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In pretty much every analysis involving housing costs, I try to mention that percentage of income spent on housing is not a great metric. A better metric is abs
by baddox 8y ago
In pretty much every analysis involving housing costs, I try to mention that percentage of income spent on housing is not a great metric. A better metric is absolute income minus housing costs.
All else being equal, I would gladly earn $1 million per year and spend 75% of it on rent, because that remaining 25% would be a heck of a lot of money.
I doubt this metric would significantly change the conclusions of this article, but I’d like to see that metric used.
- geodel 8y agoWhile you are right, it is an exceptional scenario to earn that kind of money. So it is statistically insignificant to calculate absolute income minus rents etc.
- PhasmaFelis 8y agoIt's quite significant even within much more common ranges. If you make $60K/year and spend 25% of it on rent, you net nearly 20% more than someone who makes $40K and spends 5% on rent. Looking solely at percentage of income spent on housing will lead you to a very wrong conclusion in that circumstance.
- jexah 8y agoYou're forgetting about income tax.
- PhasmaFelis 8y agoThen factor that in as well. The divide between $60K/25% and $40K/5% will still be substantial.
- JumpCrisscross 8y ago> I would gladly earn $1 million per year and spend 75% of it on rent No, you wouldn’t. As income goes higher, long-distance transportation becomes (a) more comfortable and (b) smaller as a fraction of income. De-camping to Washington State and commuting to San Francisco doesn’t make sense at $200,000; it does at $1 or 2 million.
- ceejayoz 8y ago> No, you wouldn’t. I can say with absolute certainty that I'd be pretty damn happy with $250k post-rent income.
- deleted 8y ago[deleted]
- maxerickson 8y agoI think the dispute is more wether 75% rent is a likely choice in the million dollar scenario. (vs the contentment with remainder)
- coding123 8y agoThis entire thread is so strange to me, if you're spending $750000 per year renting, shouldn't you be buying $750,000 properties once a year instead?
- Bud 8y agoWe're talking about San Francisco. There aren't any $750k properties. ;)
- manfredo 8y agoI think the idea that the grandparent commenter was pointing out is that pointing to higher percentages of income going towards rent is an overly simplistic metric. If the percentage of income spent on rent goes from, say, 20 to 40%, but average incomes double then the total amount of post-rent income still went up by 50%.
- dsfyu404ed 8y agoProtip for those of you who are rolling in the $$ and considering this: The locals hate it when you do this because you screw with their low CoL so please don't shove it in their face by being politically active as well.
- 8y ago
- toasterlovin 8y agoI’d guess that, in practice, the ratio is more important for birth rates. Humans seem to be wired to judge their position in life relative to those around them. So, you make more, but then you end up around other people who also make more. And now it doesn’t feel like you’re making that much money. The crazy thing is that this seems to hold true almost all the way up to the 1%. IMO, the winning strategy is to be weird.
- nautilus12 8y agoNo, this should end up being about the same. This means that household is extremely over leveraged in household cost. Suppose that their income is cut in half, they would have to come up with 250k just to keep their housing expenses alive. The net result of this is that on average you would be averse to having kids if you knew that they could suddenly be thrust into this circumstance.
- branchless 8y agoIt's the average. If the median wage was $1MM all goods would be way more expensive. But all this is wrong because rents rise to soak up income. If we all earned $1MM rents would be most of that if all other goods stayed the same.
- isostatic 8y agoThis was shown. When household incomes increased as women working became the norm, households had more to spend on housing, which meant house prices ballooned. Much of the rest of the money was taken by things like childcare, gardening, cleaners, etc. This had the end result that those who want to stay at home can't, society is now based arround two decent income salaries.
- throwaway713 8y ago> All else being equal, I would gladly earn $1 million per year and spend 75% of it on rent Ah, so you want to live in San Francisco
- shados 8y agoThere IS a reason why rent in high cost areas are so, well, costly. If you go to NYC or SF and make 400k/year after tax, who cares if housing costs you 300k out of that. Especially if you're buying, in which case you can get part of your money back once you sell.
- pxeboot 8y agoAnd when the bubble pops, how long will you be able to make your 30k/month mortgage payments?
- hshehehjdjdjd 8y agoYou won’t, because you were smart and rented instead. :)
- kevin_thibedeau 8y agoIf you were smarter you'd have commuted in from the suburbs and banked the money for retirement.
- ido 8y agoIn SF the suburbs are called Silicon Valley and are also expensive.
- daveFNbuck 8y agoThere are also suburbs across the bay that are cheaper.
- 8y ago
- psandersen 8y agoI think you have to consider downside risk, if the economy goes bad or you lose your job how easily can you make rent and survive? At 75% you have much less margin than at 22%.
- forapurpose 8y ago> percentage of income spent on housing is not a great metric. A better metric is absolute income minus housing costs. / All else being equal, I would gladly earn $1 million per year and spend 75% of it on rent, because that remaining 25% would be a heck of a lot of money. It makes sense, but that doesn't make it true. Is your argument based on your personal beliefs, or is it based on actual outcomes in the economy? As someone once pointed out, if 'makes sense' was a reliable indicator of the truth, we would have had accurate physics in 5,000 BC.
- PhasmaFelis 8y ago> It makes sense, but that doesn't make it true. Is your argument based on your personal beliefs, or is it based on actual outcomes in the economy? Seems to me it's based on basic arithmetic. Are you arguing that $250,000/year isn't a very comfortable take-home wage?
- forapurpose 8y agoI'm saying that the currency of fact is evidence, not speculation and analysis. It's an interesting theory, but we need evidence to know whether or not it's true. That's what science and reason are about.
- RealityVoid 8y agoThat pretty much strengthens the position of the article, assuming living surface need increases proportionally with head count. Then adding people to your family will quickly become unsustainable because your income is fixed but costs increase far quicker.
- seattle_spring 8y agoAnd that remaining 25% would help you pay for rent in retirement... How? Not everyone wants to move to Ohio to retire.
- kgwgk 8y agoIt’s not about you, it’s about aggregate housing costs. If everyone was earning $1mn and spending $750k on rent, the remaining $250k may not be a lot of money. But of course you’re right, everything else being equal I would also be happy to earn $1bn and spend 99% on rent.
- mseebach 8y agoNo, the aggregate isn't important: the thought experiment is the same as if everybody earned $251k and spend $1k on rent -- but the percentage of income spend on rent would be radically different. But yes, if everybody suddenly had $250k disposable income, prices would be higher. I think the point GP is trying to make, is that it matters more if you can afford in absolute dollars to have a family on whatever is left when you're done paying rent, not what the percentage is.
- kgwgk 8y agoAnd my point is that an “everything else being equal” argument about the income and spending of an individual is not particularly useful when discussing demographic issues.
- sidrajaram 8y agoYes, the cost of things is more expensive in dense cities, but by 2x-3x for some services and not at all for buying a pair of jeans from a retailer - those prices are pretty much uniform everywhere, modulo state/local taxes. I'll argue that one's quality of life is better in SV on $250k vs $70k in the rural midwest or $100k in a midwestern city - obviously this will depend on spending patterns, which depends on personal preferences. But for me, it's a conscious decision to make more and spend more on a west coast city.
- Retric 8y agoThe problem is you need more space after having kids. If your already spending 75% of your income on rent adding another room is not feasible. Or more basically you need a significant surplus to be able to afford kids.
- deleted 8y ago[deleted]
- flexie 8y agoIf you live in an area where housing costs are high, most other cost is likely also higher (tax, food, daycare, school, etc.).
- grosjona 8y agoNo you wouldn't be glad because most of that remaining $250K would go towards paying other people's rents... E.g. When you go to a restaurant, everything on the menu would cost more to cover their rent. The cost of rent factors into pretty much anything that money can buy.
- usrusr 8y agoBecause the ratio is what makes people aim low or high. If it takes 75% to have a house, is very attractive to live in something smaller and pocket the delta for fun and games (and/or stash it away for a downpayment later in life). High wage/rent areas will only exaggerate this, since many of the luxuries in question are not coupled to local markets (gadgets, vacations, stressing away for living in a cheaper place) If shelter is cheap, skimping there won't be worth it.
- usrusr 8y agoExaggerated example: in a high wage/rent area, I'd rather have a boat than an extra bedroom. In a low wage/rent area, I'd rather have an extra bedroom than a slightly bigger TV.
- jychien 8y agoThe ratio of income is important in another way. Many apartments (in the Los Angeles area at least) want or require tenants to only spend X% of their gross income on rent. Places with $750k/year rent probably don't care, but for the median working American it matters a lot.
- collyw 8y agoIf you are earning a million a year you are in the outliers where percentage cost is fairly irrelevant. For people on "normal" salaries it makes more sense to use a percentage.
- ksec 8y agoI have argued for the same as well, but not many cares. However I don't believe in minus housing cost, as everything is relative. We should simply have housing cost / wages shown at different distribution level. Median, 60% and 80%, etc. Although I am glad the world has finally caught up to the housing prices problem. Hong Kong people has been crying about it for decades.
- nazgul17 8y agoThat kind of metric would not be comparable across cities with different costs of life. Dividing by housing cost is a good normalising factor. You could divide your metric by housing cost, maybe.
- dexen 8y agoYou are missing one important factor: prices of locally rendered services will factor in the high housing costs of the service provider workers, and of service establishments. I.e., all the services will be significantly more expensive just as well. And even goods' prices will reflect the high rent costs, given that stocking & sale of good requires[1] employment of local workers, and purchase/rental of local commercial space. -- [1] even the automated, self-service stores require certain amount of human work as of now.
- utexaspunk 8y agoSo you need absolute income minus housing costs [PPP]?
- webXL 8y agoWell, it would be PPP adjusted income minus nominal housing costs then. But since housing costs factor into everything you purchase, that metric would probably only give you a sense what was being spent locally vs. spent everywhere else and/or saved.