Why real estate prices have skyrocketed

Below is the author’s opinion and analysis:

EJ Antoni

Arizona is one of the states where there is no affordable housing in any metropolitan area. In the Flagstaff area, the situation has become so bad that you now need more than 100% of the median net income to afford a median-priced home. In other words, it's impossible.

How we got here is a lesson in failed politics, and the situation will not change until these mistakes are corrected.

Over the past four years, the federal government has spent trillions of dollars it didn't have and far more than it could possibly borrow. To make up the deficit, the Federal Reserve created money that the Treasury could borrow and spend. While this solved the government's finances problem, it also triggered the worst inflation in four decades and created a cost-of-living crisis.

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While inflation is driving up prices everywhere, selling prices in the housing market in particular have risen to stratospheric heights. Part of the Fed's plan to create trillions of dollars for the Treasury was to keep interest rates artificially low, making credit, including borrowing for a home, extremely cheap.

Potential homebuyers had access to loans so cheap that they collectively drove home prices to unprecedented levels.

But after the Fed's low interest rates and easy lending fueled inflation, the central bank swung the monetary levers in the other direction and began rapidly raising interest rates, making borrowing money prohibitively expensive for countless Americans.

Normally, rising interest rates lead to falling property prices, but this time it was different.

The government spending sprees of the past four years have been so large that the Fed has had to create a truly unprecedented money supply to finance them. About a third of all dollars in existence have been created since the pandemic began. Cheap credit has been so abundant that millions of Americans have been able to obtain mortgages (including refinances) at interest rates of two or three percent.

For these people, selling their home today means losing the extremely low interest rates and getting a new home at 7 or 8 percent, which can double their monthly payment. These low interest rates have become golden handcuffs.

The only way to get rid of their low-interest mortgage is to sell their home at a high premium. This leaves people with a significant down payment and less to borrow at today's higher interest rates. This has dramatically increased the prices of existing homes and limited their supply in the housing market.

Similarly, inflation has driven up the cost of home builders to record highs, driving up the price of new homes and once again limiting supply, keeping prices high across the board.

The deadly combination of skyrocketing prices and interest rates has literally made the dream of homeownership a dream that is simply not attainable for millions of Americans, and Arizona residents in particular.

The monthly mortgage payment for a median-priced home has more than doubled since President Joe Biden took office, increasing 119.5 percent. That's nearly $14,000 more per year – for 30 years – for the same home!

Yet Biden continues to push for even more of what caused this chaos: trillions of dollars in new government spending. His latest budget proposal would set another record for government spending, surpassing even anything America has experienced during wars, recessions or Covid.

Yet all of this government spending has to be paid for one way or another. The Biden administration has chosen to use the hidden inflation tax to cover its budget deficits, which has led to a veritable cost of living crisis across America, with housing costs playing a major role.

In Arizona, it has now reached the point where a single working adult must earn $97,000 to live comfortably, more than 50 percent more than the average income of 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 adults working, each of them would have to earn nearly twice the median income of a full-time worker to reach that annual income.

To be clear, this is not a question of policy, but of politics. Both Republicans and Democrats in Congress have supported the Biden administration's big-government agenda that has led to the current cost-of-living crisis.

If Arizonans want to make life affordable again, they should remember that every increase in the federal budget means shrinking family budgets.

Follow these steps to easily submit a letter to the editor or guest article to the Arizona Daily Star.

Arizona Daily Star

EJ Antoni is a finance scholar and Richard F. Aster Fellow at the Heritage Foundation and a senior fellow at the Committee to Unleash Prosperity.

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