House poor

Having spent a lot of time crunching consumer spending numbers for her popular books, “The Fragile Middle Class” and “The Two-Income Trap”, bankruptcy law expert and Harvard University Professor Elizabeth Warren states that the basics such as food, clothing, and shelter now take up close to three-fourths of every families spending power (it was about 50 percent in 1973), leaving very little left over at the end of the month and leaving many families with no cushion in case of a job loss or health crisis. Even though household incomes have risen about 75 percent from 1970, most of that is the result of a second earner, generally a women, joining the work force, and that added income been almost insignificant due to rising fixed expenses such as child care and housing costs.

The average family pays at least twice as much for housing compared to its counterpart in the 1970’s, and in some competitive areas with good schools, housing cost have risen as much as 600 percent. Four in ten Americans don’t have even one months’ worth of savings for use in case of an emergency, according to a survey by HSBC Bank published in 2006. And with two incomes built into the family budget, the odds of a household getting hit by a layoff have doubled in the last generation.

This combination - high-housing debt, rising healthcare cost, lack of savings, and greater exposure to unemployment – leaves families in a very precarious financial position. The U.S. Census Bureau defines “House Poor” as spending more than 30 percent of income on housing expenses. In 1999, 26.7 percent of U.S. households were considered house poor. By 2006, the number had jumped to 34.5 percent. The number of households spending half their income on housing – an amount that for most would be fiscal suicide – also has dramatically increased, from 10 percent in 2000 to 14 percent in 2006. Identifying the source of the squeeze requires more than simply comparing overall inflation to overall wage growth.

Rising housing cost have quietly broken a social contract with consumers that promised that a “Good Job” with a good income would guarantee a good place to live. While that may have been true in the 1970’s, it is often not true today. Middle-class squeeze skeptics often point to rising credit card debt as evidence that consumers have themselves, and their spending habits to blame for any economic anxiety.

As the combination of intelligent, creative minds and advanced technology has given rise to a new world of possibilities, the majority of people are still stuck in the same mode of thinking that was effective 20 years ago. As the population continues to grow, middle-class and lower-income people will face increasing competition in the already limited and still shrinking “Good Jobs” that are still available. Why is this? How is it effecting you?