Author: Margaret Probst
Topic: Housing Market Crisis
MADISON, WI – Once upon a time, there was a world where a mortgage down payment was only a quarter of a household’s net income. This isn’t in a land far, far away – this was the nature of the US housing market just 40 years ago. So, kids – when your parents ask why you haven’t bought a house yet, you can tell them a 20% down payment is now 106% of net income. Not quite the same.
In the 1980s, the first-time homebuyer was in their late 20s. Today, the average age of first-time homebuyers is setting record-highs at 38 years old (Sola). The reason – income relative to home prices. The housing market is a highly complex market where supply and demand inefficiencies are exacerbated by inflationary pressures. It has led us to a market where a 20% down payment can exceed annual income and leave you with a debt-to-income ratio (DTI) near 40%, well above a rate a bank would approve. How did we get to this situation and what does this mean for home buyers?
A 449% increase since 1984 in the median home price says it all – the housing market has absolutely boomed. Other factors such as net migration and birth rates undoubtedly have played a role in controlling the ever-lasting supply and demand battle. However, government intervention is the man behind the puppet – macro policy has completely altered the housing market.
Focusing on the last twenty years, it’s clear there is a substantial gap in annual home price growth and annual income. Adjusted for inflation, there is a mere 18.11% increase in income, as displayed in this graph, compared to a 101.69% increase in median home sale price. It’s hard to imagine there not being a gap here – but going back to the 80s, there was a marginal difference here – a roughly $10k difference between the two. Today, home prices have become extreme – forget affording the house, it’s the down payment people can’t even muster.
When debt-to-income (DTI) is a major consideration in mortgage approvals and general financing forecasting, it cannot be such that a down payment exceeds annual income. Generally speaking, this won’t forecast out – we are in a massive debt bubble waiting to burst which will disrupt the economy and alter these ratios. For context, the debt-to-GDP ratio is 1.26 (Trading Economics) in 2008, it was only 0.405 (Srinivasan). However, the housing market and home buyers don’t simply wait for the markets to be ideal buying markets – competitive markets continue to thrive, fueled by the supply and demand imbalance.
Analyzing Changes on Percentage Down
|
Median HH Income |
Median Home Price |
% Down |
Down Payment |
Rate |
Monthly Payment |
DTI |
|
$80,610.00 |
$429,000.00 |
20.0% |
$85,800.00 |
6.82% |
$3,004.98 |
44.73% |
|
$80,610.00 |
$429,000.00 |
15.0% |
$64,350.00 |
6.82% |
$3,145.11 |
46.82% |
|
$80,610.00 |
$429,000.00 |
10.0% |
$42,900.00 |
6.82% |
$3,285.23 |
48.91% |
|
$80,610.00 |
$429,000.00 |
5.0% |
$21,450.00 |
6.82% |
$3,425.35 |
50.99% |
To complete the DTI argument – a bank will only allow a mortgage payment that is equivalent to 28-36% of your monthly income in the highest levered scenario. A 20% down-payment lands you far outside the interval (0%, 36%] of allowable DTI. However, more realistically, people don’t have the fluid capital to put down 20% – the typical down payment is between 10 and 15%, falling lower to 8% for first-time homebuyers (Araj).
In the 10% down payment scenario, a household is spending almost 50% of its gross monthly income on a mortgage. When you consider money allocated to investment plans, taxes, and consumption goods, this scenario is seemingly impossible.
Changing income, or rather lack thereof, is the glaring shortcoming in the situation. What if income had increased at the same rate of home prices? The following table models different income scenarios, with the final row reflecting an increase in real household income at the same growth as home prices.
Analyzing Changes in Income with a Multiplier
|
Income Multiplier |
Median HH Income |
Median Home Price |
10% Down Payment |
Mortgage Rate |
Monthly Payment |
DTI |
|
1.00 |
$80,610.00 |
$429,000.00 |
$42,900.00 |
6.82% |
$3,285.23 |
48.91% |
|
1.25 |
$100,762.50 |
$429,000.00 |
$42,900.00 |
6.82% |
$3,285.23 |
39.12% |
|
1.50 |
$120,915.00 |
$429,000.00 |
$42,900.00 |
6.82% |
$3,285.23 |
32.60% |
|
1.75 |
$176,334.38 |
$429,000.00 |
$42,900.00 |
6.82% |
$3,285.23 |
22.36% |
|
2.00 |
$241,830.00 |
$429,000.00 |
$42,900.00 |
6.82% |
$3,285.23 |
16.30% |
|
4.49 |
$791,741.34 |
$429,000.00 |
$42,900.00 |
6.82% |
$3,285.23 |
4.98% |
It is impractical to suggest median household incomes should have grown at the same rate as median house sale prices, however, the model shows just how much we have fallen behind the 8-ball in this category. So people didn’t have the income yet to buy these homes – how? Abnormally low interest rates.
It doesn’t take an economist to understand – low mortgage rates allow more people to buy, and with deeper pockets than they have. As rates came down from its peak in the late 1900s – 18.63% in 1981 – more people were deemed “fit to borrow” by banks despite speculative situations. This would come to be known as the subprime mortgage crisis.
The world recovered, eventually, from the financial crisis of 2008, fueled by a broken housing market, however, rates never returned to what they were. They shot down again in 2020 during the COVID-19 pandemic in an attempt to avoid a recession. Home prices saw another significant uptick and have remained high. I’m not suggesting a return to near 20% mortgage rates, however, having rates too low for too long contributed to the housing boom. But what booms, must bust.
Today, the housing market is roaring, only plateauing the last few years at this high and not coming down. What’s going to pop this? Tariffs.
Econ 101 – Tariffs increase prices.
As the new administration took over in January, policies have been a rollercoaster of events leading to a volatile economy, to say the least. Inefficient policies, masked by empty promises, have created a divided society, some of whom are foolishly optimistic. Yes, let’s make everyone else pay for our tariffs! News flash – that’s not how the basic supply and demand curve works. A key factor in the effects of tariffs is the elasticity of curves, specifically the supply curve. A more inelastic supply curve, such that the slope is steeper (for their micro firm graph), will result in a larger change in prices due to a variety of factors.
While there is no line to depict the market supply in monopolistic competition, as there is no one-to-one correspondence, firms still supply with constraints. They supply where marginal cost equals average total cost, and hope that this also intersects with marginal revenue since that is profit maximization. It is not my intention to lecture on macroeconomics theory, however, you can instead visualize through the following graphs:
In long-run equilibrium, average total costs (ATC) exceed the price demanded. Firms are at a negative profit. To reduce their costs, i.e. not absorb the tariff effect, they push the tariff to the consumer. Prices for consumers increase, and firms unable to compete with increased firm costs exit, leaving fewer firms standing. So, tell me how these tariffs are going to help small American firms?
Deadweight loss is explained by lower economic efficiency and societal surplus. You see, only a fraction of that loss is passed to the government for revenue – the majority of the increase in DWL is simply lost opportunity. It’s intuitive – trade is efficient; when you forego trade, you lose efficiency.
The effects of ATC are ambiguous – can firms gain a great enough share of the to disperse their increased costs (tariffs) across units? With demand decreasing, at what point do firms have to absorb some tariff effects just to stay in business? Tariffs are bad for both consumers and producers. Firms are already seeing changes to lumber prices, with prices up 17.5% year-over-year (NAHB). While not all of this is attributed to the new tariffs, we see just how sensitive this industry is. So – what does that mean for consumers? Are their costs also up 17.5%?
How will the Canada v. US battle pan out?
It’s a flashback to 2018 – another Trump tariff, that time on washing machines – where consumers absorbed 125 to 225 percent of the tariffs via increased prices. While the tariff was only on washing machines, these units increased an average $86/unit, while their counterpart, dryers, increased by $96/unit (Yourish). It’s counterintuitive that a complementary good/s price increases by greater monetary units, but this reflects the reality of the spillover effect in economics.
Now translating to houses, what else will increase? There is no singular complement to lumber in housing construction. Instead, construction companies will disperse the tariff across entire construction bills. Given 82.3% of all lumber used to come from Canada, you can imagine the substantial resulting construction costs for consumers (Shmidtlein et al). It declined once in 2017, the first time Trump was in office, yet whether this actually increased US lumber productions and jobs is ambiguous.
Moreover, trade occurs to promote specialization. It’s the basic concept of comparative advantage – the ability to produce at a lower opportunity cost than another. If more extreme tariffs are implemented, firms will look to recoup some of their losses by placing the cost on consumers.
Logistically, how is shipping and transit affected when new lumber hubs are introduced? When you consider capacity constraints and the specialized facilities needed for lumber production – how long until the US can absorb the demand switch? Effects will not be limited to the domestic markets but will shake up the global economy.
Canada relies heavily on US imports to purchase their lumber production – 84% of Canadian lumber exports are purchased by the US (Government of Canada). So where does all this lumber go instead? Sure, real estate could theoretically go boom in other parts of the world, but as we’ve seen – markets are not that simple. Factor in logistics, complementary goods, capacity constraints, etc. for this suggestive alternative demand – does it still work? No – it’s why Canada pushed back earlier this year and would again.
Housing accounts for 16.2% of US consumption, one of the driving components of GDP (Weinstock). When this sector blows up due to the lumber tariffs, a US recession is bound to spiral. Consumers cannot absorb even greater housing costs, as we’ve seen the housing market is already in a debt-bubble, tariffs or not.
There is not a definitive magnitude by which home prices will increase, however, it is guaranteed that new home prices and home renovations will increase due to rising input costs, while existing home prices will increase based on relative pricing and supply and demand principles.
What are the firms saying?
Bliffert Lumber, a lumberyard based in Southeastern Wisconsin, remains hopeful. Despite the inevitable rising prices, the firm believes that they can get through an “administration that likes to use tariffs for economic policy” which was loosely compared to the resilience they faced when Bliffert went through WWI, The Great Depression, and WWIII (Bruner).
Confidence is what consumers need – sentiment can defy economic health. In today’s panic, we are seeing people begin to stockpile resources. Stockpiling is counterproductive – one agent locks in a low price while prices skyrocket for others following this excess demand and supply deficit that cannot keep up with stockpiling.
Firms are desperate to avoid these tariffs – some are stockpiling 33% over their normal inventory, going as far as renting out additional yard space to make room (Picciotto). However, this very short-term solution, and one that will only escalate the problem, and cannot combat the longer-term effects of these tariffs.
New-home buyers are forced to turn to new builds in the midst of a historically unfortunate time for the existing home market – record-setting high prices with low inventories (Picciotto). Yet, as we’ve seen, this isn’t a viable solution as lumber tariffs will increase these new-home prices, too. Further, leasing agents will have leverage to raise rents, leaving housing less affordable than it is today, if you can imagine that.
The intensified grudge between Canada and the US couldn’t come at a worse time.
The housing market is very seasonal. It’s hot in spring – the most catastrophic target for tariffs, duties, and taxes. Had these tariffs come in winter, the magnitude of these tariffs would be less significant to the net change in real estate, slowly creeping up until spring and allowing consumers to adjust more easily.
Big (Debt) Bubble, Bound to Burst
Despite the Senate overturning Canadian tariffs and a general 90-day delay in tariffs, tensions remain high with the world on edge. As we’ve seen, this risk is not limited to the US economy but will directly affect the global markets.
With consumers and firms unable to function out of equilibrium long-term, a recession looms around the corner. It’s a bubble that’s been waiting to burst – one that has been expanding for almost twenty years – and one that the current administration is far too eager to poke with a needle.
Notes on Data Preparation
All data on mortgage rates, median household income, and median home sale price were obtained from the Federal Reserve Economic Data database (FRED). The data was sorted and filtered to transform the data into analyzable figures. No manipulation was done to the data, and subsets of data are noted per context, i.e. “focusing on the last 20 years.”
References
Araj, Victoria. “Average down Payment on a House: Here’s What’s Typical.” Www.rocketmortgage.com, 26 Apr. 2024, http://www.rocketmortgage.com/learn/what-is-the-average-down-payment-on-a-house.
Bruner, Alyson. “Tariffs Add Uncertainty to an Already Fluctuating Lumber Market.” Spectrumnews1.com, 14 Mar. 2025, spectrumnews1.com/wi/milwaukee/news/2025/03/05/tariffs–lumber–wisconsin.
“Framing Lumber Prices – NAHB.” Www.nahb.org, 7 Apr. 2025, http://www.nahb.org/news-and-economics/housing-economics/National-Statistics/Framing-Lumber-Prices.
Government of Canada, Statistics Canada. “Sawmill Industry in Canada: 15 Years in Review.” Www150.Statcan.gc.ca, 20 Feb. 2023, www150.statcan.gc.ca/n1/pub/11-621-m/11-621-m2022023-eng.htm.
Picciotto, Rebecca. “Builders Stockpile Lumber, Swap out Materials to Work around Tariffs.” WSJ, The Wall Street Journal, 11 Mar. 2025, http://www.wsj.com/real-estate/trump-tariff-construction-import-costs-d4824a44.
Schmidtlein, Rhonda K, et al. SOFTWOOD LUMBER PRODUCTS from CANADA. US International Trade commission, Jan. 2017.
Solá, Ana Teresa. “Average Age of First-Time Homebuyers Is 38, an All-Time High. Here’s What That Says about the Real Estate Market.” CNBC, 5 Nov. 2024, http://www.cnbc.com/2024/11/05/the-average-age-of-first-time-us-homebuyers-is-38-an-all-time-high.html.
Srinivasan, Hiranmayi. “U.S. National Debt by Year.” Investopedia, 21 Sept. 2023, http://www.investopedia.com/us-national-debt-by-year-7499291.
Trading Economics. “United States Gross Federal Debt to GDP.” Tradingeconomics.com, Trading Economics, 27 Apr. 2019, tradingeconomics.com/united-states/government-debt-to-gdp.
Weinstock, Lida R. “Introduction to U.S. Economy: Housing Market.” Congress.gov, 1 Apr. 2025, http://www.congress.gov/crs-product/IF11327.
Yourish, Karen, et al. “What Have Trump and His Administration Said and Done so Far? U.S.A.I.D., Federal Workers, International Criminal Court.” The New York Times, 6 Feb. 2025, http://www.nytimes.com/interactive/2025/us/trump-agenda-2025.html.