I spent most of last week in Elizabethtown, Kentucky visiting my grandma. It's a cute little town full of flowering trees — but you wouldn't believe what it costs to live there!
Killing some time in the Airbnb one night, I decided to pop onto Zillow. "These numbers can't be right," I thought.
Basic houses are often $300,000 or more. Prices for many of the houses seemed to have gone up by 50-100% since COVID.
E-town, as the locals call it, is lovely and has a charming downtown. But it's also quite remote — the nearest city, Louisville, is 45 miles away.
It's Not Just E-Town
There are some local factors affecting prices in the area — Ford is planning to build a big new battery plant nearby. But the giant run-up in real estate prices goes way beyond E-town.
The median house price is now 5.8x the median household income. Even during the peak of the 2000's real estate bubble, that ratio peaked at 5.1.
What's behind this?
The economy is strong and unemployment is low. COVID-era policies expanded the money supply significantly, causing inflation. What's more, America hasn't built enough housing ever since the 2008 financial crisis.
Housing Prices Aren't Adjusting to Higher Rates
Higher rates usually make prices fall. But so far, that hasn't happened.
Constrained supply is a major reason why those prices haven't fallen. We're building too few houses, and owners of existing homes don't want to sell.
After all, who wants to exchange a 3% mortgage rate for 7% on a new house!
"If It Can't Go On Forever, It Will Stop"
People just can't pay today's housing prices.
A mere 16% of homes are affordable for the typical family. Homelessness is rapidly increasing.
In time, I expect to see house prices fall.
Families will reach the limit of what they can pay, if they haven't already. More supply will be built.
As economist Herb Stein once said "if it can't go on forever, it will stop."
Wrap-Up
Today seems like the worst time in many years to buy a house. Both interest rates and prices are sky high.
I expect that scary price/income ratio to revert to the mean sooner or later. In the mean time, the best solution for America is to pop up houses as fast as we can!
What are you seeing in the real estate market? Leave a comment and let us know.
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More on housing:
Why Manufactured Housing Won't Fix High Housing Costs
YIMBY Is Working Wonders in New Zealand
Your Next House Will Be Built By Robots
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