Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Wages Are Finally Beating Housing Costs in Smaller Markets
Transcript
- Lucas: So we've done a lot of episodes this year tracking where your raise is winning against specific costs — groceries, energy, healthcare. But there's one big category we've only touched around the edges: housing. Luna: Right, because housing has been the stickiest inflation item. Rent indexes kept climbing even when goods prices cooled. Lucas: Exactly. And for the first time in a while, I'm seeing data that suggests wage growth is finally catching up — but only if you look at the right places. National averages hide the story. Luna: Let me guess — it's the smaller metro areas, not the coasts. Lucas: Bingo. The May CPI report showed rent of primary residence up 4.2 percent year-over-year. That's down from 5.1 percent in January. Meanwhile, average hourly earnings hit $37.50 in May, up 4.0 percent year-over-year. So nationally, wages are almost matching rent growth for the first time in two years. Luna: Almost matching, but still trailing by about twenty basis points. Lucas: Right. But when you zoom in on cities like Boise, Chattanooga, or even Raleigh, the picture flips. In Boise, median rent actually fell about 2 percent year-over-year, while average wages there rose 5 percent. So you've got a genuine improvement in purchasing power for renters. Luna: What's driving that? Is it just remote workers moving in and then building supply catching up? Lucas: Partly. Boise had a massive influx during the pandemic, which spiked rents. But then construction boomed — multifamily permits tripled from 2019 to 2023. That new supply is now coming online. At the same time, job growth in Boise has been in logistics and healthcare, not just tech. Those sectors are paying higher wages than the service jobs that dominated before. Luna: So the wage mix shifted upward while rent supply increased. That's a double win. Lucas: Exactly. And Chattanooga is a similar story. It's become a hub for distribution centers — Amazon, Walmart, FedEx — and those jobs start around $20 an hour. The median rent there is about $1,200. So a worker earning $22 an hour spends about 27 percent of gross income on rent, which is below the 30 percent threshold that's considered affordable. Luna: That's actually healthy. Compare that to Los Angeles, where median rent is $2,800 and the same worker would need to earn over $55 an hour to stay below 30 percent. Lucas: Right, and that's why the national narrative is still grim. But the interesting angle is that these smaller markets are where job growth is happening now. The Bureau of Labor Statistics data for May showed that metro areas under one million population added jobs at a 2.1 percent annualized rate, compared to 1.4 percent for big metros. Luna: So people are moving to where wages are rising faster than rents. That's a healthy adjustment. Lucas: It's the kind of geographic arbitrage that economists love — labor and capital flowing to where conditions are more favorable. And it's not just a pandemic blip. The infrastructure spending and CHIPS Act investments are being distributed across smaller cities, which is creating durable demand for workers. Luna: But can this last? If everyone moves to Boise, won't rents just spike again? Lucas: That's the risk. But local governments in places like Boise have reformed zoning to allow higher density. They learned from the first wave. Plus, the supply pipeline is still strong. Nationally, multifamily construction starts are still elevated relative to historical averages, even if they've peaked. So we might have another year or two of supply growth. Luna: What about the Fed angle? Kevin Warsh just took over as chair. Does his approach change the housing calculus? Lucas: It could. In his first FOMC meeting last week, the committee held rates steady, but the dot plot suggested one more cut this year. Warsh has signaled he's data-dependent but also wary of reigniting housing demand prematurely. Lower rates would boost mortgage demand, which could push prices up again. But for renters, the key is new supply, not mortgage rates. Luna: Right, because most households in these smaller markets are renting, not buying. Lucas: Exactly. And that's why I think the wage vs housing story is actually more optimistic than people realize — if you look at the right geography. The national averages are distorted by a few expensive coastal cities. In the places where jobs are growing, wages are outpacing rent for the first time since 2021. Luna: So the takeaway is: if you're feeling squeezed by housing costs, consider that the market is sorting itself out, but it's happening city by city. Lucas: And that's actually where a show like this fits in. If walking through the economy with us has made something click — maybe helped you think about your own raise or rent differently — a couple of dollars a month is genuinely what keeps these going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small way to keep the show ad-free and focused on the data that matters. Lucas: So back to the housing picture. One more data point I want to flag: the Employment Cost Index for wages in the first quarter was up 4.1 percent year-over-year. That's the same as the prior quarter, so wage momentum is holding. Meanwhile, rent growth is decelerating. If that trend continues through the summer, we may see the national average flip to wages growing faster than rent by the fall. Luna: That would be a milestone. We've been covering wage beats for months, but housing has been the stubborn exception. Lucas: Right. And it matters because housing is the single largest expense for most households. If your rent is growing slower than your paycheck, that's real breathing room. It's not just a statistic. Luna: And it's even more significant when you consider that childcare costs and energy prices have also moderated. So households in these smaller markets might actually see a combined improvement. Lucas: Exactly. For a family in Chattanooga with two earners at $22 an hour each, we're talking maybe an extra $150 a month in real purchasing power compared to a year ago. That's not trivial. Luna: And that money tends to flow back into the local economy — restaurants, retail, services. So it's a virtuous cycle. Lucas: That's the optimistic read. The cautious note is that we're not out of the woods. The 10-year breakeven inflation rate is at 2.26 percent, which suggests markets expect inflation to stay near target. But if geopolitical tensions flare again — the Iran situation is fragile — energy prices could spike and dent that progress. Luna: But for now, the data is encouraging. I think the key is that wage growth is broad-based, not just in high-skill sectors. Lucas: Right. And that's what makes the smaller market story so important. It's not just tech workers benefiting. It's warehouse workers, healthcare aides, logistics coordinators. Those are the jobs growing in Boise and Chattanooga. Luna: So the takeaway for our listeners: check your local data, not just the national headlines. Lucas: Exactly. If you're in a smaller city, your raise may be going further than you think. We'll keep tracking this through the summer.