Cutting Edge Insights
with Dr. Lee

What About the Wage Index?

Last week, I mentioned the significance of the 50-year anniversary of then-U.S. President Richard Nixon “temporarily” discontinuing the convertibility of debt into gold.

In other words, he took us off the gold standard (and the “temporary” maneuver perseveres).

As I predicted, our media was too wrapped up in other sensationalism to give it any mention at all.

I also pontificated about how the fall of the dollar makes things (houses, etc) appear to have risen in price more dramatically than if we had compared their historical prices measured in a tangible asset (corn, cotton, oil, ec.). You can read that blog post here.

But I was surprised that no one (besides a CPA who is trained to notice these things) highlighted the fact that I failed to examine the effects of the wage index over time. And the article had a near-record number of link clicks and shares on social media!

It turns out that wage index doesn’t happen to be the most succinct or accurate metric with which to compare home affordability over the years. Wage index compares wages between different geographical areas and over time and assists with computing entitlement benefits – social security and the like.

Other metrics – average salary, per capita income, etc. – aren’t useful either…average is skewed by a preponderance of highs and lows, and wages don’t necessarily make a mortgage payment.

But household income does. And median household income is probably the best way to compare affordability over the years…Median is a more representative figure (half are more than, half are less than), and household income makes a mortgage payment – not hourly wage.

So, the gospel according to Dr. Lee is the comparison of median household income adjusted for inflation over the time period in question.

Ok…here goes…

In 1971, the median U.S. household income was $8,700. This represents $57,315 when it is adjusted for inflation for the year 2020 (the most recent year for which we have reliable data).

And in 2020, the median household income was $68,400. (That’s $68,400 adjusted for inflation to 2020…but it’s probably $72,500 adjusted to 2021.)

When you compare median household incomes in 1971 and 2020, the conclusion is that incomes went up in that time frame.

And so did your purchasing power.

Q: So how do we reconcile incomes, home prices, futures, and the dollar’s moves?

A: It’s helpful to only compare one variable at a time.

We know that home prices increased in the last 50 years, substantially more than raw assets such as corn, oil, etc. Part of the difference can be explained by the decline of the dollar…that dreaded 3-syllable word called inflation. But we also know that due to the decline of the dollar, home prices didn’t increase as much as we expected in real numbers (adjusted for everything else).

Now enter median household income. The apparent inflation-adjusted increase in median household income over a 50-year period serves to diminish the real increase in home prices.

At the end of the day, it costs more to buy an average home in 2021 compared to 1971 after accounting for ALL variables. But the increase is not as much as a first glance would indicate.

As you think about that, also think about whether the mass media gives these concepts any attention. I’m still waiting (one week and counting) to witness any nod to the Nixon-initiated change of 1971.

If you’d finally like to learn how to combat the fall of the dollar and hedge against income stagnation, then download our ebook immediately below.

As always, free, no strings attached, and IMHO.

Until next time,

Dr. Lee Newton

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