Two weeks ago, I asked why Americans were in such a rotten mood when the data said the economy is in such good shape. The disconnect has only grown since. Inflation, we just learned, eased in October, extending a two-week rally in stocks and bonds. And yet the University of Michigan’s index of consumer sentiment keeps falling.
Many readers offered reasons for their sour mood that had little to do with the economy: the border, crime, President Biden, former President Donald Trump.
As for economic reasons, readers made it clear they cared less about inflation dropping, which only meant prices were rising more slowly, than about the fact that the level of prices is painfully high compared with three years ago.
It is also clear that not all inflation is equal. Three things in particular have our attention: gasoline, food and houses.
Gasoline and groceries are a big part of your budget, and you buy them every week, so you notice when the price goes up—and stays up. Their prices have also risen especially steeply: 43% and 20%, respectively, since January 2021, versus 15% for the consumer-price index excluding food and energy.
This helps explain why consumer sentiment is lower than unemployment and inflation would predict. Specific prices don’t enter into the University of Michigan’s index. That said, a rising share of respondents spontaneously mention food or gas prices in the interview and they have much lower sentiment than those who don’t, Joanne Hsu, director of the university’s survey, said. That jibes with my anecdotal evidence. “Obviously, you don’t do much grocery shopping or have a car that uses gasoline,” was one reader’s quite typical reaction to my column.
The good news is, gasoline is down about a third since its mid-2022 peak. Grocery prices haven’t fallen, but they are only up 2% in the past year; dairy, eggs, chicken and meat are flat. Even if they don’t drop, maybe a long spell of not going up will loosen their grip on our psyche.
Housing is an entirely different matter. The Bureau of Labor Statistics, which compiles the CPI, doesn’t measure the cost of homeownership with home prices. Rather, it estimates what a homeowner would pay to rent their own house. This “owners’ equivalent rent” tends to track rents rather than houses and is up 17% since the start of 2021.
But if you’re actually in the market, what matters is the price of a home and the mortgage rate. Since January 2021, home prices, despite a late 2022 dip, have risen 29%, according to the S&P/Case-Shiller national home price index, and mortgage rates have nearly tripled. The buyer of the typical home thus faces a monthly principal and interest payment of nearly $2,200, more than double the level of early 2021, the National Association of Realtors calculates. No wonder the net share of consumers telling the University of Michigan it is a good time to buy a home is the lowest since 1982.
If you own a house and have no plans to move, you might not care, or you might even enjoy your home rising in value. But for buyers, this matters more than gasoline or food prices: A home affects decisions about marriage, children, career and where to live.
Brian McCusker attests to that. “Gasoline and food don’t scare me: I’ll go out to eat less. I’ll buy a moped,” he told me. “Housing is that one thing a lot of people view as the American dream…That first house proves a lot about you as an American adult.” So it bothers him that at age 33, with a master’s degree in school counseling with a concentration in children and family-based therapy, he’s back at home, living with his parents. “My grandparents and my parents both had houses at my age,” he said.
He had graduated at the start of the year from a university in Southern California. Unable to find a job in his field, and faced with paying $2,000 rent on his condominium when his roommate moved out, he moved back to Michigan’s Upper Peninsula where he grew up, where he’s now working in community mental health.
Career opportunities, such as launching his own practice, are limited. In places where opportunities are better, like Northern Virginia, Florida or Southern California, McCusker can’t afford the down payment on a house, and “even if I did, I would be house broke, spending half of my paycheck or more on mortgage costs alone.”
Less than 1% of households in any given month will buy a house. But 17% plan to buy a home in the next 12 months, and add to that the millions like McCusker who want to buy their first house or trade up but can’t afford to. They have all seen their hopes wilt.
As of yet, this hasn’t made a dent in homeownership rates, which are higher among almost all age groups than before the pandemic, according to the Census Bureau.
But homeownership will probably fall if it remains this unaffordable. John Burns, chief executive of John Burns Research and Consulting, says it will take some combination of falling mortgage rates, lower prices and rising incomes for affordability to return to normal, but, absent a recession, that will take years.
Mortgage rates have dropped with easing inflation, but they aren’t headed to prepandemic levels, given upward pressure from structural forces such as global supply shocks and budget deficits. Burns said home prices are likely to flatten out but not fall next year. His home-builder clients see single-family housing starts rising 17%, to a level still lower than before the 2007-09 recession and below long-run growth in new households. Behind restrained building: financing costs, a shortage of developable land and onerous permitting.
Fixing supply constraints is a job for state and local—not federal—lawmakers. Unfortunately, local resistance to development demonstrates that while no one is rooting for high gasoline and food prices, plenty of people want home prices to stay high.
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