Hi! I’m Aziz. My newsletter contextualizes economic news using data visualization. These days I’m focusing on housing—hit reply and let me know what you think.

American households are better off today than when the US government first started measuring their finances in detail in 1984. Tallied in 2021 dollars, after-tax annual incomes are $16,000 higher. Everyday items like clothing and food are cheaper. But households are spending much more on some items—most glaringly, housing. The median household spends almost $5k per year more on housing today than in the mid ‘80s. The high cost of housing reduces the gains—from rising incomes, and from falling prices for other items—by a quarter.

Housing is gobbling up a greater share of household spending, but we are still much better off today than several decades ago. By far the most important reason is that incomes have gone up.

In 1984 the median household (middle quintile) earned just under $45k (2021 dollars). In 2021, the median household earned almost $61k.

Reconciling higher incomes with stagnant wages

This result might seem surprising, since it has been widely (and, accurately) reported that median real wages have stagnated for decades (they’ve grown a paltry 0.4% per year since 1984). But wages and income are not the same. Despite stagnant wage growth, incomes are higher, for three reasons:

1. We are working more: unemployment is lower, workforce participation is higher, there are more two-earner households, and many people are working longer hours.

2. Non-wage income—bonuses, benefits, and pension contributions—have risen.

3. The median household is benefitting from more favorable taxes and government transfers.

In fact, we may be underestimating income gains, for two reasons.

I used the Consumer Price Index (CPI) to estimated the inflation rate needed to convert 1984 dollars into today’s dollars. CPI overestimates inflation compared to other measures, like the Personal Consumption Expenditure (PCE) index (the PCE accounts for consumers substituting out expensive items for cheaper ones more frequently than does the CPI). Using the PCE, the median household earned $22k more in 2021 than in 1984.

Second, the average household is 0.25 people smaller today than in 1984. People are having fewer children and partnering less frequently. They less often live in multi-generational households. Rising household incomes are being spread across fewer people.

This isn’t to say middle class households are not still struggling, or that there aren’t incendiary problems like income and wealth inequality. But the data shows some substantial gains that belie the conventional narrative of the middle class running on a financial hamster wheel.

Other wins

Aside from higher incomes, households have benefitted from some basic needs like food and clothing becoming cheaper. This is partly a result of technology. Compared to 1970, the US manufacturing sector produces 3x more using 25% fewer workers.

And where human input is required—say, textile manufacturing—globalized supply chains means that this is being done in countries where the cost of labor is much lower.

As a result, prices for manufactured goods have not just risen more slowly than overall inflation, prices have actually declined.

We may have concerns about the effect of technology on the labor market, and on the treatment of workers in labor markets beyond our shores. But in the context of the financial situation of the median American household, one effect of these developments has been cheaper goods.

What’s standing in the way of a better standard of living? Expensive services

While food, clothing, cars and televisions are all far higher quality and more affordable than in the past, some items have grown more expensive. These tend to be services that are difficult to turbocharge with technology, or to do offshore.

Healthcare and education are prime examples. They have grown more expensive because, like all services, they are resistant to technological efficiencies. It’s no coincidence that we describe insufficiently empathic doctors as having a robotic bedside manner.

Housing’s share of the budget has grown the most

Healthcare and education are more expensive, but they pale in comparison to the drag coming from housing.

In 1984, the median household spent just over $15,000 on housing per year. In 2021, They spent more than $20,000. The next largest item—transportation—is half the size (about $10,000). And spending on housing dwarfs spending on healthcare (less than $5000) and education (a surprisingly meagre $534).

But higher prices for housing isn’t necessarily the only answer.

Since a household’s expenditure on any item reflects both its price and the quantity consumed, one reason housing is taking up a larger share of household budgets might be that we are consuming more of it.

But though there are widespread reports of Americans living in increasingly larger homes, this is not actually true.

In “120 Years of U.S. Residential Housing Stock and Floor Space”, Moura et al. explain how square feet per capita has risen, but square feet per household has remained surprisingly steady over not just decades but centuries:

Over the 1891–2010 period, floor space increased almost tenfold, from approximately 24,700 to 235,150 million square feet, corresponding to a doubling of floor space per capita from approximately 400 to 800 square feet. While population increased five times over the period, a 50% decrease in household size contributed towards a tenfold increase in the number of housing units and floor space, while average floor space per unit remains surprisingly constant, as a result of housing retirement dynamics.

The median American household now spends 37% of its budget on housing. It’s by far the largest, and the fastest growing, pressure point on household finances.