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Home » Home Ownership, Save Money, Summer of Saving

The Cost of Housing & why it Can Make or Break your Finances

Last updated by on April 20, 2016

Health care is a wrap in the Summer of Saving series, and it’s time to move on to the BIG ONE: housing costs.

Realtors are paid to tell us “It’s a great time to buy a home” (in fact, I remember an ad campaign recently with just that slogan…), “You deserve it!”, and “You should probably offer more than asking price, so you don’t lose the the house to another bidder”.

Mortgage brokers are paid to tell us “Yeah, 30-40% of your income towards your home is totally fine” and “No steady income history? You’re approved!”. They backed that up with easy money to many people who should not have been given easy money.

After years and years of this, more people than ever were buying homes and paying more than they could afford. Bidding wars ensued and buying homes to rent or flip them became commonplace. A lot of people made a lot of money very quickly on their homes.

Who doesn’t love a good get rich quick story? A bubble was born. And almost just as quickly, it burst (as shown through the U.S. home price index):

housing costs

Foreclosures and the mortgage and housing crisis ensued and we ended up with a Great Recession. Tens of millions of American families not being able to afford their lofty mortgages led to us narrowly escaping a second Depression.

As recent as this story is, history is bound to repeat itself unless we learn a thing or two.

Average Housings Costs in the U.S.

What we pay for our homes and apartments has a HUGE impact on our financial health. The cost of housing dwarfs all of the other top spending categories for Americans.

According to the most recent BLS statistics, Americans spend an average of $16,803 on housing per year (per consumer unit, or household). This more than doubles the next highest category – transportation.

And across all income levels, the percentage of total spend crosses 31%. With lower income levels it’s almost at 40%.

ItemFirst (Lowest) 20%Second 20%Third 20%Fourth 20%Fifth (Highest) 20%
Health Care7.9%9.7%8.9%8.4%6.9%
Insurance & Pensions2.1%4.8%7.8%11.2%15.6%

Getting a Grip on your Housing Costs

We’re still paying way too much for housing.

And the result is that it can completely destroy our financial picture when circumstance goes south.

We lock ourselves in to mortgages or leases that allow the slimmest room for error.

Here’s the thing about housing costs – everyone needs a shelter over their head. But what happens when we lose our jobs, encounter a medical emergency, or other financial setback? The average American personal savings rate has dipped back down to the 3% range. What do you think happens when 50% or 100% of someone’s income disappears? Complete personal finance destruction.

Unlike with food, transportation, utilities, entertainment, travel, clothing, and just about every other spending category – housing costs are pretty inflexible once you are locked in to a contract. If you can’t afford to meet your monthly rent or mortgage, you have to heavily draw down on your savings or you lose your place.

Outside of having a much higher personal savings rate than 3%, what can you do to prevent this scenario from happening?

That’s what we’ll be discussing over the next few weeks.

Housing Costs Discussion:

  • What percent of your total spending is made up of housing costs?
  • What percent of your income is housing costs?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Jan says:

    Our mortgage payment is 7.5% of our gross household income. I feel comfortable with this number. If we lost part of our income we could still handle the payment (we probably wouldn’t make extra principal payments). We could have bought a bigger house but we preferred to take a smaller mortgage and pay the house of faster, and 2200 sq ft is plenty big for both of us.

  • I think once we buy a house, our housing costs will be around 25-30% of our after-tax income. Crazy, right? And that’s us buying a modest home with a modest mortgage. Many of my coworkers are looking at buying bigger, more expensive houses! I honestly how they can afford it? Maybe they are making much more than me…

  • Jake @ Common Cents Wealth says:

    Housing is necessary, but I know I could survive in a $500 apartment vs. our $1,100 house if we needed to. My goal is to keep housing costs around the 25% mark, then with utilities and repairs it’ll creep up to the 30% mark. I don’t want my mortgage to be 35% of our income just because that constricts us a bit too much. I would love to do a 15 year mortgage next time, but I’m not sure if I will yet.

  • Alex says:

    My big problem is that I’m a Cal State student and live in Long Beach, Calif.

    Although I bring in $2,000/mo from my Post-9/11 G.I. Bill, my rent is $725/mo. For a studio. With bars on the windows.

    That $725 is 36% of my G.I Bill housing allowance, which is my only reliable income while I’m in school (I do odd jobs here and there, but I can’t count on them month to month).

    Can I live with my parents to save money? Nope. They moved to North Carolina last autumn, ditching their house in south Orange County (which became far too expensive after 2008).

    A 1-bedroom apartment goes for around $1,100/mo here.

    A $500 apartment doesn’t land you in the best part of town.

    So, yes, I’d agree that housing is the biggest setback in my financial life. It crowds out the possibility of being able to pay for healthcare.

    • Willy says:

      This is a major point of consideration. When you’re in big metro areas there’s a big trade off and wide range of monthly rent/mortgage costs that don’t exist in non-metro areas. The decision involves big differences in not just housing cost, but transportation cost, time, etc. Thanks for bringing this up. Also, major point of consideration is low financing rates in current environment, and renting vs owning. You can cut monthly costs by renting, but the trade off is you don’t have an asset (which we can argue on it’s value as well).

      Ps. Thank you for your service. Without people like you, we wouldn’t have the opportunity and security that we do.

  • Lauren D says:

    We live in a modest 1800 sqft home in a nice neighborhood in south Florida with surprisingly no HOA fees. We spend 21% of our after-tax income on our mortgage and significantly more maintaining the house. I’m comfortable with that number and know that if one of us lost a job we could cover the mortgage in the interim. If we were to be financially put in a bad spot we could easily cut back on home care services to save money; cleaning lady, pest control, tree/hedge trimming.

    I like where youre going discussing average spending and saving. As for savings I’d like to read more about recommendations for % of income retirement savings and liquid personal savings. I feel I kick but at retirement saving but am terrible at personal liquid saving.

  • David says:

    Hey, did my comment get deleted? I typed a somewhat long, and what I thought to be appropriate, comment. Now I do not see it. =/


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