We have been following the drama in three American cities of San Francisco, Los Angeles, and the Detroit area. The homeless population in these cities, along with many others, has exploded in recent years, but the causes are long in the making. Too many people have lost jobs due to lost manufacturing jobs to overseas locations. For example, the loss of the automotive jobs in Michigan has led to cuts in services and rampant crime, as depicted in Netflix’s original series Flint Town.
And even the working middle class are having a hard time surviving in today’s market of rising housing costs due to monetary inflation. A recent study by the National Low Income Housing Coalition (the NLIHC) points out how badly the housing cost crisis has become in America. Rents are becoming increasingly too expensive for most average wage earners to afford.
The above graphic illustrates the problem with rental costs – the average family relying on a single wage cannot afford a simple one bedroom apartment. Two bedroom apartments are out of reach unless there are at least two wage earners in the household. Contrast that to 1960s, when a single earner could not only afford to own their own home, but to go on frequent vacations and have money for retirement. Since the 1960s; however, the increases in median wages have been dwarfed by rising rental costs according to Apartment List.
With basic housing costs rising so much, it is no wonder that many more now cannot afford basic apartment accommodations. The share of ‘cost-burdened renters’, defined by people having rising rents but falling incomes, has risen from 24 to 49% between 1960 – 2014.
Renters in most cities across America are rising faster than incomes, with only a few notable exceptions. So even those seeking better opportunities by moving to cities will be surprised by their lack of housing purchasing power over what generations before them had. The coastal cities, in particular, have gotten so expensive that many cannot afford housing there.
Certain wage earners are doing fine with respect to housing affordability. However even higher wage earners are experiencing declining purchasing power overall due to housing inflation costs. The NLIHC data shows that only a small percentage of jobs provide the ability to afford housing. An earner will need to be in the 70th percentile currently to afford a two bedroom apartment. Only half of wage earners can afford a spartan single bedroom rental.
Housing is a core need for people to survive. As the costs of housing rise above wages, room for other things will be squeezed out of the family budget. This includes discretionary spending on entertainment, name brand clothing, vacations, post-secondary schooling, and other luxury goods. If the trends keeps continuing the same direction, housing costs could squeeze the amount of money that goes into investment for retirement, including stocks, bonds, and other investments. The situation will reach a crisis should housing costs prevent people from buying other needful items such as food and basic clothing. Eventually this could also affecting housing segments of the economy as less people are able to afford their own apartments and homes, causing a crash in real rents and home prices.
If you are an investor, be wary of the current trend in residential housing price increases. Real estate price trends cannot continue to rise where less people can afford to pay rents. Given the trends in wages versus housing cost growth, less will also be able to purchase homes. Therefore, those REIT investments you are counting on to deliver your retirement funds may come under severe pressure in the coming years.
Also, investors should assess whether current trends of housing inflation will affect growth in the retail sector as well. As we recently pointed out, data shows that consumer participation is already flagging in the economy.
The rise in housing costs will affect everyone, including investors. This may cause you to reconsider that discretionary purchase that you were considering, whether it be a family vacation, new car, or luxury home item. Saving more of your income now in stable inflation-protected assets will provide more purchasing power later when it is needed more due to rising costs over wages. Gold and silver are excellent vehicles for saving your purchasing power over time. In contrast, putting your dollars into paper investment vehicles like stocks and bonds may have adverse consequences moving forward. The value of those investments is likely to lose value until the point at which the majority of incomes rises faster than basic subsistence living standards, providing more discretionary income for other sectors of the economy to grow.