I recently read an article on CNN Money that pulled data from a Harvard University study on housing. It stated that 11 million Americans were now spending at least half of their income on rent, and 21.3 million were spending at least 30% of their income on rent. Most personal finance gurus believe that you should spend at most 30% of your income on rent, and the lower that number is the better off you are. While this may be possible in a lot of areas, it is becoming increasingly difficult around many major cities.
The problem with spending this much on rent is that it may compound other financial issues, such as being able to save for an emergency fund or being able to save for retirement. When a huge chunk of your money is going just to have a place to live, the rest of your fixed expenses feel even larger and your discretionary income drops even more. This also leads to less money being put into the economy on a larger scale, but that is obviously a much larger issue.
One of things that the article mentions is that the middle class is being especially squeezed out, with a larger percentage of them going above the 30% of rent threshold compared to everyone else in expensive cities. I think a lot of this has to do with the fact that most housing options being built-in more expensive cities seems to be luxury housing with a small portion of affordable housing. There’s more money to be made in luxury housing, and as long as it keeps selling, developers will keep building it. This squeezes both the “middle class” and lower-income housing supply and their wallets.
The other interesting thing that I found in this article was the fact that the amount of renters is at an all time high, around 110 million people. And while you would expect a huge surge in younger people (let’s say like 18-29?) who can’t afford a down payment for a home it was actually a bit higher than that. Renters aged 30-49 made up 40% of new renters! With the under 30 demographic making up the bulk of renters, it seems that the trend for home purchasing may be increasing in age.
And even though the article states that 110 million people are renting, if we break that down further we find that there are 43 million households that are renting. This likely means that almost half of all renting households are spending at least 30% on their rent if the 21.3 million statistic is accurate! It’s kind of scary to see numbers this high, because having a place to live is obviously a necessity. It’s not like these people are spending a huge amount of money on shiny new toys, they are just trying to afford somewhere to live.
On the flip side, people with mortgages appear to be doing better. This is the fourth consecutive year that the amount of people paying over 30% of their income on a mortgage has decreased. This is from a combination of factors like lower interest rates, cheaper housing in some areas, and tighter restrictions on who can take out a mortgage.
How is the rent in your area or in your personal experience? Is it actually cheaper to have a mortgage compared to renting?