Why do Americans spend so much on housing?

July 9, 2015 11:29 AM

I have been reading some articles about housing costs in the U.S. and I'm interested in learning why – historically, culturally, economically, or otherwise – Americans spend a larger portion of their incomes on housing compared to other developed nations.

I can't find the article now (I think it was The Atlantic) but there were some statistics about how people in Germany and Japan, which have relatively similar economies, spend significantly less of their income on housing than Americans do.

Why is this? Is it because of the mortgage market in the U.S., which tends to make housing more accessible? To me it seems that a combination of more Americans living in less dense housing districts (suburbs) and the cultural value of a single family home as a status symbol which probably encourages families to stretch their housing costs. Or are there other reasons? I'd prefer citations or supported studies more so than speculation, but both would be interesting to hear.

posted by deathpanels to Work & Money (23 answers total)

I wonder if some of that could be because housing costs vary so much depending on where you are in the U.S. A three bed/one bath bungalow can sell for millions in California but well under $100,000 in the Midwest, for example.
posted by cooker girl at 11:40 AM on July 9, 2015 [3 favorites]

According to the OECD, the US spend average. What they get in return is massively larger homes.
OECD actually ranks the US as the best in terms of housing.
posted by sandmanwv at 11:44 AM on July 9, 2015 [12 favorites]

You mention mortgages so it is worth saying that in part it is because The American Dream was built on property ownership. Manifest Destiny and the resultinghomesteading is the foundation of the US. See also: 40 acres and a mule.
posted by DarlingBri at 11:45 AM on July 9, 2015 [3 favorites]

I think your premise is wrong. See here (click on the 'Prices against average income' tab). As a fraction of income, Americans pay less than the Japanese and about as much as Germans.
posted by mr_roboto at 11:47 AM on July 9, 2015 [11 favorites]

I can only speculate - relatively cheap land and the availability of mortgages turned the idea of the house, for many of us not living in large cities, into the main status symbol and lifestyle indicator.

Of course, in some areas, the land is no longer cheap, and we all know what has happened in the mortgage industry, but I think that's where it got started in the minds of people in the US. Seems to be a bigger deal the more you progress from urban to suburban to rural.

I also think that in more rural (and perhaps at least somewhat religious?) environments a house, being a functional, family-centric place is more socially acceptable to use as a display of wealth vs. jewelry, cars, etc. Clothes are somewhat the same way. I know people who wouldn't be caught dead in a car more expensive than a Toyota who also wouldn't be caught dead in non-brand-name clothing.

Possibly of tangental interest - Freakonomics podcast on how the Japanese view their homes as much more disposable than other cultures.
posted by randomkeystrike at 11:47 AM on July 9, 2015

Came here to post the link that sandmanwv posted... you may have to clarify your terms a bit, because it appears that, measured as a proportion of disposable income, American's spending on housing (18%) is actually lower than, for instance, Germany (21%) and Japan (22%). And they get more rooms per person for that price!

Do you mean as a proportion of GDP or something? I couldn't readily find stats on that.

I think a couple reasons that housing is reported as being expensive in America are that (1) people are flocking to economically vibrant cities from the hollowed-out rural and suburban parts of the country, thus driving up costs there and (2) economic inequality allows a small proportion of people to gentrify choice areas and drive up the costs disproportionately more there. So all at once you have a lot of people competing for housing in good areas, longtime residents getting forced out by increasing rents, and a very modest overall average for housing spending.
posted by Joey Buttafoucault at 11:52 AM on July 9, 2015

Here's a nice long report. A quick glance (see Table 4 especially) will show you that people in the US don't really pay very much of their income for housing relative to people in other developed countries.
posted by mr_roboto at 11:53 AM on July 9, 2015 [2 favorites]

Response by poster: The article I read was relative to household income.
posted by deathpanels at 12:02 PM on July 9, 2015

It was pretty fun to be mildly shocked at a bizarre and counter-intuitive premise for a second. Overwhelmingly abundant (and therefore cheap) real estate is a pretty salient feature of the United States.
posted by deathmaven at 12:03 PM on July 9, 2015 [1 favorite]

The article I read was relative to household income.

Is it possible the article was talking about people living in cities? Everyone I know spends an enormous chunk of their income on rent (I live in Washington DC).
posted by Mrs. Pterodactyl at 12:05 PM on July 9, 2015 [1 favorite]

Response by poster: It's possible. I think it was looking at urban environments.
posted by deathpanels at 12:09 PM on July 9, 2015

I'm not convinced that your premise is accurate but putting that aside, I think Americans prefer bigger homes, square footage-wise.
posted by kat518 at 12:13 PM on July 9, 2015 [1 favorite]

Even in metro areas the US has much lower housing costs in most cities.
posted by sandmanwv at 12:28 PM on July 9, 2015 [1 favorite]

The article I read was relative to household income.

As are all the data you're being given here. Your premise is incorrect.
posted by mr_roboto at 12:30 PM on July 9, 2015 [5 favorites]

> I think Americans prefer bigger homes, square footage-wise.

I think American real estate development companies have based their very profitable business model on ensuring that Americans prefer bigger and newer homes.
posted by desuetude at 12:31 PM on July 9, 2015 [5 favorites]

Again, see Table 4 in the PDF I linked above. The data here are in terms of the median multiple: the ratio of median home price to median income. For comparisons of urban areas, see Tables 5, 6, 7 and Figure 3. Four of the ten least affordable urban areas are in the US, none of these are the least affordable overall (the least affordable housing in the US is in San Francisco/San Jose, with a median multiple of 9.2; these tie at the fourth least affordable in the world). However, 14 of the 14 most affordable urban housing markets are also in the US. Table 7 shows clearly that housing in the US is overwhelmingly more affordable than it is in other developed countries.
posted by mr_roboto at 12:40 PM on July 9, 2015 [2 favorites]

Anecdotally, but I do think the amount Americans spend on housing is insane - the notion that it's okay to spend 30% of income on a roof over your head just makes my brain explode.

BUT.

This occurrence isn't because we all WANT to spend that much on housing. It's because there are some parts of the country where it's damn near impossible to find anything cheaper and still be within a reasonable commute to work. Take the Seattle area for example. The median home price is $500,000. Not everyone in the Seattle area makes enough money for that home price to be equal to <30%. There are baristas and cooks and secretaries and all kinds of other jobs in the city that don't pay a super high wage. If you have one of those jobs your choices are to move far away so you can spend less on housing (but ironically spend way more on transportation since public transit is limited here) or spend 30% or more of your income on housing in order to not have a shitty/expensive commute.
posted by joan_holloway at 12:48 PM on July 9, 2015 [6 favorites]

I don't have resources at my fingertips, but before life got in the way, I was pursuing a bachelor's in environmental resource management with a concentration in housing and I had plans to follow that up with a master's in urban planning. So I used to read a good bit about such topics.

Part of what goes on is rooted in tax incentives and the fact that there are big differences between urban and rural housing markets and the federal tax incentives do not do a good job of handling or accounting for such disparities. So you get a tax break on mortgage interest in part to make big city housing more affordable and one of the results is that it encourages people to buy larger houses because, in some markets, the tax break makes the extra square footage practically free. This promotes a growing divide between the haves and have nots, where, if you can afford a house at all, you have incentives to get a large house. Meanwhile, we have drastically reduced availability of things like SRO rentals. So there is also more homelessness.

Another thing is culture. In France or Japan, it is much more common to meet friends in a cafe or other public setting. In the US, people are much bigger on inviting friends to their home. So of you are very social in the US, you almost need a big house to play host.

The other thing is that we have this huge infrastructure built up wrt financing and what not and most of it was created on the heels of WWII and is predicated on the assumption that buyers are all nuclear families looking for a detached single family house in the suburbs. This makes it hard to build or buy anything else. When the war started, we were in ThevGrwat Depression and lots of families moved every 13 months to get one month free rent because if you pay your rent forba whole year, the landlord would give you one month free. And then the war happened and women were asked to work factory jobs and grow Victory Gardens so farm food could go soldiers. The men were overseas, so you de facto had lots of two income families who had no opportunity to make babies. Car factories were converted to make military vehicles and luxury items were rationed and there was literally no opportunity to spend all the money they were making. Savings rates were as high as 50% for parts of the war.

Then the men came home. Women were encouraged to quit their factory jobs so men could get jobs. Most of them were happy to do so. With money in the bank and the war over, lots of people were happy to buy themselves a life of luxury and leisure compared to the depression and war. The soldiers also got help with mortgages.

So there was huge pent up demand for single family detached houses and the entire country mobilized to create financing infrastructure and actual physical infrastructure and suburbs began popping up like daisies all over the place, as fast as they could build them. We still have the policies and financing mechanisms and what not that made that happen. Since then, the population has diversified and needs less homogenous housing but our policies have not kept up. So a lot of people are prisoners of what is available and cannot make happen the kinds of housing they would like to have.

Housing is such a burden for Americans that if you can afford to buy, it makes sense to treat it like an investment and buy the most house you can in hopes of profiting more when you sell. And it has thus become this hamster wheel we are stuck on and do not know how to stop. So out of fear, individuals perpetuate the cycle even if they do not want to. They are sometimes just trying to protect themselves in a hostile environment that doesn't give people the options they really want.
posted by Michele in California at 1:30 PM on July 9, 2015 [12 favorites]

An additional note to Michele's comment - America is one of the few places in the world that allows tax deductions on home mortgage interest.
posted by lizbunny at 2:16 PM on July 9, 2015 [5 favorites]

Something I should have made clearer: When I owned a house in the Midwest where housing was relatively cheap and during a time when interest rates were low, I did not pay enough interest to qualify for the tax deduction. So the deduction does not apply evenly across the board. It benefits you only if it is a fairly expensive house and you are paying a lot of interest.

This is intended to make urban housing more affordable for middle class families but it seems instead to just heat up these markets and make the disparity between different markets worse. This type of market manipulation tends to have unintended consequences. One of the things that needs to happen is these market manipulations need to be dismantled and other policy approaches need to be instituted that will actually make urban housing more affordable for the average person. What we are doing to treat the problem gives short term relief but, in the long term, makes the problem worse.
posted by Michele in California at 3:15 PM on July 9, 2015

Some of it can be explained by regulations that tilt the balance towards owning as opposed to renting (such as the mortgage interest tax deduction), a looser stance towards lending by banks, dysfunctional local government and zoning laws, and the American mentality of treating property as an investment, all of which act to produce dysfunctional market outcomes in the US. Housing prices in Germany are far lower, for example, due to markedly different regulatory, market, and social mentalities, and this Forbes article goes into some of what they do differently:

When Americans travel abroad, the culture shocks tend to be unpleasant. Robert Locke’s experience was different. In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third. [...] Rather than keep their noses out of the economy, German officials glory in influencing market outcomes. While the Goerlitz authorities are probably exceptional in the degree to which they micromanage house prices, a fundamental principle of German economics is to keep housing costs stable and affordable.

It is hard to quarrel with the results. On figures cited in 2012 by the British housing consultant Colin Wiles, one-bedroom apartments in Berlin were then selling for as little as $55,000, and four-bedroom detached houses in the Rhineland for just $80,000. Broadly equivalent properties in New York City and Silicon Valley were selling for as much as ten times higher.

posted by un petit cadeau at 7:33 PM on July 9, 2015 [2 favorites]

So first, you must be misremembering this, because the situation in other western nations is even worse.

What has happened for all of us, is that the ratio of house prices to average income has got more dismal over the last few generations.

To get really really general:
In your grandparents day, a house was probably about 2.5x the average income. Now it is often 5-8 times.
Actually, from my home in New Zealand, it is even worse.

Why?
Er different reasons which I'm not qualified to talk about. Check out Elizabeth Warren for discussion on house price ratio being based on TWO incomes instead of one, which is inherently less stable. When you had a stay at home partner, they could still go out and work if it meant not losing the house.

But the ratio is worse than that, which is probably just a 1% thing. Wealth concentrating into landowners, and real estate used as a safe deposit in times of economic uncertainty, property as an 'investment'.
Eh, who says feudalism is dead?
posted by Elysum at 6:51 AM on July 10, 2015 [1 favorite]

This is far from being fact checked or scientific, but this thread on Reddit right now might be interesting to you.
posted by phunniemee at 6:28 AM on August 16, 2015