WSJ's Greg Ip: Affordability is as much a state of mind as it is an economic condition

Key Concepts Affordability Crisis, Inflation vs. Affordability, Perceived vs. Real Affordability, Mortgage Rates, Housing Supply and Regulations, Corporate Profits, Monopoly Enforcement, Lived Experience, Pricing Stickiness, Quantitative Easing (QE), National Association of Realtors Affordability Index.

The Amorphous Nature of Affordability

The discussion highlights that affordability is a central issue in Washington, D.C., especially following President Trump's meeting with New York City Mayor-elect Zoran Mamdanis. Greg Ip, The Wall Street Journal's Deputy Economics Editor, argues that affordability is "something amorphous" and cannot be measured like inflation. It's largely "how people feel," making it "incredibly difficult to try and solve."

Mamdanis's campaign significantly elevated the term "affordability," leading to a surge in Google Trends interest over the last year. However, from an economic data perspective, there's no indication that affordability has "gotten notably worse in the last year"; it has followed a similar trend to previous years. Ip concludes that affordability is "as much a state of mind as it is an economic condition." People are currently in a "stressed state of mind," focusing on things that are harder to control, such as beef prices (after eggs previously). This suggests that "as long as people are in this stressed state of mind, there will always be an affordability crisis," for which there is no "magic key" solution.

Political Rhetoric vs. Lived Experience

The conversation contrasts how different administrations have addressed affordability and inflation:

• Biden Administration: Faced much higher inflation. Their strategy was to reassure people that "it's not that bad," "things are getting better," and "inflation is coming down." However, this approach "doesn't work if people feel like they're paying all the time."
• Trump Administration: Can point to falling oil prices, but faces challenges with higher electricity prices and significant issues with mortgage rates. Unlike Biden, Trump "goes around saying there's no inflation," calling the affordability crisis a "con job." He expresses frustration, telling people that "what they see and think isn't really true."

A key argument presented by Greg Ip is that "it doesn't really matter what the president says. People are going by their own sort of lived experience." This emphasizes the subjective and personal nature of the affordability perception.

Economic Data and Public Perception

Steve Liesman presents polling data that underscores the widespread concern about affordability:

• Cross-Party Concern: Affordability is a "big deal" that "cuts across parties." A third-quarter poll revealed that 18% of Republicans (a "big number"), along with more Democrats and independents, believe prices are rising faster than usual.
• Healthcare as a "Real Issue": Liesman distinguishes between perceived issues (like eggs or beef) and "real issues" such as healthcare. A "big percentage" across all parties are unsatisfied with healthcare affordability, indicating it's not merely a perception.

Liesman also explains a fundamental economic concept: prices can rise but don't necessarily fall back down. The expected adjustment is for "incomes to rise to the price level," which they have been doing. He cautions against falling prices (deflation), as this typically means incomes are also decreasing.

Specific Affordability Challenges: Housing and Monopolies

The discussion delves into specific areas where affordability is a major concern:

• Housing Affordability:
  • Mortgage Rates: A "real issue for anybody who's trying to buy a house." People became accustomed to "abnormal" 3-4% mortgage rates in the decade before the pandemic, a period characterized by low inflation, depressed conditions, and Quantitative Easing (QE). Current rates, while higher than the recent past, are "roughly back to where it was before 2008," according to the National Association of Realtors Affordability Index. While affordability is "a lot worse now than it was before the pandemic," it's "not crazily out of line with history."
  • Construction Prices: While they have increased, they've done so "more or less at the same rate as everything else," suggesting they don't fully explain why housing is disproportionately more expensive.
  • New Home Prices: Have actually been "coming down in the last 2 or 3 years," with the ratio of new to existing home prices "back down to its record low."
  • Impact of Lower Rates on Housing Prices: If mortgage rates decrease, the savings on the rate often "ends up in the price of the house" due to a "lack of housing" supply in many markets, potentially leading to an "inflationary effect."
  • Unique Impact of Housing: Housing is the "biggest part of most people's pay." Unlike goods like beef or eggs, where consumers can switch to substitutes, there's "not a whole lot you can do to diversify or say, I'm going to substitute with something else" when housing prices rise.
• Corporate Profits and Monopolies:
  • Antitrust Enforcement: Steve Liesman suggests that government antitrust and monopoly enforcement could be a way to affect affordability by addressing "pricing stickiness or inelasticity" caused by monopolies, especially local ones.
  • Beef Prices: Trump's order for an investigation into "price collusion or anti-competitive behavior by beef companies" after complaints mirrors actions taken by the Biden-Harris administration. Greg Ip expresses doubt that solving such issues would "affect the overall price level."
  • Health Insurance: Rising health insurance prices are attributed to increasing costs and the phasing out of 2021 subsidies, not "monopolistic competition."
  • Pandemic-Era Profits: Liesman notes that during the pandemic's inflation, "corporate profits did not suffer." Companies "found the ability not just to raise prices to meet input prices, but raise them further." This suggests high profitability on Wall Street, which may not be concerned about inflation if profits continue to rise. Ip counters that these high profit margins allowed companies to "absorb Trump's tariffs in the last year without raising prices so much."

Potential Solutions and Policy Directions

The discussion identifies several areas for potential intervention:

• Disentangling Inflation and Affordability: Greg Ip stresses the importance of separating the inflation issue from the affordability issue, as good news on inflation "seems to have had no effect at all on people's moods or attitudes about affordability."
• Housing Supply and Regulations: There is broad agreement that local and state governments can "improve the supply of housing just by reducing regulations." An example cited is the approval of ballot initiatives in New York City that "significantly reduce the barriers to building new developments," a strategy advocated by experts.

Conclusion

The core takeaway is that the affordability crisis is less about objective economic data and more about a subjective "state of mind" and "lived experience." While inflation may be moderating, public sentiment regarding affordability remains negative, posing a significant political challenge. Specific issues like healthcare and, critically, housing, are major drivers of this sentiment due to their substantial impact on household budgets and limited substitution options. While solutions like antitrust enforcement and, more significantly, local and state regulatory reforms to boost housing supply are discussed, there is no simple fix for what is fundamentally a deeply personal and perceived crisis.