 for the first time in four years. Nearly a year into President Donald Trump‘s second term, an all-consuming inflation crisis wrought by four years of Bidenomics is slowly but surely waning to a belated end.
And yet, the cost of living continues to plague the public, with voters continuing to prioritize prices as their No. 1 issue and increasingly souring on Trump as a consequence.
REAL WAGES UP 1.5% AND CORE INFLATION AT FOUR-YEAR LOW: A CHRISTMAS MIRACLE FOR TRUMP?
The problem, of course, is not the broad-based inflation that is currently being tamed by +4% economic growth and a 19% reduction in the federal budget deficit, but rather the specific sector of housing.
Fox Business’s Ed Lawrence asked the president shortly before Christmas if he was still considering going forward with his rumored emergency declaration on housing supply. Trump replied with a false dichotomy.
“You have a lot of people who have housing that — because we have such a strong time, such a strong market — houses are very valuable,” Trump said. “It’s a big part of their net worth, their house. I don’t want to knock those numbers down, because I want them to continue to have a big value for their house. At the same time, I want to make it possible for young people out there and other people to buy housing. In a way, that [conflicts]. In other words, you create a lot of housing all of the sudden and it drives the housing prices down. So I want to take care of the people who have houses, that have a value to their house that they never thought possible, sort of made them wealthy and happy, especially in their later years. I want to keep them up. At the same time, I want to make it possible for people to go buy houses.”
The problems here are endless. As a matter of politics, if Trump took this fallacious logic to its endpoint, he and the GOP would be the recipients of generational warfare at the ballot box in 2026, with young voters legally locked out of housing affordability all but destined to coalesce around “Marxist Mamdanism” as a last resort. To accept this false premise of a zero-sum game and back the wealthiest generation in history over the young voters who delivered Trump his 2024 victory would doom the Republican Party and the country.
(Consider that while the boomers and especially Generation X’s favor for Trump has held fairly strong throughout his second term, YouGov found that Trump’s net approval since his Inauguration Day has fallen by 21 points among millennials and 38 points among Generation Z.)
But more importantly, the premise that housing is a zero-sum game and that it’s up to the government to pick winners and losers is the same sort of socialism that has hollowed out California, New York, and every other indigo blue metro that has bled population in the past decade. And ironically enough, the zero-sum housing fallacy is the exact opposite of the approach that this century’s Republican success stories from Texas to Florida have adopted.
Trump must indeed facilitate the easing of housing prices that are driving disproportionately young voters to perceive the overall economy as negative. The only way to drive down housing prices is to bolster the supply, which local and state Democrats have legally hamstrung, artificially inflating home prices. But this requires a rejection of zero-sum socialism, not its embrace.
As I have written ad nauseam, the entire cause of our sky-high housing prices is the fact that we built half as much housing in the 2010s as we did during the stagflationary hellhole of the 1970s, when our population was two-thirds what it is today. Goldman Sachs estimated that the housing market has a shortage of some 4 million units, while J.P. Morgan said it’s closer to 3 million. Because half of all homeowners locked in pandemic or pre-pandemic era mortgage rates of below 4%, the shortage is compounded by a game of musical chairs where sellers would rather hold on to properties like medieval fiefdoms. J.P. Morgan estimated that purchasing a home is 40% more expensive than renting, the highest discrepancy since the Volcker era.
Why did the shortage happen? Too much government, not too little. The National Association of Home Builders estimated that a quarter of the cost of a single-family home is just a regulatory tax from local, state, and federal governments, amounting to an average tax of $94,000 per home. And the zoning regulations that criminalize new buildings are not distributed equally. The Census found that states with Republican governors issued almost 30% new housing permits per capita than states with Democratic governors last year. AEI ascertained that California is missing an equivalent of 12% of its housing supply, Hawaii 14%, New York 8.5%, and the District of Columbia 8.7%. By contrast, the states with the highest domestic in-migration are all red states that actively encourage home building.
If Trump were correct and allowing new housing supply and lower housing prices made wealthier Americans much poorer, we would expect to see wealth flee those Republican YIMBY states, right? But the exact opposite is happening.
According to VoteWithYourFeet.net, the three states with the largest increase in their housing stock from 2012 through 2022 (all the red bastions of Utah, Texas, and Idaho) generated a cumulative $73 billion in new personal income from domestic in-migration during the same time frame. And whereas median earnings only rose 37% nationally from 1990 to 2023, they have risen almost 50%, faster than any other metro in the nation, in the YIMBY epicenter of Austin, Texas.
If zoning were required to maintain boomer wealth, we would expect to see states with wildly relaxed zoning, such as Florida and Texas, to see an exodus of boomer wealth rather than the extraordinary influx they have embraced.
Now, what would practically solving housing affordability actually look like?
Fiscally responsible homeownership in the century of the federally backed, 30-year fixed mortgage necessitates two basic budget constraints: the amount required to save for a 20% down payment on the home, and then the monthly payment of principal and interest. Homeowners must also pay property taxes and insurance, and while those are not usually monthly payments, prospective buyers correctly tabulate those fees into their monthly estimates as they consider what counts as affordable.
Housing expenditures have long comprised around one-third of average household expenditures; while the share of annual household spending on mere shelter costs — that is, rent or a mortgage payment — was as low as 13% in 1960, the total share of household expenditures on housing more broadly has held closer to constant at around 33%. What consumers have to spend more today on the list price of rent or a home purchase, they save in all the maintenance and furnishings that used to go into making drafty homes with little space and fewer kitchen and bathroom amenities habitable enough for bigger families.
Conventional wisdom in personal finance has long internalized this reality. The 28/36 rule says the upper limit for monthly total housing costs (i.e., principal, interest, insurance, property taxes, and any associated fees such as homeowners’ association dues) should comprise no more than 28% of a household’s pre-tax income or 36% of its post-tax income.
The median household income in 2024 was $83,730. We have never and should never expect the country’s lowest earners to own a home outright, but if we want the middle class of roughly average Americans to be able to do so, we would want monthly home payments to amount to less than 28% of one-twelfth of $83,730, or less than $1,954.
The problem is that the median home price of $410,800, which is 30% higher than it was five years ago, confers an average monthly payment of nearly $2,500 per month even when generously accounting for an average 30-year fixed mortgage rate of 6.21%, the national average property tax rate of about 1% of a home’s value, and the national average of homeowners insurance rates of about a third of 1% of a home’s value.
In other words, the median American has a $500 monthly gap in their budget to afford homeownership. Unlike some false nostalgia that misremembers the glory of a past economy, home ownership is actually much less affordable today because of artificially constrained housing supply.
The irony of solving this problem is that there is not one income demographic that relies on property ownership as the majority source of their net worth. The plurality of household wealth is actually vested in equities, as they should be; as elementary economics will teach you, even for an institutional investor, return on equities over time has long outpaced the return on property. And for the overwhelming majority of Americans, their home is a place to live in, not a speculative asset. Their income, even in retirement, comes from equities, not their primary residence.
THE ONE-INCOME, MIDDLE-CLASS HOUSEHOLD IS A HISTORICAL MYTH
Furthermore, as the boomers die out and the rest of the nation’s population gets older and smaller, our economy’s total value will become increasingly dependent on productivity, not population size. We may very well be at peak housing, whereas the value of the stock market’s gamble on artificial intelligence has begun to be justified in the nation’s +4% economic growth in the past six months.
Trump’s political favor may indeed depend on whether the class of young Americans legally locked out of home ownership sees any improvement in their property prospects. Fixing the faux pas of Democratic governance does not require zero-sum theft from boomers, but instead growing the economy as a whole. As other metros follow suit and develop as Texas and Florida have, whatever pennies are lost on primary property valuations are gained through that greater engine of economic growth that capitalists and Republicans must champion.
