Tag: housing-market

The error of price-to-income-

The comparison of home prices to buyers’ incomes is a popular measure for assessing the health of the real estate market. Presently, that multiple seems high, and people are using it to cry, crisis! But is this true?

Amy Nixon posts on Twitter (now known as X):

All of economics is supply and demand.

The median household to median income argument makes sense only in an economy where we have built enough housing units per capita, and every housing unit is being allocated as a family shelter unit because it serves no other economic utility

The model breaks down when you have wealthy families buying 3-4 spare vacation homes. And mom and pop landlords hanging onto starter homes when they upsize. And institutions buying millions of single family homes. And single people living alone in two units instead of coupling to buy one unit. And foreign citizens buying homes. And people buying and using 2 million single family homes as hotels (Airbnbs)

So long as single family residential housing is viewed as and can be used as an investment or luxury item beyond owner-occupied shelter and we don’t build enough homes to offset all those other uses, the ratio pictured in the infographic below can (and will) go even higher over time

It’s not 1985. And it’s never going to be 1985 again.

What Amy says is that there is a mix of home-ownership types. If you are analyzing Lake Country, with many second homes, there will be a different price-to-income figure than if you consider a first-tier suburb built almost exclusively of starter homes. I like to call them platters. It’s the local eco-systems of properties that have interesting numbers. Averaging just smudges out all the details.

I’ll also note the shift in demographic mix. The number of first-time buyers is at an all-time low. From NAR:

WASHINGTON (November 4, 2025) – The share of first-time home buyers dropped to a record low of 21%, while the typical age of first-time buyers climbed to an all-time high of 40 years, according to the National Association of REALTORS®’ 2025 Profile of Home Buyers and Sellers. This annual survey of recent home buyers and sellers covers transactions between July 2024 and June 2025 and offers industry professionals, consumers, and policymakers detailed insights into homebuying and selling behavior.

Repeat buyers enter the market with equity. They do not need to take on as much debt relative to their income as first-time buyers do. Yet the sales price is the measure from which payment is extrapolated, not the actual payment. As a market rises, so does the equity, pushing this fictitious measure of debt load out of whack with reality.

The Cascade Effect: Unlocking Housing Affordability

Housing markets often seem mysterious, but at their core they operate as a cascading system shaped by wealth, supply, and lending rules. A recent model by Abramson and Landvoigt highlights how rising wealth inequality and slow housing supply interact to push prices upward. Their framework divides housing into quality tiers, from luxury to starter units, and shows how households with different levels of wealth compete across these tiers.

A central insight is that prices at the very top do not stay isolated. Luxury buyers are a small share of the market, and in some sense they simply bid against one another for exclusivity. One might argue that they are “fools” for paying such large premiums, while the rest of the market should remain relatively affordable. But in practice the tiers are linked. When supply of luxury units is restricted, affluent households who cannot find space at the top tier shift down into the next-best homes. That displacement triggers a chain reaction: middle-income households face stiffer competition, prices at their tier rise, and the pressure filters all the way down to lower-income renters. Economists call this the filtering or musical chairs effect, and it means that adding supply at the high end can improve affordability across the board.

This cascading dynamic is exactly what makes the market work. New supply at any tier frees up units that can be occupied by someone else, allowing households to sort themselves according to means and preferences. The danger arises when either end of the ladder is blocked. If new high-end supply is not built, the wealthy bid down-market and crowd out others. If older or more affordable stock is neglected, the bottom rungs collapse and low-income households are left without viable options.

At the same time, credit standards shape who can actually buy. A household that cannot afford the payments will not receive a loan, which protects individuals from becoming dangerously over-leveraged. But this underwriting filter does not stop prices from rising overall; it only determines who gets excluded. The clearing price is still set by those wealthier households who can obtain financing. Those priced out of ownership often remain in the rental sector, where demand pressures drive rents upward as well.

Taken together, the picture is less about a simple split between the rich and poor and more about a tightly connected cascade. Housing affordability depends not only on overall supply but also on how well each rung of the ladder is maintained and allowed to expand.

Ownership Preferred

Lists are fun, especially when your team is ranked at the top of the list. In this case, Apartment List pulled data from the Census to show that homeownership is the highest amongst Millennials in our area. Over 50 percent of folks in the 29-44 age range choose to own their homes rather than rent them.

Apartment List

Many will say that this is about price, as residents in San Jose and LA —cities at the bottom of the list —don’t own homes due to the high prices. And that’s a broad stroke, likely to be true, observation. But the list is long, and there are many other cities between the two extremes. So what else makes for a culture of ownership?

I’ve worked with some first-time buyers who don’t end up buying, and this is what seems to play on their minds. They are afraid they will lose the house in foreclosure. Someone close to them, perhaps even more than one, lost a home to creditors, and the negative experience frightens them. Second, they are afraid they will buy a lemon. Homes are complex, comprising many components. It’s easy to feel overwhelmed with the responsibility of keeping it all running smoothly. Lastly, they are afraid of adversarial neighbors.

Here’s a further breakdown of homeownership rates amongst all age groups in Minnesota.

MN Homeownership Report

I speculate that the last group has a homeownership rate of 77% because of the following factors. Low foreclosure rates keep the negative and traumatic experience of losing a home out of people’s lives. Since many residents grew up in owner-occupied households and experienced the ups and downs of repairs throughout their lives. They also have these folks in their lives to turn to for guidance. If the buyer has lived locally for most of their lives, they gravitate toward areas where they find the family and friends.

Minnesota rarely experiences the dramatic price swings that are more frequent in the coastal states. Hence, real estate tends to be a stable and reliable source of equity. People buy for pride of ownership and independence as well as frugality.

Crisis?

Crisis [ˈkrīsəs], noun, a time of intense difficulty, trouble, or danger.

Let’s consider a few housing facts to see if the state of our housing needs rise to that level in MN:

  • According to the US Census, Minnesota’s homeownership rate has hovered between 72% and 76% in the last four years. This is well above the national homeownership rate of 65%.
  • Minnesota’s foreclosure rate is down 9% from last year and ranks 27th nationwide with 370 homes in foreclosure or 1 out of 6,740. (Attomdata)

It seems that many Minnesotans can afford to own homes. Few are having difficulty maintaining their ownership positions. Crisis of homeownership averted in the far north.

That’s not to say that there may be housing issues for non-homeowners. Princeton University tracks evictions. Minnesota is third from the bottom on their list, at 4%. So renters don’t seem abnormally stressed or in crisis.

For those undergoing foreclosure or eviction, there is a crisis. Thus, they should receive the appropriate support to help them navigate their way to a solution to reestablishing shelter.

There is a crisis. It’s a crisis of wasteful regulation. So, call that out and make efforts for reform where needed.