When the housing bubble burst across the country in 2008-2009, prices plummeted and, in many areas, there were more empty houses than people. This was a bad thing for sellers, as home values were down, but good for buyers and renters, who had plenty of opportunities to choose from.
In the decade since, there has been a significant recovery in most areas. The issue is that in cities where people want to live, there are not enough houses to accommodate the growing workforce, and prices are high.
This is fine if you are a seller, or even a buyer with good credit. If you are a renter,though, the market is tough, and the entry level price of a house is also rising. The dreaded Adjustable Rate Mortgage is making somewhat of a comeback as those who are less fortunate are trying to find a way to afford a home.
Low-income housing is at a premium and hard to get into, with waiting lists as long as a year. Other housing dominates family incomes, forcing them to make some hard choices. Here are some of the effects of the rising costs of housing on consumer credit.
Less Disposable Income
The general rule of thumb is that your housing should not cost more than 1/3 of your income. However, for many Americans who are low income or lower middle class, that number is closer to fifty percent. This means that those families have less disposable income.
In a consumer-based economy, this is a real problem. The less consumers consume, the less profit companies make, and the fewer employees they need. Or the hours of the least essential employees are cut, meaning those families make even less money. This s a vicious cycle. There are other issues though, ones that then impact credit even more than just lower income.
The Roommate Dilemma
One “solution” to the cost of housing is to take on roommates. This comes with risks as well as rewards, but it is hard to tell sometimes which is greater. First, rooms for rent gives those with lower income places to live that are more affordable. It does help them, but it creates other social and personal tensions.
For the homeowner, the roommate situation can help financially at least on a temporary basis. However, if the homeowner then becomes dependent on the income from that roommate, and the renter leaves, the budget is once again wrecked. This dependence on this kind of situation creates other issues for the homeowner, including increased utilities, potential damages, and the lack of privacy. The financial risk can potentially affect their personal credit.
The roommate is often not building credit or real rental history. When they eventually move, the landlord is more of a personal reference, and they have not been paying full rent, making it harder to prove they can afford a place on their own. Their credit can be potentially impacted as well.
Less disposable income and more spent on housing means families have less to save both for emergencies and for pleasure and large purchases. This can lead to some bad credit habits. For instance, a family might use a credit card for these purchases instead. If their credit is already not good, they may get a card with lower limits and higher interest rates.
This makes them more likely to “max out” a card, which impacts credit score due to how little available credit they have. This also makes them more susceptible to the dangers of a financial emergency. Without available credit or savings, they can hardly weather an emergency car repair or similar issues without taking out a personal loan, and using that money to cover their expensesand therefore creating more debt.
Borrowing to Live
The other danger in high housing costs is that often those who are spending too much on housing must borrow to live. Gas cards, store cards like those offered by WalMart, and other credit cards are used to cover everyday expenses, while at the end of the month the user is only able to make the minimum payment.
This means the credit balance is rising while the limit is not, again creating issues. If the credit card user misses a payment or two, their score drops even more, making it less likely they will get more credit to help them survive.
The Toughest Choice
The toughest choice comes in the area of health. Many will have to choose between going to the doctor and paying for prescriptions or paying for housing and food. The result is an unhealthy spiral. The person spending too much on housing will not pay medical bills, further impacting their credit.
Being underinsured and unable to afford healthcare, they are less likely to go to the doctor when they need to. Also, since for the most part, eating healthy costs more at least in the short term, they are unlikely to take as good of care of themselves, which promotes more unhealthy behaviors. Those who need the doctor more and need to be healthier are unable to afford to do so.
If they do stretch themselves, go to a doctor appointment or hospital they cannot afford, and then don’t pay due to high housing costs, their credit score goes down again. They cycle never seems to end.
What is the solution? Communities must plan for low to moderate income housing so that workers have an affordable place to live. Renters and buyers alike must be careful not to take on more than they can reasonably pay for housing, and if they do, to have an alternate plan in case something goes wrong.
The rising cost of housing has a huge impact on consumer credit, and if we don’t address it soon, we’ll have another housing crisis on our hands.