Food, clothing, shelter. It seems like those simple necessities of life now cost more than they ever did before. But is that perception true? W. Michael Cox, vice president of the Dallas Federal Reserve Bank and coauthor of “Myths of Rich and Poor: Why We’re Better Off Than We Think,” has a paradoxical perspective on the price issue.
“Stuff is just getting cheaper,” he said.
While the cost of a new home climbed from about $5,000 in 1920 to $195,000 in 2003, Cox said homes and many other items consumers purchase are still a big bargain. He has found that Americans typically spend less time now to earn money for expenditures than they have spent historically.
The key to this equation is productivity. Increased efficiencies in production have continually kept down the cost of items to consumers.
“There’s always a better way,” Cox suggested.
Most people look at costs in terms of money, while the reality is that “the currency in life is time,” he said. “We don’t work for money, but we work for what money buys. People even say, ‘I’m spending time.’ “
In the book he co-authored, Cox examined the cost of such basic items as a gallon of gasoline, a three-pound chicken and a loaf of bread. In 1950 those items cost more work time than they do today, he found, though the price in dollars may now be higher. Likewise, a new home in 1920 required about 7.8 hours of work per square foot, while a new home in 2003 cost about 5.9 hours of work per square foot of house.
Modern homes tend to be far larger and have many more amenities compared with their predecessors, Cox said, so home buyers are getting more bang for their hours of work. Cox’s research showed most new homes in 1956 lacked garbage disposals, wall insulation, storm windows, central heating and air-conditioning systems, dishwashers and refrigerators, while these amenities and others are found in most modern homes.
In 1901, the average working family owned a home with five rooms. In 1934-36, the average home had 6.4 rooms. By 1988, 79 percent of all new homes had a garage, 75 percent had central air-conditioning and 42 percent had more than 2.5 bathrooms, according to federal statistics. Only half of new homes had garages in 1950, compared with about 91 percent today, according to data compiled by Cox.
The National Association of Realtors has found the median-income household has spent a declining percentage of its income since 1981 on mortgage payments for a median-priced home. The median-income household spent about 36 percent of income on mortgage payments in 1981, while that figure declined to almost 18 percent in 2003.
The percentage of income spent on mortgage payments dipped as low as 16 percent in 1972, according to association data. Taxes and insurance aren’t included in this data, said Walt Molony, an association spokesman.
A larger share of consumer spending now goes toward shelter compared with past decades, though, according to the U.S. Bureau of Labor Statistics. Shelter costs, which include housing costs minus the cost of utilities and furnishings, accounted for about 15 percent of total spending by urban wage earners and clerical workers in 1901. That compares with shelter costs amounting to 20 percent of total expenditures in 1986-87.
And for all consumers, shelter costs increased from about 13 percent of total expenditures in 1960-61 to about 19 percent of total expenditures in 2002, the statistics bureau reported.
Also, median home prices have been rising faster than median incomes in some markets, according to a study the Fannie Mae Foundation published in April. If this rapid home-price appreciation continued for the next five years, it could put homes out of reach for many first-time buyers across the nation, the study noted.
While housing costs are up as a percentage of consumer spending, the percentage of expenditures that consumers devote to food and clothing has been on the decline. About 6 percent of consumer spending went toward apparel and related services in 1984, compared with 4.3 percent in 2002, according to Bureau of Labor Statistics reports. And the percentage of consumer expenditures on food and alcoholic beverages declined from 26 percent in 1960-61 to 14 percent in 2002.
These numbers are even more extreme for urban wage earners and clerical workers. This group of consumers spent about 14.7 percent of their total expenditures toward apparel in 1901, compared with about 5 percent in 1986-87. And about 46 percent of their total expenditures in 1901 went toward food and alcoholic beverages compared with 19 percent in 1986-87, according to bureau data.
Cox said people seem to view housing as a “superior good” because they tend to spend a higher percentage of any increase in income on housing than they spend on some other goods. Cars and entertainment can also be considered “superior goods” for this reason, he said.
“Generally speaking, needs are inferior goods and wants are superior goods” in terms of income growth and consumer spending, Cox added.
Send tips or a letter to the editor to glenn@inman.com or call (510) 658-9252, ext. 137.
