An Overlooked Reason Homes Are So Expensive

Morgan Housel (0:06)

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Investing involves risks, including possible loss of principal. All right, welcome back. The famous baseball player Yogi Berra, who is mostly known for his quotes and his quips, of which he had many, has this little joke that I loved. He's talking about a bar or a restaurant, and he says, nobody goes there anymore. It's too crowded.

And the obvious illogic of that quote is what makes it funny. It's sarcasm. I think that idea, nobody goes there anymore, it's too crowded. You could actually piece that together for what is frustrating a lot of people with the housing market.

Where in a lot of cities, particularly the coastal tech cities, you're talking a million dollars for a starter home, sometimes two million dollars for a starter home. We're talking about San Francisco or Seattle, where I am.

And a common question is, how can people afford it? Or even more, nobody can afford that. And the illogic of that, of nobody can afford these houses because they're so expensive, is no, a lot of people can afford them. They are paying for them. That's why they're expensive. If nobody could afford those prices, the prices wouldn't be that. And so then you get this question, like, who is buying these houses? How are houses so expensive? Where are these people getting this much money? And I'll tell you a little anecdote about my city where I live in the suburbs of Seattle. Home prices doubled, exactly doubled, from 2020 to 2023

2X in three years, which is, it's hard to think of a word for what that is. Like, that should not happen. And it happened. And I think at the time, a lot of people here were like, this is just a crazy temporary bubble that's about to burst. But here we are three years later, not that long. But prices are even higher now. To me, this is actually a very clear explanation of what happened here in Seattle. And I'm going to apply this to the rest of the country as soon as I tell the story, which is that the main drivers of the economy in Seattle are tech, primarily Amazon and Microsoft that are headquartered here. And a very important thing that those companies do is they pay their employees a lot, if not primarily, in stock.

You get stock options in stock, and that's a huge part of your compensation. And what happened to Amazon and Microsoft's stock during those years? They roughly doubled.

And when you have people who live in the Seattle area, whose compensation that they're receiving in stock doubles, their own budget for a house also doubles. And so the fact that, like, the reason home prices went up so much is because the wealth of the people who lived here went up an astounding amount as well.

Now, what also happens in real estate is what happened to me.

We bought a house in 2020, and it doubled by 2023, 2024

What did that do to me, to my wealth, or my ability to afford another house in Seattle? And the answer is absolutely nothing.

Would the house that I owned doubled meant that, like, I didn't actually earn any more, any real wealth from that? Because if I sold that house for twice as much as I bought it for, the other house that I would have to buy to replace it also doubled in price during that period. So I didn't actually make any money whatsoever. The other side of that is when home prices doubled, it didn't make those houses less affordable for me because the home that I owned at the time also doubled. And so, look, if that's a lot to keep track of, maybe I'm talking over myself there. So which of the price of anything is just what can people afford? And when you say afford, most people think about your salary income, your hourly income. And more often than not, in today's economy, it's not about your salary to income, it's about the wealth that you have, primarily the stocks that you own. And if that sounds like a high class problem that doesn't apply to everyone, well, let me share with you a couple of statistics that I think are very important here. In 1929, on the eve of the Great Depression and the roaring 20s, when there was a giant stock market bubble, 5% of Americans owned stocks. That's it. When the stock market burst during that era, it had a profound impact on a very, very few people. Stock ownership was a rich person's game. Forget the average American, even a lot of upper income Americans did not participate in that whatsoever. And that has changed profoundly over the decades. I pulled up some numbers here. So, 1929, 5% of Americans owned stocks. By 1990, 30% of Americans owned stocks. By 2000, another stock market bubble, roaring economy, 48% of Americans owned stocks. And today, it's about 60% of Americans, a very comfortable majority of Americans participate in the stock market. Now, a lot of them, most of them, are doing that through their retirement accounts. They're 401Ks and they're IRAs. And to state the obvious, there is a ton of inequality within that ownership. Elon Musk owns a trillion dollars of stocks. The average ordinary American might have a couple tens of thousands in their account. There's obviously a huge distribution in there. Nonetheless, 60% of Americans own stocks. And the stock market has done very, very well over the last 10, 20, 30 years. And so the average American, the typical American, has participated in a lot of wealth building over those years. And I think that's important because when we look at the price of housing, the price of college, the price of child care, the price of cars, vacations, I think in a way that doesn't have a ton of precedent if you're going back through long stretches of history. The inflation, the demand for those things is not necessarily being driven by people's incomes, their paychecks. It's being driven by the wealth that they have. And why that's important is because the stock market can, has, and probably will increase at a higher rate than people's paychecks at a faster rate than the economy overall.