It is worth considering that one of the reasons that people are having more difficulty saving for retirement now than they did, say, 10 or 20 or 30 years ago, is that housing costs are absorbing a larger portion of their wages than used to be the case.
And I'm rather sure that if one looked at the sum of their housing and commuting costs as a percentage of income, that, too would have risen significantly.
The old rule of thumb was to spend no more than 1/4 of one's income on housing. I assume that was construed to include not just the rent or mortgage payment, but also property taxes, condo or association fees, homeowner's or renter's insurance, heating fuel, and utilities such as electricity, water, sewer and telephone. That was probably before TV was a monthly bill, and before an internet connection became, if not essential, nearly so. And it may have been before borrowing more than 80% of the purchase price became common, adding in costs for private mortgage insurance, costing 0.32% to 1.2% of the loan principle. It doesn't take into account the likely costs of maintenance, sometimes estimated at a few percent of the house's value.
Thirty or forty years ago, one couldn't get a standard mortgage whose payments, plus property taxes and homeowners' insurance, exceeded 28% of gross income, or take on a mortgage when the sum of those costs and other debt service (credit card, student loans, car loans) exceeded 35% of income.
Today, according to the Consumer Financial Protection Board, "Qualified Mortgages" generally don't exceed a debt-to-income ratio of 43%. But that doesn't appear to include expenses for utilities.
According to a Census Bureau publication based on the 2006 American Community Survey,
The 2006 American Community Survey (ACS) shows that 46% of renters nationwide pay 30% or more of their income on housing costs. Thirty-seven percent of owners with mortgages and 16% of owners without mortgages spend 30% or more of their income on housing costs.
That article provides some history of the standards, dating back to 1937. But as it pointed out, the 2006 ACS found that 46% of renters and 37% of households with mortgages were paying over 30% on housing. The ACS defines utilities as part of housing costs.
That 30% rule of thumb is useful, but it doesn't take into account family configuration; a family with more children may be cost-burdened at a lower ratio than a childless couple.
One might divide the housing-burdened into renters and homeowners. We might note that cost-burdened homeowners may have reason to hope that some of the components of their housing costs will remain fixed over time (assuming a fixed-rate mortgage, and no cash-out refinancing) and that their wages will rise, relieving some of the burden --- though statistics show that wages for the bottom 90% of workers aren't rising much these days. Rent-burdened tenants, though, are likely to face rising rents over time, particularly if we don't find ways to increase the supply of rental housing.
Commutes are getting longer. For homebuyers, the rule is "drive until you qualify." But the case has been made that the sum of housing costs and commuting costs may be fairly constant within any particular metro area. To express it another way, housing prices take into account capitalized transportation costs. In a city like NYC, where subway fares are not zoned, one may not pay in dollars, but certainly does pay in time spent commuting. In the suburbs, served by commuter rail, one pays both in time and in commuting costs (and if one must drive to the station, keeping a car and parking it, as well as the transit cost itself).
It is worth noting that mortgage lending rules, which gradually moved from 20% down payments to down payments of less than 5%, and from 28%/35% to 43% or more have helped fuel the increase in housing prices. Who has benefited from this? People with houses or land to sell; real estate agents; first mortgage lenders; mortgage-insurance providers, title insurance agents (a/k/a attorneys), to name a few. (See "FIRE sector" -- Finance, Insurance, Real Estate" --- not "Financial Independence Retire Early!")
Motley Fool suggests a 50/20/30 rule: 50% to fixed costs, 30% to variable costs, 20% to savings.
Rent or mortgage payments, homeowner's or renter's insurance, property tax, mortgage insurance, condo or association fees, utilities (now including cable, broadband, cell-phone) are all pretty much fixed costs. Homeowners also need to consider maintenance, including the replacement of major appliances or house systems such as roofs, windows, etc., needs to be accounted for. Other fixed costs include auto loans, insurance, fuel, maintenance, parking, perhaps tolls, and/or commuting by subway, bus, train; student loans; servicing -- and paying off -- credit card debt, groceries. Childcare is a fixed cost, though it might vary depending on the children's ages and the time of year. Children's clothes should probably be treated as a fixed cost, as long as they keep growing; children's activities come with a cost, and even public school education has out-of-pocket costs for parents.
Variable costs might include meals out, furniture purchases, clothing, gifts, entertaining and charitable gifts.
Savings should include an emergency fund to cover 3 to 6 months' worth of expenses; retirement; children's college.
It seems to me that we must find ways to bring down the cost of housing, if individuals and families are going to be able to save for retirement or, indeed, be able to meet the rest of their living expenses.
Buildings cost what they cost. Improved technologies, and perhaps more reliance on manufacturing housing in factories instead of building them from sticks on site, may be able to bring down the cost of producing new homes. Older homes cost less, both because their technologies are older and likely less efficient, and because, even with the best of maintenance, their systems -- roof, windows, HVAC, plumbing, electrical, structural -- are gradually aging, and approaching the need for replacement.
It is worth noting that the older home is likely to be closer to the center of things, and therefore to have higher land value, and also a higher ratio of land value to total value. One is paying for the location, not the sticks and bricks.
Perhaps the biggest variable is the value of the site. Here's where it gets interesting. A site has at least two different kinds of value. It has a value for use: what is it worth to someone who wants to use the site? A city site 50 steps from a subway stop will be worth more than a site 200 steps from the same subway station, and both will be worth more than a site half a mile from that subway stop. A site served by a subway will be more valuable than a site served only by buses. A site with a desirable view -- urban or rural -- will have more value, at least to some users, than a site with no view or with an unpleasant view. That value could best be described as the annual rental value of the site.
The second kind of value is the price of buying the site from its current owner. It takes account of the current value for use, but also incorporates expectations of what the site will be worth next year, and the following year, and for the foreseeable future. This makes some assumptions about the value which the community will add to the value of the site. New subway stop nearby? Or another line serving the existing stop? Ca-ching! More jobs in the area? Ca-ching! A new cultural amenity? More restaurants or food delivery options? Ca-ching! The current owner of the property isn't planning to do anything to the site, but recognizes that what the community does will "naturally" raise the value of his site, and permit him to charge a tenant more to be there next year, next decade, next century. Without him lifting a finger.
This is equally true of a central business district site, a residential neighborhood a subway ride away, a suburban neighborhood well served by commuter rail and good schools and other services, or by good highways that aren't overloaded at rush hour. It is equally true of that farmland that stands to receive an interstate highway spur, or a widened highway, or a new exit on an existing limited-access highway. (Land-owning politicians have been known to put forward bills to benefit themselves, and/or to buy land in the path of some intended taxpayer-funded infrastructure.)
This may sound as if it is beyond solution, and that little can be done to help those afflicted.
In fact, there is a measure that will make a big difference, and it is one that few people seem to know about, and one about which some will have a knee-jerk reaction that it would not benefit them. In fact, it will benefit the vast majority of us.
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