the American Housing Crisis: Why Homes Aren’t Filtering Down Anymore
The American dream of homeownership is increasingly out of reach for many, and a fundamental shift in how housing markets operate is a key driver of this crisis. For decades, a process called “filtering” – where homes gradually become affordable to lower-income families as they age – ensured a degree of economic diversity in neighborhoods. But since 2008,this natural progression has largely reversed,with homes instead “filtering up” in income,creating a system where the cost of simply staying in a community is escalating for long-term residents.
Filtering, at its core, describes the change in typical income of residents within a given home over time. As one analyst explained, in a healthy market, “homes should filter down.” Historically, this meant a neighborhood initially populated by high-earning professionals – doctors and lawyers, such as – would, over the decades, see those homes occupied by accountants, then teachers, and eventually, by those in clerical roles. This wasn’t about decline, but about a natural evolution as housing aged and became more accessible. While local changes always occur, the overall trend in the past was downward filtering in the average neighborhood where new housing was available.
However,the united States has experienced a dramatic departure from this pattern.Since 2008, homes have predominantly filtered up – meaning higher-income individuals are increasingly occupying the same housing stock. “I’m not sure we have fully come to terms with what this means,” one expert noted, pointing to research detailed in a recent paper at Mercatus. The research, utilizing data from 1973 to 2018 estimated by Liyi Liu, Douglas A. McManus, and Elias Yannopoulos, reveals a clear correlation between filtering rates and home prices.
In 1999, markets with negative filtering – those where homes were filtering down – typically saw price-to-income ratios between 2x and 3x.Conversely, areas with positive filtering exhibited a direct relationship: the faster homes filtered up, the higher the home prices. This isn’t a gradual slope, but a “tipping point,” where the dynamics of the housing market fundamentally change.
For much of the 20th century,downward filtering was the norm,with home price-to-income ratios consistently around 3x across all neighborhoods,irrespective of wealth. Prosperous cities grew, and families adjusted their housing choices – size, location – to maintain affordability. Even in expensive cities like New York, housing
making two key errors: assuming expensive cities are simply “superstars” without acknowledging the role of these artificial constraints, and overstating overall wealth by including the inflated value of land controlled by these “trolls.”
As a nation, we are not wealthier simply because older homes in desirable areas now sell for exorbitant prices. Our collective net worth is, in fact, a reflection of our housing poverty.The families experiencing this firsthand understand that claims of increasing wealth don’t align with their lived realities. Renters feel it acutely,but even homeowners sense a growing unease,realizing they are becoming the “trolls” themselves,benefiting from a system that excludes others.
Looking at data from 2022, price-to-income ratios have continued to rise, even in areas that previously experienced negative filtering. This isn’t due to a change in the underlying housing stock, but rather a widespread shift towards positive filtering rates. The trendlines from 1999 illustrate the natural correlation between filtering and home prices, and as cities move towards positive filtering, prices inevitably increase.
From 1999 to 2005, a combination of cyclical booms and upward filtering drove up prices, especially in stagnant cities. A subsequent market collapse from 2005 to 2012 lowered prices but failed to address the underlying filtering problem. Since 2012, upward filtering has continued unabated, pushing price-to-income ratios higher across the board as growth has slowed in most cities.Families are now paying higher rents simply to remain in place.
The gap between cities with the lowest and highest filtering rates has widened from a 1x income difference to over 2x, and this disparity persists as homes become more expensive everywhere. Homes are becoming more expensive everywhere because growth has stalled. The fundamental issue isn’t simply a lack of housing, but a broken system where the benefits of location are increasingly captured by land value, rather then being shared through affordable housing options.
