Politics & Policy

The Fading American Dream

EDITOR’S NOTE: The August 31, 1992, issue of National Review, set out to set the record straight about the Reagan administration’s economic record. We reprint the content of the issue here.

Myth: Home ownership became increasingly beyond the reach of ordinary American families during the Reagan years.

“Middle-class families can’t buy a house because they’re too busy paying for people to have mansions in Chevy Chase, second houses in Malibu, and empty office buildings everywhere.”

–C. Austin Fitts, former federal housing commissioner (1989-90),

quoted in The National Journal, June 22, 1991

In fact, lower inflation and interest rates during the Reagan years greatly increased housing affordability. The Housing Affordability Index indicates the degree to which median-income households can afford a median priced home. When the index equals 100.0, the median family income equals exactly the amount needed to qualify for purchase of a median-priced home, using conventional financing and making a 20 per cent down payment.

Housing affordability plummeted during the Seventies. Soaring home prices and mortgage rates, along with stagnant real incomes, pushed the affordability index down to 120.6 in 1977 from 154.8 in 1972. By 1981 the index had dropped below 100.0, indicating that the median U.S. family could no longer afford the median-priced house.

The turnaround started in 1981. By 1988 the index was above 120.0, and today, by this measure, housing is more affordable to the typical family than at any time since 1976.

In addition, U.S. homebuyers are demanding, and getting, bigger and better houses than their parents ever dreamed of. A Congressional Research Service study showed that the average size of new homes rose 15.2 per cent between 1970 and 1980, and another 13.5 per cent between 1980 and 1988.

The CRS study shows that the 16 per cent rise in new house prices between 1980 and 1988 was accompanied by a 13.5 per cent rise in house size. As a result, housing prices rose a mere 3.3 per cent per square foot. Even this rise is largely accounted for by amenities such as air-conditioning and multiple bathrooms, which became far more prevalent over this period.

The CRS study goes on to point out that prices of existing homes were flat, after adjusting for inflation, during the Eighties. This, combined with higher median family income and lower interest rates, means that housing was markedly more affordable at the end of the decade than at the beginning.

Warren Brookes, in an article on the CRS study (January 17, 1990), quoted its author, analyst Richard Bourdon: “The rapid rise in home prices has made some think that the current generation of young people may have to settle for less housing than their parents. However, a significant explanation for rising house prices is that homes are getting bigger and better. Media reports often inappropriately refer to the high prices of these bigger and better homes in their stories about how hard it is to buy a first home.”

Mr. Rubenstein is NR’s economic analyst.

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