It’s difficult to imagine buying a house in the years before the Internet, but it did happen and there are plenty of anecdotes to prove it.
Back in the late 1940s and early 1950s, the GI Bill was instrumental in helping former soldiers and their families go back to school and also thereafter purchase a home because they didn’t have the student loan debt.
In those days, the listing agent was reachable by telephone or, gasp, mail, and held all of the most reliable information about a house in their paper files.
If you worked with a larger firm, then a tally of houses that were on the market might be kept in a large book that could be updated monthly, if you were lucky.
If you were trying to find out information about a house from outside of town then you had to rely on time being on your side to find out all the information you needed – as the MLS we use today was virtually non-existent – or to make an offer, and then you had to be patient while you waited for the listing agent to contact the seller for an answer.
It’s truly interesting to look back in time and see what a salary from that time could purchase in today’s economy.
To understand just how unaffordable owning a home can be in American cities today, look at the case of a teacher in San Francisco seeking his or her first house.
Educators in the City by the Bay earn a median salary of $72,340. But, according to a new Trulia report, they can afford less than one percent of the homes currently on the market.
Despite making roughly $18,000 more than their peers in other states, many California teachers — like legions of other public servants, middle-class workers, and medical staff — need to resign themselves to finding roommates or enduring lengthy commutes. Some school districts, facing a brain drain due to rising real estate prices, are even developing affordable teacher housing so they can retain talent.
This housing math is brutal. With the average cost of a home in San Francisco hovering at $1.61 million, a typical 30-year mortgage — with a 20 percent down payment at today’s 4.55 percent interest rate — would require a monthly payment of $7,900 (more than double the $3,333 median monthly rent for a one-bedroom apartment last year).
Over the course of a year, that’s $94,800 in mortgage payments alone, clearly impossible on the aforementioned single teacher’s salary, even if you somehow put away enough for a down payment (that would be $322,000, if you’re aiming for 20 percent).
The figures become more frustrating when you compare them with the housing situation a previous generation faced in the late ’50s. The path an average Bay Area teacher might have taken to buy a home in the middle of the 20th century was, per data points and rough approximations, much smoother.
According to a rough calculation using federal data, the average teacher’s salary in 1959 in the Pacific region was more than $5,200 annually (just shy of the national average of $5,306). At that time, the average home in California cost $12,788.
At the then-standard 5.7 percent interest rate, the mortgage would cost $59 a month, with a $2,557 down payment. If your monthly pay was $433 before taxes, $59 a month wasn’t just doable, it was also within the widely accepted definition of sustainable, defined as paying a third of your monthly income for housing. Adjusted for today’s dollars, that’s a $109,419 home paid for with a salary of $44,493.
And that’s on just a single salary.
Year Median Home Value Median Rent Household Median Income
1950 $7,400 $42 $2,990
1960 $11,900 $71 $4,970
1970 $17,000 $108 $8,734
1980 $47,200 $243 $17,710
1990 $79,100 $447 $29,943
2000 $119,600 $602 $55,030
2010 $221,800 $901 $49,445
While homes values and rent costs have increased, incomes have not kept pace. All values are national media values. Information via U.S. Census Bureau
A dream of homeownership placed out of reach
That midcentury scenario seems like a financial fantasia to young adults hoping to buy homes today. Finding enough money for a down payment in the face of rising rents and stagnant wages, qualifying for loans in a difficult regulatory environment, then finding an affordable home in expensive metro markets can seem like impossible tasks.
In 2016, millennials made up 32 percent of the homebuying market, the lowest percentage of young adults to achieve that milestone since 1987. Nearly two-thirds of renters say they can’t afford a home.
Even worse, the market is only getting more challenging: The S&P CoreLogic Case-Shiller National Home Price Index rose 6.3 percent last year, according to an article in the Wall Street Journal. This is almost twice the rate of income growth and three times the rate of inflation. Realtor.com found that the supply of starter homes shrinks 17 percent every year.
It’s not news that the homebuying market, and the economy, were very different 60 years ago. But it’s important to emphasize how the factors that created the homeownership boom in the ’50s — widespread government intervention that tipped the scales for single-family homes, more open land for development and starter-home construction, and racist housing laws and discriminatory practices that damaged neighborhoods and perpetuated poverty — have led to many of our current housing issues.
From the front lines to the home front
The postwar boom wasn’t just the result of a demographic shift, or simply the flowering of an economy primed by new consumer spending. It was deliberately, and successfully, engineered by government policies that helped multiply homeownership rates from roughly 40 percent at the end of WWII to 60 percent during the second half of the 20th century.
The pent-up demand before the suburban boom was immense: Years of government-mandated material shortages due to the war effort, and the mass mobilization of millions of Americans during wartime, meant homebuilding had become stagnant.
In 1947, six million families were doubling up with relatives, and half a million were in mobile homes, barns, or garages.
The government responded with intervention on a massive scale. According to Harvard professor and urban planning historian Alexander von Hoffman, a combination of two government initiatives — the establishment of the Federal Housing Authority and the Veterans Administration (VA) home loans programs — served as runways for first-time homebuyers.
Initially created during the ’30s, the Federal Housing Authority guaranteed loans as long as new homes met a series of standards, and, according to von Hoffman, created the modern mortgage market.
The VA programs did the same thing, but focused on the millions of returning soldiers and sailors. The popular GI Bill, which provided tuition-free college education for returning servicemen and -women, was an engine of upward mobility: debt-free educational advancement paired with easy access to finance and capital for a new home.
It’s hard to comprehend just how large an impact the GI Bill had on the Greatest Generation, not just in the immediate aftermath of the war, but also in the financial future of former servicemen. In 1948, spending as part of the GI Bill consumed 15 percent of the federal budget.
The program helped nearly 70 percent of men who turned 21 between 1940 and 1955 access a free college education. In the years immediately after WWII, veterans’ mortgages accounted for more than 40 percent of home loans.
An analysis of housing and mortgage data from 1960 by Leo Grebler, a renowned professor of urban land economics at UCLA, demonstrates the pronounced impact of these programs. In 1950, FHA and VA loans accounted for 51 percent of the 1.35 million home starts across the nation. These federal programs would account for anywhere between 30 and 51 percent of housing starts between 1951 and 1957, according to Grebler’s analysis.
Between 1953 and 1957, 2.4 million units were started under these programs, using $3.6 billion in loans. This investment dwarfs the amount of money spent on public infrastructure during that period.
The birth of the modern mortgage
Before these federal programs, some home mortgages were so-called “balloon loans,” which demanded that buyers make a significant down payment (somewhere between 20 to 50 percent) and pay back the loan over a relatively short time frame, usually five to seven years. This was one of many reasons homebuying was previously the domain of a more wealthy portion of American society.
This new era of cheap and easy financing radically changed the formula, and the face of the average homeowner. Buyers could access loans with low down payments and pay back the bank over a 25 or 30 year window. With the U.S. Treasury backing home loans and protecting lenders from defaults, the risk of a bad loan plummeted. Floodgates of capital opened, reshaping land on the periphery of cities.
Mortgage rates have been lower in the last decade than they were during the ’50s and ’60s. But they were still incredibly low during the suburban boom of the ’50s and ’60s. In 1960, the average mortgage rate was 5.1 percent, which dropped to 4.6 and 4.5, respectively, for FHA- and VA-backed mortgages.
An incredible investment
The creation of a new mortgage market, and a pent-up demand for housing, sent clear signals to developers. There was a lucrative market in meeting the housing demands of the burgeoning middle class and breaking ground to build in suburbia, rather than in cities.
Cheap land near cities offered a quick-and-easy profit for big developers, further subsidized by the federal government’s colossal investment in highways and interstates, which quite literally paved the way for longer commutes and a greater separation between work and home.
With rising incomes and homeownership rates, the mortgage-interest tax deduction, once a more obscure part of the tax code that only impacted certain Americans, began growing into a massive entitlement program that redirected money toward homeowners.
In 1950 alone, suburban growth was 10 times that of central cities, and the nation’s builders registered 2 million housing starts. By the end of the decade, 15 million homes were under construction across the country. And during that decade, as the economy expanded rapidly and interstate roads took shape, residential development in the suburbs accounted for 75 percent of total U.S. construction.
Many of these new homes, large-scale, tract-style construction, were built with the backing of various government financing programs, and became available to a much broader cross section of society.
While FHA loans could go toward new urban apartment buildings, the program had an anti-urban bias. Minimum requirements for lot sizes in FHA guidelines, and suggestions about setbacks and distances from adjacent structures often excluded many types of multifamily and apartment buildings.
During the ’50s, the program was used on seven times more single-family home starts than downtown apartments. That anti-urban bias in building has shaped our markets to this day, and explains why so many urban areas suffer from a dearth of affordable units.
Housing starts are on the rise today
Last year, 1.2 million homes were started across the country. But adjusted for both an increased population as well as the large drop seen during the recent Great Recession, these numbers appear anemic, the lowest number per capita in 60 years.
And unlike the postwar building spree, fewer new homes can be considered affordable starter homes. Builders say the combination of land, labor, and material costs makes affordable homes impossible, and only more expensive models offer enough of a profit margin.
The advantages created during the postwar boom were not equally shared among all Americans: Both the FHA and VA loan programs excluded African Americans and other people of color, through unconstitutional redlining, an outright denial of access.
Redlining was a system of appraising and rating neighborhoods, a practice that was especially detrimental because it accelerated existing prejudices, against both people of color and older neighborhoods. It originated with another government-created entity, the HOLC (Home Owners’ Loan Corporation), which rated every neighborhood in every city using a four-point scale, with red being the worst.
When this rating system became a guiding force for the postwar explosion in development, it hypercharged inequality, and further isolated already-marginalized groups. This created a cycle of shrinking returns on homes and properties.
It’s true that in the ’50s, both white and black rates of homeownership increased in the United States. But the gap widened; the black/white homeownership gap was 14 percent in 1940, but 29 percent in 1960.
Being locked out of this suburban development created a persistent wealth gap that exists to this day. Being denied access to the mortgage market and homeownership meant paying rent instead of owning and gaining value. Today, the average homeowner has a net worth of $195,400, 36 times that of the average renter’s net worth of $5,400.
And missing out on homeownership in the ’50s meant missing out on a goldmine. During the 1950s, land values in some top-tier suburbs increased rapidly — in rare cases, as much as 3,000 percent.
Many of the pressing urban planning issues we face today — sprawl and excessive traffic, sustainability, housing affordability, racial discrimination, and the persistence of poverty — can be traced back to this boom. There’s nothing wrong with the government promoting homeownership, as long as the opportunities it presents are open and accessible to all.
That vision, however, has become distorted, due to many of the market incentives encouraged by the ’50s housing boom. In wealthy states, especially California, where Prop 13 locked in property tax payments despite rising property values, the incumbent advantage to owning homes is immense.
In Seattle, the amount of equity a homeowner made just holding on to their investment, $119,000, was more than an average Amazon engineer made last year ($104,000).
In many regions, we may have “reached the limits of suburbanization,” since buyers and commuters can’t stomach supercommutes. NIMBYism and local zoning battles have become the norm when any developers try to add much-needed housing density to expensive urban areas.
How about the 70s?
In the 1970s houses could be purchased for what today seems like a song. For instance, an average price in 1971 for a house was around $30,426 — or $190,388 in 2014 dollars. By comparison, the average price in 2014 for a house was around $566,696 (and that was up more than $30,000 from a year earlier).
But that strong market of the ’70s took a hit when interest rates skyrocketed in 1981 — to as high as 23 per cent for a five-year mortgage.
The market recovered again and then soared in the late ’80s. In 1987, housing prices went through the roof to an average $189,105 ($354,117 in 2014 dollars) — a 29-per-cent increase in just one year.
But in 1990, after four consecutive years of double-digit growth, housing prices tumbled 11 per cent as mortgages rates once again soared, this time to 14 per cent. The following year saw another big dive, when housing prices dropped 12 per cent. This slump continued for several more years.
Buyers did return eventually. Housing prices have been rising since 1997, save for the recession-related anomalies in 2001 and 2008.
In other words, it’s a great time to own a home — and a terrible time to aspire to buy one. Even though we have better and faster tools to look up information on a potential home, actually figuring how to afford it is another thing altogether, something the Greatest Generation didn’t have to face.