Average American Spending on Housing
When taking a look at today’s spending habits, Americans are putting 37% of their pre-tax income towards housing expenses. The standard measure of housing affordability is 30%.
Does this mean Americans are spending more than they should on their living arrangements?
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The simple answer is yes.
Every American is impacted from overspending on their home; this includes renters and owners of real estate. Renters allocate most of their spending towards paying their landlord the rent and, at times, paying for the utilities used. Homeowners have to look at many costs, including mortgage payments, property taxes, and utility bills.
Why Is the Housing Affordability Expense Ratio Important?
Below are three reasons why spending 37% of pre-tax income on housing expenses is negative for both consumers and the economy.
First, higher annual housing expenses result in more buyers being afraid of entering the homeownership world. This is because, over time, the costs of a house will increase in many aspects. For instance, as a property increases in value, its owner would have to pay more in property taxes. To account for this, the owner’s income would have to increase at the same rate as—or higher than—the expenses of the total annual housing cost. As a result, real estate is unobtainable for many individuals.
On the other hand, if a renter sees their monthly housing cost increase, they have more flexibility; they can look for a more affordable place to call home. By changing their residence, renters can lower the amount of their income allocated towards housing costs.
The second reason why a high housing affordability ratio is harmful to the economy is that it results in less cash moving in the economy. With more money flowing into the real estate market, people have less disposable income for other areas of the economy, such as vacations, restaurants, and leisure activities. Over time, this could lead to various sectors contributing less to the economy.
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Third, it means that Americans won’t have a lot of money left to save for retirement. As every saver and investor knows, the longer you hold onto an investment, the greater the compounding benefits. If this trend of rising annual housings costs continues, it means that individuals will be forced to work for a longer time before they can retire. There will also be more need for government income programs. Further, less money would flow into the financial markets.
Final Word on the Average American Housing Expense Ratio of 37%
The largest cost of home ownership is the carrying cost, otherwise known as the mortgage payment. One method of lowering this ratio for individuals is by purchasing a house that is more reasonably priced. One possibility is that, because of the high ratio, demand for real estate will drop. As a result, the real estate market could soften and we could see a downward drift in the price of real estate properties. Therefore, the overall mortgage cost would be more affordable. This could then put the housing affordability more in line with the desired 30% ratio.
The mortgage payment is the only number that purchasers are in control of; property taxes and utility costs are standard fixed costs.
