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

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):

average 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 $24,298 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 at least 30%. With lower income levels it’s closer to the 40% mark. Here’s a breakdown of average housing cost spend per household, by income level:

ItemFirst (Lowest) 20%Second 20%Third 20%Fourth 20%Fifth (Highest) 20%
Health Care10.3%9.3%9.6%8.2%6.3%
Personal Insurance (Non-Health) & Pensions1.9%4.9%8.8%13.1%17.4%

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 finances when circumstance goes south. We lock ourselves in to mortgages or leases that allow the slimmest room for error. Is this the “American dream“?

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 been in the 3-6% range in recent years (recently as low as 2.5%). 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, 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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