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Why home prices have gone through the roof – in Arizona and elsewhere

Why home prices have gone through the roof – in Arizona and elsewhere

Jun 27, 2024

Why home prices have gone through the roof – in Arizona and elsewhere

Arizona is one of the states where not a single major metropolitan area has affordable housing. The situation has become so bad in the Flagstaff area that it now takes more than 100% of the median after-tax income to afford a median price home. In other words, it’s impossible.

How we got here is a lesson in failed public policy, and the situation won’t change until those failures are reversed.

Over the last four years, the federal government spent trillions of dollars it didn’t have and far more than it was capable of even borrowing. To cover the shortfall, the Federal Reserve created money for the Treasury to borrow and spend. While that solved the federal finance problem, it also unleashed the worst inflation in four decades and spawned a cost-of-living crisis.

While inflation causes prices everywhere to rise, the housing market in particular has seen stratospheric increases in sales prices. Part of the Fed’s plan of creating trillions of dollars for the Treasury was keeping interest rates artificially low, and that made borrowing extremely inexpensive, including borrowing for a home.

Potential home buyers had access to so much cheap credit that they collectively bid up the prices of homes to never-before-seen levels.

After the Fed’s low interests and easy credit created inflation, however, the central bank swung the monetary levers in the other direction and initiated fast interest rate hikes. That suddenly made borrowing prohibitively expensive for countless Americans.

Ordinarily, rising interest rates cause home prices to fall, but this time was different.

The bacchanalia of government spending over the last four years was so large that the Fed needed to create a truly unprecedented amount of money to finance it all. About one-third of all the dollars in existence were created since the onset of the pandemic. Cheap credit was so abundant that millions of Americans got mortgages (including refinancings) at 2 or 3 percent interest rates.

For those folks, selling your home today means losing that ultra-low interest rates and getting a new one at 7 or 8 percent, which can double your monthly payment. Those low interest rates have turned into golden handcuffs.

The only way people can lose their low interest rate mortgage is if they sell their home for a large premium, giving them a sizeable down payment and reducing how much they must borrow at today’s higher rates. That has drastically increased the price of existing homes and limited their supply to the housing market.

Similarly, inflation has driven costs to homebuilders to record highs, pushing up the price of new homes and once again limiting the supply. Thus, prices across the board have remained elevated.

The deadly combination of both prices and interest rates skyrocketing has made the dream of homeownership a literal dream, something that’s just not a reality for millions of Americans and Arizonans specifically.

The monthly mortgage payment on a median price home has more than doubled since President Joe Biden took office, rising 119.5 percent. That’s almost $14,000 more per year — for 30 years — for the same house!

Yet Biden continues to push for even more of what created this mess: trillions of dollars in new government spending. His latest proposed budget would set yet another record for government spending, even exceeding anything America has seen during wars, recessions, or Covid.

But all this government spending must be paid for, one way or another. The Biden administration has chosen to use the hidden tax of inflation to cover their budget shortfalls, resulting in a veritable cost-of-living crisis across America, with housing costs playing a large role.

In Arizona, it has reached the point where a single working adult needs to earn $97,000 to live comfortably. That’s over 50 percent higher than the median income for a single full-time worker.

If you want to comfortably support a family of four in Arizona, you’ll need to earn $231,000. Even with two working adults, they’d need to each earn almost twice the median income of a full-time worker to hit that annual income.

To be clear, this is not a matter of politics but policy. Congressional Republicans and Democrats alike have been complicit in facilitating the Biden administration’s big-government agenda which has resulted in the present cost-of-living crisis.

If Arizonans want life to become affordable again, they should remember that every time the federal budget grows, the family budget must shrink.

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