But, over the last few posts, I have discovered that real estate is actually a higher proportion of low income families' assets and incomes than of high income families, even accounting for the lower home ownership rates. I am sure that much of the reason for this is that many of these families are retired households that own their homes, so that they have low incomes and low or no debt, and a house that is large relative to their income. (Well, I say I am sure, but I am less sure of a lot of things after digging through this data.)
Thinking about this, I began to wonder what the distributive effects of the housing shortage really were. And, as has been typical in this series, the answer is more stark than my newfound intuition suspected.
The Net Imputed Rent after Interest Expense/Income is roughly equivalent to the BEA measure of Share of GDI as Rental Income to Persons with Capital Consumption Adjustment. My measure runs slightly higher than the BEA measure, because mine is as a percentage of household income while the BEA measure is as a percentage of GDI. In the SCF data, 1989 appears to be a bit of an outlier, for reasons I haven't dug into, so I will use 1992 as my baseline, so as not to inflate the effects I am describing here.
In 1992, imputed rent after interest was 1.3% of all incomes. By 2013, it was up to 4.2%. Please note, this has nothing to do with home prices. The BEA uses rates in the rental market to estimate the expected rental rates of owner-occupied homes. In fact, I believe growth in rents as a portion of GDP and growth in net rental income to home owners largely comes from two sources. (1) Tax preferences to owning, implemented since the 1980's, which have increased housing demand for owner-occupiers, and (2) the collapse of the mortgage credit market after 2007, which has decreased housing supply. Both of these factors benefit owners at the expense of renters, in terms of income. (The credit market collapse harms owners, in terms of capital gains and losses.)
As I have argued previously, the BEA measure of rental income is somewhat incoherent, because it subtracts a nominal capital expense (interest expense) from a real capital income (rental income). In order to correct for this, we need to only subtract the real interest expense from rental income in order to arrive at net rental income for the homeowner. The inflation portion of the mortgage interest expense is really a pre-arranged savings plan, when considered in real terms.
But the overwhelming take-away from this graph is that changes in this source of income are much more significant for low income families than for high income families. In 1992, net rental income for owner households in the lowest quintile amounted to 22.3% of reported income, and rose to 28.1% by 2013. For the median family, it was 6.9% in 1992 and 8.9% in 2013. For the top 10%, it was 3.3% in 1992 and 4.6% in 2013.
So, what if we add this imputed rent income to measured incomes, and track real incomes over time? The first graph here is indexed to 1992. We see a jump of about 20% among all income groups, except the top 10%, which sees a jump of about 60%. The effect of housing is overwhelmed by what I presume is mostly a product of the technology boom.
And, during this period, we see that imputed rent from homeownership takes on more importance, especially among the low income households. Rent, or implied rent, is an unusually large relative expense for both renters and owners in the lowest income group, so here we can see that perhaps the most significant income effect of the housing bust has been a passive transfer of aggregate income from low income renters to low income owners. (Well, the most significant effect has been the subsequent crisis that dropped incomes across households.)
PS: Here is an old post on median household incomes. The reduction in incomes since 2001 appears to come entirely from the decline in the number of earners per household, which has also been reflected in falling labor force participation that is largely the product of aging. As Scott Sumner points out, average wages have been growing during this period.
* There are some assumption I have to use in this case. I have to assume that within each quintile the mean income for home owners is the same as the mean income for renters. I have a mean income figure for renters and owners for all families, but I don't have one within quintiles. While there might be some difference, I don't think it would change the outcomes significantly. I also have assumed that home prices are relatively efficient until 2010, so that implied rental income can be deduced by using families' reported value of their primary residences. Survey data does tend to overestimate these values, so I did adjust for this by comparing the total survey values to the reported value of owned residences in the Federal Reserve Flow of Funds report. In 2010 and 2013, home prices are not efficient, so the inflation premium of mortgages that is implied by comparing real returns on homes to nominal effective mortgage rates becomes unreliable. For these years, I manually set the inflation premium at 1.5%.
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