The US economy has been running too hot for too long, and the FED had to act in curtailing runaway inflation and excessive spending - by raising rates - forcing people to spend less and save more. This unfortunately always hurts the lower incomes more because of unexpected price increases, low income, and less savings than higher incomes with excess assets and savings. Housing prices and rents are rising at insane speeds, rapidly outpacing salaries. This was fueled by very low interest rates and a massive increase in money supply (M2).
Rates were too low for too long, leading to where we are now, almost all home owners have mortgage rates under 3.5% or lower, and many are much lower. Mortgage rates are double that, and incomes aren't catching up, making turnover impossible. The pay gap between low, middle, and high classes has never been higher!
The fed is now (Sept 2023) projecting a 5.1% fed funds return rate at the end of 2024, with inflation around 2.5% end of 2024.
Census data from 2023 was eye opening:
- Housing Prices: The cost of housing has significantly increased over the decades, with the price of a typical home rising from $11,900 in the 1960s to $436,000 in 2023.
- Interest Rates: Interest rates on mortgages have fluctuated over time, with the highest rate in the 1980s at 13.7% and the lowest in the 2010s at 3.87%.
- Principal & Interest: This represents the monthly payment for a typical mortgage. It has also increased considerably, from $105 in the 1960s to $2,433 in 2023.
- Average Rent: The cost of renting a home has increased from $71 in the 1960s to $2,000 in 2023.
- Income Used to Pay Mortgage: The percentage of a median household's income needed to pay a mortgage has varied, with the highest being 36.6% in the 2010s.
- Income Used to Pay Rent: The percentage of income used for rent payments has also increased over time, peaking at 29% in 2023.
- Median Household Income: The median household income has steadily increased from $5,600 in the 1960s to $81,000 in 2023.
- AVG CEO Pay - Top 500: The average pay for CEOs of the top 500 companies has seen significant growth, reaching $29 million in 2023 from $953,000 in the 1960s.
- CEO-to-Worker Compensation Ratio: This ratio has dramatically increased over time, with CEOs earning 398 times more than the average worker in 2023, up from 15.4 times in the 1960s.
- Inflation adjusted to 2023 dollars (for example, the $11,900 median house price in the 1960s is approximately $123,450 in 2023 dollars. A median household income of $5,600 is $58,100. Then you can conclude the housing prices have increased by ~250% whereas real income has only increased by ~40%.
| Year | 1960s | 1970s | 1980s | 1990s | 2000s | 2010s 4 | 2023 |
|---|---|---|---|---|---|---|---|
| Housing Price | $11,900 | $17,000 | $48,000 | $76,000 | $105,000 | $285,000 | $436,000 |
| Interest Rate | 7% | 7.3% | 13.7% | 10% | 8% | 3.87% | 7.5% |
| Principal & Interest 1 | $105 | $135 | $446 | $534 | $616 | $1,707 | $2,433 |
| Average Rent | $71 | $125 | $243 | $447 | $602 | $923 | $2,000 |
| Income Used to Pay Mortgage | 22% | 18% | 25% | 21% | 17.6% | 36.6% | 36% |
| Income Used to Pay Rent | 15% | 17.2% | 14% | 18% | 17.2% | 19.8% | 29% |
| Median Household Income 2 | $5,600 | $8,730 | $21,000 | $30,000 | $42,000 | $55,775 | $81,000 |
| AVG CEO Pay - Top 500 3 | $953,000 | $1.6M | $3.4M | $6.9M | $22.8M | $25M | $29M |
| CEO-to-worker compensation ratio 3 | 15.4 | 20.6 | 38.8 | 170.7 | 237.7 | 220 | 398 |
** These are "nominal rates", or coupon rates: the actual price borrowers pay lenders, without accounting for any other economic factors. The "real rate" (inflation adjusted) accounts for inflation.
1: 20% downpayment over 20 years.
2: Average income for a family of 4.
3: CEO realized annual salary in the us.
4: Affected by the 2008 collapse.
sources:
https://www.epi.org/publication/ceo-pay-in-2022/#fig-a
https://www.cnbc.com/2017/07/20/how-much-money-ceos-have-earned-over-the-years.html
https://www.census.gov/library/publications/2023/demo/p60-279.html
https://dqydj.com/historical-home-prices/
https://tradingeconomics.com/united-states/average-house-prices
https://ipropertymanagement.com/research/average-rent-by-year
https://www.cnbc.com/2017/06/23/how-much-housing-prices-have-risen-since-1940.html
