Disquiet on the Home Front

By Karen Shaw Petrou and Basil N. Petrou

On June 20, FRB Chairman Powell said, “Nine years into an expansion that has sometimes proceeded slowly, the U.S. economy is performing very well.”  Although Mr. Powell noted low labor participation, puzzling inflation, and problematic wage growth, he said that all will come right as long as the Fed stays the course.  No mention was made of unprecedented U.S. income and wealth inequality or of a housing market serving mostly the oldest, wealthiest, and most coastal among us.  Too bad – inequality and the impediments to effective monetary-policy transmission it erects are among the most important reasons that the nine years Mr. Powell cites have seen the slowest recovery in decades in concert with new threats to financial stability.

The latest Harvard U.S. housing report shows one of the darkest under-bellies of Mr. Powell’s prosperity:  an American homeownership “dream” increasingly only a fantasy for lower-income, younger, and minority households.  Thirty years after Harvard released its first national housing study, the latest one finds residential housing more unequal than ever.  Mr. Powell lauds the recent pick-up in gross domestic product (GDP), but this paper shows as do so many others that GDP gains are most unevenly shared. 

According to Harvard, the real median income of households in the bottom quartile increased only three percent from 1988 to 2016, and that for Americans between 25 and 34 gained just five percent.  GDP per capita over the same period was up 52 percent.  Who got all the money? 

As we noted in our initial assessment of housing-related U.S. economic inequality and the way financial policy makes it worse, post-crisis monetary policy has sharply increased the wealth share of the most prosperous Americans in contrast to everyone else.  Wealth inequality ramped up with particular vigor after 2008 due largely to sharp increases in the value of financial assets (e.g., stocks, bonds).  The usual rebuttal to this is that all but the poorest Americans have done at least a bit better due to gains in house values.  The Harvard study demonstrates not only that house-price appreciation is very unequally distributed, but also that more and more Americans are losing any hope of getting any of it at all.  This is a critical equality problem since home equity is the most important source of wealth accumulation for what we increasingly quaintly think of as the American middle class.

As the Harvard paper notes, “Home ownership rates among young adults today are even lower than in 1988 and the share of cost-burdened renters is even higher.”  Since 1990, national median rents have risen 20% faster than inflation and median home prices rose a still more startling 41% faster.  Real median wage growth since 1979 is essentially flat, growing only 6.1% over the previous 38 years (an annual growth rate of less than 0.2%).  Higher-income households’ wages grew 34.3% over the same period.

After hitting an historic low in 2016, the U.S. home-ownership rate has begun to rebound.  However, increases are very unevenly shared.  Asians lead all other Americans in home-ownership growth, followed by Hispanics, and, more distantly, by whites.  However, black households lost ground, with a home ownership rate of 43% down almost three percentage points since 1987 and, even more stunning, down 6.6 percentage points from the mid-2000s.  Thus, although other minority groups have closed the home-ownership gap with whites, the difference between whites and African-Americans has only widened. 

Is all of this the Fed’s fault?  Of course not – housing policy encompasses issues ranging from local land-use regulation to the cost of lumber to federal decisions about the future of Fannie Mae, Freddie Mac, and the FHA.  But, one reason the Fed initiated quantitative easing and drove interest rates below zero on an inflation-adjusted basis after 2008 was to stimulate U.S. housing markets.  The Fed well understands the critical importance of affordable rent to economic opportunity and of sustained home ownership to wealth accumulation.  Still, trillions of Fed portfolio assets and unprecedented low rates did little for all but those who already had a lot. 

Missing how unequal America already was before 2008, the Fed expected unprecedented stimulus through full-force accommodative policy to spur consumption through the powerful economic engine of home ownership.  Instead, the bulk of the beneficiaries of its housing-related efforts were those who already had had homes with enough equity in them and money in their bank accounts to get a low-cost mortgage refinancing.  Even this might have spurred some consumption, but higher-income and -wealth households have lower marginal propensities to consume than the less well-off.  As a result, the rich just got richer.

When the Fed surveys top-line data, it is comforted.  Were it to look beyond and see the real economy inhabited by the vast majority of Americans, it would better understand the urgent need for inclusive monetary policy and equality-enhancing regulation.  Without them, the GDP may advance, but real people fall ever farther behind.