Falling Behind - The Real Cost of Living

A recently released study, "Losing Ground" by the Center for Housing Policy confirms what most of us already know; the rising cost of housing and transportation is outpacing increases in household income, no matter what the monthly headline CPI numbers tell us.

Let's open with a bit of background information to help you put the conclusions of this study into context.  In this study, the Center for Housing Policy examines the housing and transportation cost burdens for moderate-income households in the nation's 25 largest metropolitan areas and gives insight into the impact of the rapid rise and fall of home prices during the last decade.  Included in housing costs are rent and utilities for renters, mortgage payments, property taxes, insurance, utilities, condo fees and payments for home equity loans for home owners.  Transportation costs include all the trips that a household makes as part of its daily routine and includes the cost of car payments, insurance, maintenance and fuel for car owners and the price of transit for those who do not own a car.  Data for this study was gleaned from the American Community Survey conducted by the United States Census Bureau for the years 2006 to 2010 and all prices are adjusted to 2010 dollars.  Moderate income households are defined as those households that earn between 50 and 100 percent of a metro area's median income, ranging from a low of $23,956 to $47,912 in Tampa to a high of $44,531 to $89,063 in Washington, D.C.  The average moderate income household for all 25 metropolitan areas was $44,566.

Despite the fact that the nation's housing market showed a marked decline in prices over the 2006 to 2010 period, housing expenses were 52 percent higher than they were in 2000.  Transportation expenses also rose as suburban development took precedence over inner-urban development, pushing transportation costs up 33 percent.  In combination, housing and transportation costs for households rose by 44 percent over the period from 2000 to 2010, up 19 percentage points over household income which rose only 25 percent as shown on this graph:

Here are two bar graphs showing how percentage increases in household income (in yellow) have been outstripped by increases in transportation costs (in light blue) and housing costs (in dark blue) for the 25 metropolitan areas in the study:

Note the small number under the metro place name?  That's the multiple of the increased cost of transportation and housing to the increase in household income over the period from 2000 to 2010.  In the worst case, Detroit, the cost of living increased by 4.54 times the increase in household income.  In the best case, Seattle, the cost of living increased by 1.16 times the increase in household income.  As well, you can see that it was in increase in housing costs (in dark blue) that drove most of the increased cost of living in each of these metropolitan areas, even though the price of houses declined markedly after 2006.

In this time of national attention to the growing divide between wealthy and regular Americans, the authors of the study look at how the cost burden of transportation and housing impacts moderate-, median- and above-median-income households as shown on this bar graph:

On a nationwide basis, housing and transportation costs consume 59 percent of the income of moderate-income households, 48 percent of the income of median-income households and only 33 percent of the income of above-median-income households even though the latter spend nearly $9800 more annually on these two items than moderate-income households.  

Unfortunately for some households, the situation looks different when looking at the same data by metropolitan area as shown on this bar graph:

You can see that Miami has the highest cost burden for moderate-income households, consuming 72 percent of household income compared to the national average of 59 percent and Washington, D.C.'s average of 51 percent.  Even though Washington has the most expensive housing and transportation, its high average income makes it a more affordable place to live.

As I noted at the beginning of this posting, it is interesting to see that, despite the drop in real estate prices since 2006, many Americans, particularly those of modest means, are finding it more and more difficult to make ends meet, particularly as increases in wages have not kept pace with the increased cost of housing and transportation.  This leaves many American households with difficult consumption choices and affects their ability to save for both the future and to plan for emergencies.  While the American employment picture is showing modest improvement since the depths of the Great Recession, it is also quite apparent that the increases in household income simply are not big enough to meet the growing cost of living no matter what the headline inflation numbers are telling us.