Affordable Housing Institute : US

Welcome to Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above-average.

– Garrison Keillor

 

Every year, the National Low Income Housing Coalition performs a real service, addressing the data paradox by calculating the ‘housing wage’ in every American metropolitan market. 

 

 

It’s a great concept because it reduces affordability to a simple scalar that everyone can understand and with which everyone can identify.

 

“I can’t get good sins any more, must be the wages.”

 

Every year, NLIHC publishes a study listing the housing wages and comparing them to the minimum wage.  A typical report includes useful shorthand statistics such as these:

 

• The vast majority of American renter families (81%) live in counties where a two-bedroom apartment at the Fair Market Rent is unaffordable to a family with two full-time minimum wage earners.

 

• Nine in ten renter households live in counties where the average renter wage (what renters actually earn) – $12.22 nationally – is insufficient to afford a modest two-bedroom apartment at the Fair Market Rent.

 

• The ten most expensive states for renters (with their Housing Wages) are:

 

Hawaii    $22.30
California   $22.09
Massachusetts   $21.88
New Jersey   $20.87
New York   $19.73
Maryland   $19.62
Connecticut   $19.30
Rhode Island   $18.42
New Hampshire  $17.58
Alaska    $17.40

 

• San Francisco is the nation’s most expensive city for renters.  [That’s because it has a pernicious form of rent control! — Ed.]

And every year, the NLIHC’s study is entitled, Out of Reach.

 

 

What’s truly brilliant about the NLIHC study — and I say this with affectionate rue — is that it has so framed the problem as to force that conclusion:

 

 

 

Here’s why.  Two equations yield one perpetual inequality.

 

Market rent = 50th percentile income.  Land value is a residual, and markets always clear.  Because of this, in an equilibrium economy, market-rate rent represents the median buying power of an area’s renter pool.  It has to — if rents are below median, demand will push them up; if rents are above, new supply enters and drives them down.

 

(Supply-constrained markets are a special case.  If new construction is categorically prohibited, rents rise without a practical cap — hence skyrocketing values in downtown Hong Kong or Tokyo.  If construction is limited, the metro area expands to take in lower-cost land — with consequent lengthening of commuting times and stress or overstress on transportation infrastructure.)

 

In equilibrium, therefore, market rent = affordability to 50% percentile household.

 

Minimum wage = 25th percentile income.  Who makes less than minimum wage?  Those who have no job, those who work part-time, and those exempt.  That’s not many folks, at least measured nationally.

 

There are a lot of Americans …

 

The US currently has about 113 million households, and 150 million people in the civilian labor workforce, so the average US households has 1.3 workers. 

 

Of the workforce, 7.5 million are unemployed (5.0% of the workforce).  Another about 1.5 million people (most of them young), make less than minimum wage, just about 1% of the total potential workforce.

 

Who makes more than the minimum wage?  Everybody else except the small fraction of households (about 0.5 million, less than 0.5%) that make exactly the minimum wage.  In other words, about 93.5% of the workforce.

 

Thus America’s workforce distribution relative to the minimum wage is:

 

              5.0% are unemployed  

  1.0% of workers make less than minimum wage (be kind to your waitress!)

              0.5% make minimum wage

            93.5% make more than minimum wage

 

Minimum wage earners as a percentage, 2002

 

These figures are specific to 2005, but the overall point is universal and timeless: minimum wage earners are the bottom of the economic ladder, and as a result have incomes that are well below median.  Indeed, if one converts the $43,300 national median income into an hourly rate, the median American ‘hourly wage’ is $21.65 per hour, which is 4.2 times the $5.15 minimum wage.

 

Actually, it’s even more forbidding than that, since many households have two or more earners.  Indeed, if one family member makes minimum wage, it’s more than likely another is working part-time, for cash, or for an above-minimum wage job.

 

For a full-time worker (2,000 hours a year), today’s minimum wage translates into $10,300 per year, or 24% of the national median income.  In my experience, minimum wage represents the income level at about the 20th to 25th percentile of earners, probably lower.

 

[Percentages of median and percentiles are not the same but the difference is unimportant here.]

 

25th percentile < 50th percentile.  Once we’re here, the rest is just arithmetic:

 

25th percentile earnings cannot pay 50th percentile prices.

 

There’s a reason economics is frequently called the dismal science.

 

 

So, in NLIHC terms:

 

Minimum Wage << Housing Wage

 

Permanent advocacy!

 

Is there no escape?

 

 

There is a bit of relief, in that market rent relates to the 50% percentile of renter households.  And in America, about 30% of all households are renters, and they tend to be lower incomes than those who own homes (because given their druthers, Americans druther own a home).

 

That can be a relief when housing is plentiful and thus house prices are so low nearly everybody can afford a home.  (This condition prevailed during the 18th century settlement of America, but few other times.)  We see this phenomenon in emerging countries, but at the cost of shrinking down the market’s definition of a home.  The logical end state is the owned slum. 

 

In developed nations, however, land is at a premium, the more so in nations that have strong greenfield-protection laws. 

 

In other words, the more progressive your government — local, state, Federal — the less affordable will be your housing market, and the greater your challenge in housing your lower-paid but essential workforce.

 

“Hey, I never said it was fair.”

 

What does that mean for affordability?  It means, in the simplest terms:

 

1.         Markets never produce sustainable affordable housing.  It will not exist in economic nature and thus is transitory, government-supported, or both.

 

2.         Pumping up the minimum wage will not relieve housing costs.  They will rise with infuriating precision and impressive speed.  Who thus benefits from a pumped-up minimum wage?  Property owners, among others.  (Isn’t economics fun?)

 

3.         Affordable housing always costs money.  You want it, society, you pay for it.

 

“You mean we can’t have high wages and high affordability?”

 

But then, if you’ve been reading this blog, you already knew that.

 

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