Solving the Housing Crisis

In my last post, I discussed the current economic reality of the housing market and how the current mix of high interest rates and housing prices makes owning a home seem like an insurmountable task. However, as I also stated, this is just another economic cycle we will need to weather through and we will see some things move in favor for buyers. This includes the potential decrease in interest rates as the Fed is being pressured by the Trump administration to decrease interest rates, a move that threatens the independence that the Fed has had for decades. I do want to note, however, that is it not just the pressure from the sitting president, as current Fed chair, Jerome Powell, has remained defiant these past few Fed rate decisions, but also the weakening of the labor force which is the second half of the dual mandate for the Fed. We are also seeing the housing market swinging towards a buyer-favored market as the percentage of houses bought over asking price has decreased 4.2 points year over year and 22.1% of homes with a price drop, according to Redfin’s July data.

That being said, the housing market in the United States is it pretty rough shape. The housing supply is much lower than the housing demand, and basic economics tells us that when the demand is higher and the supply is lower, prices get higher. And that is exactly what we are seeing now, both in the home-buying market and even in rental market. Now, there has been a plethora of ideas on how to solve this crisis. For the rental market, there is rent control or housing subsidies. The difference between the two is that rent control limits the increase of rent for an existing tenant, while housing subsidies includes the government paying for a portion of the rent. The problem with rent control, is that due to the restricted cash flows for the investor, they are less incentivized to maintain the property. That then leads to a degradation of the property, and you end up with people living in sub-standard living conditions. Housing subsidies may help alleviate the cost in the short-term, however, it does also incentive the landlords to increase their prices if they know that the government will step in and cover the difference. With that, our first instinct might be to feel bad for the tenants as they are living in sub-standard living conditions, but there too, we must realize that they are economically incentivized to stay there as that is what they can afford. This realization didn’t come to me as an epiphany, I read it in Thomas Sowell’s Economic Facts and Fallacies. The point he made there was that people, typically intellectuals and politicians, feel like they know what is best for other people and want to make changes to help. The only problem is that these people are outsiders looking in, and aren’t living in the reality of the people they are aiming to help. This idea is touched on a bit more in depth in Thomas' Sowell’s Social Justice Fallacies in which Thomas points out that there is no set of knowledge that is superior to another, and therefore, the intellectuals and politicians attempting to fix a problem they themselves aren’t a part of can cause more harm that good. I am also currently exploring the idea even further in Hanes C. Scott’s Seeing Like a State as he explores the faults of urban planning and how attempting to bring order to a world of natural complexities tends to end up hurting the very people it aims to help.

That does not necessarily mean that there aren’t things that the government can do to help with the current issue. For one, we need to remove the red tape that is involved with the building process. If you look at California in particular, we have one of the most stringent building codes which makes it difficult to build new houses. Granted some of the regulation can be explained for the need to ensure new builds can withstand earthquakes, but there are also some sustainability concerns that also make it difficult to get permitting. It wasn’t until recently that governor Gavin Newsom rolled back some environmental laws that were adding difficulties to construction projects which includes new housing builds. While we are still unsure of how much of an impact this will have on new builds, it may be a step in the right direction. While I am all for sustainable construction and would like us to be more sustainable, we have to weigh the costs of these things. California is currently struggling with a large amount of unhoused people, and pouring money into the problem isn’t necessarily solving it. We can choose to have these limits to new builds in the name of sustainability, but then struggle with the issue having a market that leaves people priced out of homes. And while housing availability isn’t the only answer to bringing the unhoused population down, it definitely would help.

In summary, the housing crisis we are currently facing is somewhat fabricated by our very own policies. State and local governments needs to readjust their zoning and building laws to make building new homes easier and we may need to reconsider some of the current ways we are trying to ease the problem. While rent control and housing subsidies may be a short-term fix, we need to start looking at things longer term and address the issues at their root cause.

The American Dream is Dead

Or at least it seems to be for many young people. I mean who can blame them? Living costs are at all time highs, wage growth does not keep pace with the cost of living, and owning a home seems unreachable.

Let’s do a bit of a math exercise. Now, while recent events may bring question to the Bureau of Labor Statistics, and I do have my own thoughts on this that I will relay in either a separate blog post or a podcast, I think the idea still holds. Take a look at the average sales price of houses sold in the United States in the first quarter of 1971, which was $27,300. I chose this data point because this is as far back as we have information on mortgage rates which I will discuss in the next paragraph. If you were to plug that amount into the Bureau of Labor Statistics Inflation Calculator, and adjust it to today’s dollars, as of June, 2025, the average house price should be $219,598.89. Compare that to the second quarter of 2025 where the average sales price of houses sold was $512,800, more than twice that amount. The math doesn’t fair any better with the median sales price of houses sold in the United States either which reflects similar numbers: $24,300 in the first quarter of 1971 adjusts to $195,467.14 compared to $410,800 in the second quarter of 2025.

Now, that’s just the price of the homes themselves, but let’s look at the means to pay for them. If we apply the same math to the average hourly earnings for April 1971 which was $3.58 we get an inflation-adjusted hourly wage rate of $28.80, lower than the current average hourly wages of $31.34 as of July 2025 which means that average hourly wages have actually gone a bit higher than inflation. However, when we look at the percentage that the payments of a 30-year mortgage is relative to income, we see a drastic difference. Take the hourly wage for April 1971, $3.58, and multiply it by 173.33 (this is 2,080 hours typically worked annually, divided by 12 months), you get monthly income of $620.53. Then, take the weekly average 30-year mortgage rate for the week ending on April 2nd, 1971 which is 7.33% and apply it to a loan amount of the average house price in 1971 of $27,300, and you would get a monthly payment of $187.72. Finally, divide the monthly payment by the monthly income, and we see that the mortgage was only 30% of monthly income in 1971. Now, if you were to do the same with todays’ numbers: $31.34/hour wages, $512,800 average home price, 6.63% weekly average 30-year mortgage rate for the week ending on August 7th, 2025, the mortgage payment of $3,285.21 is a whopping 60% of the $5,432.16 monthly income. With this in mind, I do want to point out that we are in a rather unique situation in which we have elevated interest rates and a shortage of housing supply that increases the cost of housing. If you purchased a home before the pandemic (fourth quarter of 2019) you would see: $23.84/hour wages, $384,600 average home price, 3.72% weekly average 30-year mortgage rate for the week ending on January 2nd, 2020, the mortgage payment of $1,774.60 is 43% of the $4,132.19 monthly income, which is still considerably high, but not that drastic. My point being here that we are in rather unfavorable economic cycle, and the feelings of exasperation are amplified by the economic reality that buying a home is not feasible, at least in a financially responsible way, and many see that, along with the other economic disadvantages, as a sign that the American Dream is dead.

And while I sometimes catch myself entering that same sentiment and others argue the American Dream never really existed, I remind myself that the American Dream is still very real for people looking for an opportunity for a better life. I talked about this in my post from a few years ago, and while the solution I offered then is simplistic and naive at best, it touches on the idea that people come to the United States for an opportunity. I see this play out in my own life through my parents. You see, both my parents came to America in search of the American Dream, and I would say, they have achieved it. My dad grew up in a poor village in Nayarit, Mexico and knew nothing but work. Hell, he didn’t get to attend grade school as he needed to work as a child to help provide for his family. Similarly, my mother grew up in a pueblo in Colima, Mexico, and while she had the luxury to attend school up until middle school, the prospect of wealth was not really feasible. And so, they both made their quest to the United States, and started a family in Santa Ana, California where they reside today. Over the years, they worked and were eventually able to purchase a home. They had three kids, two of which graduated from a 4-year university and are on with their careers, and their last one set to attend UCLA this fall. They have placed the foundation for the next generation to flourish and I think that is what they wanted.

I sincerely believe that the American Dream is still very much alive and that opportunity is still very much here. That is not to say that the United States does not have its fair share of problems, especially now with a rather despotic administration who is terrorizing the very fabric of what it means to be American. These harsh economic truths alongside public sentiment need to be taken seriously because it can quickly digress to a pessimism that blankets reality and can actually kill the American Dream.