ARBOR WEALTH: Home prices, purchasing power, luck and toil

Editor’s Note: This is the first in a two-part series on purchasing power for Americans.

“Luck is not chance- it’s toil — fortune’s expensive smile is earned” — from “Luck is Not Chance” by Emily Dickinson

A look back sometimes provides valuable perspective on our current economy. Let’s consider what things cost, and the purchasing power that existed to buy these items, some 50 years ago.

In 1965 a stamp was a nickel. A loaf of bread was 21 cents. A gallon of regular gas was 31 cents. A dozen eggs cost 53 cents and a gallon of milk was 95 cents. A new car set us back about $2,700. According to the U.S. Census Bureau, the median price for a new home in July of that year was $21,000 (the Bureau doesn’t begin listing average home prices until 1975). Many new homes were purchased for less.

All costs are relative, though, right? So let’s consider what the U. S. Census Bureau says about wages that year. “The median income of all families was $6,900,” reads their report. “This was about $300, or 5 percent, higher than in 1964. However, since consumer prices rose about 2 percent between 1964 and 1965, the gain in real purchasing power was approximately 3 percent.” Simply stated, if your family income was about $7,000, and you bought a house for about $14,000, which many Americans did, then one year’s salary was equivalent to about one half of the cost of a new home.

Now, let’s talk 2015. Bureau statistics indicate that the average home price in May of this year was $337,000. The latest median family income numbers are from 2013, and that number is $52,250. Estimates put current median family income at around $56,000. Double that number, just like in 1965, and you’ve got $112,000 to spend on a new house, which is of course $225,000 short of the current average home price of $337,000. The application of this simple formula, median family income vs. average home prices, tells us that real estate purchasing power has declined significantly in the last 50 years.

In December of last year, a stamp was 49 cents. A loaf of bread and a dozen eggs were each about $2. A gallon of milk was $3.15 and a gallon of regular gas was $2.75. The average cost of a new car transaction last August was $31,250, up by 3.2 percent over the previous year.

It’s true, median family income has increased by a multiple of eight since 1965, and egg prices have only increased by a multiple of about four, so there’s good news on some fronts. And many other staple items unrelated to housing remain affordable. But what we haven’t mentioned is the exponential rise in the cost of health care, which has significantly damaged businesses and family budgets alike.

Next week: The high cost of living for older Americans.

Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.