As most people know, the real estate market has a profound affect on our entire economic system. Because housing is the highest cost for 99% of the people, what happens in the housing market is reflected in almost all other parts of the economy. Today, one out of every three Americans is spending more on housing than they can reasonably afford.
As foreclosures forced millions of people to move backwards from homeowners to renters, the cost of rent has increased an average of 21 percent since 2006. At the same time, real income has fallen 14 percent since 2006 when inflation is taken into account. This resulted from people being forced into part time jobs and lower paying jobs than they had before the Great Recession. New York City's borough of the Bronx is not the most expensive place to live based on the number of dollars spent. However, it is the most expensive place to live when viewed as a percentage of income. In the Bronx, the average rent is running about $1,800 per month. It represents an average of 66 percent of household income.
The Millennial Generation has been kicked in the teeth by the Great Recession and the overall poor economy going forward. Strapped with school loan debt that was suppose to position them for high paying jobs, they are being forced to take low paying jobs. The combination of school loans and rental costs prevent them from being able to save a dime towards homeownership. Little wonder that this generation prefers to live in the city near public transportation - they can't afford to own a car.
Just over half of young people graduating from college between the years of 2006 and 2011 have full time jobs. Yet, 67 percent of them have college loans needing to be repaid. Government backed college loans are not like credit card debt that you can walk away from if you're willing to let it rip apart your credit rating for a few years. These debts never go away. The lender can and will put liens on personal property such as a house if payments are missed.
A 26 year old young woman college graduate should be taking advantage of today's low home prices and interest rate to become a first time homeowner. She is working at a full time job plus a second job on the weekends. She recently went looking for a home to buy only to have her dreams dashed by a realtor that told her that her student loan prevented her from qualifying for a mortgage.
Before having her dreams dashed, she had found her dream home at a cost of $80,000. The roughly $500 monthly payment would have been less than the $610 rent she had been paying. But she isn't paying rent any more because she moved back in with family so that she can stay current on her $1,470 student loan payment. So much for the American dream of a college education and homeownership.
But the impact on the economy doesn't stop there. With one out of four renters devoting 50 percent or more of their income to rent, they have to limit their spending everywhere else. They spend less on food, health care, entertainment, and retirement savings. These people certainly aren't in a position to save a down payment for a home. And those with crippling student loans won't be going back to school for an advanced degree that could move them into a better paying job.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.