For most people, housing is their biggest expense – experts recommend spending no more than 30 percent of your income on a mortgage or rent.
However, the JCHS study shows a large percentage of American households surpass this guideline. Because of unaffordable housing, they have less money to spend on other essentials, putting them in difficult financial situations.
Here’s a breakdown of the research — and what you can do to improve your finances if you’re spending too much on housing costs.
In Harvard’s State of the Nation’s Housing 2017 report, researchers found that one-third of households are cost-burdened, meaning they spend over 30 percent of their incomes on housing. The number of cost-burdened households has doubled since 2001. Even worse, approximately 19 million Americans spend 50 percent or more on housing.
The increase of unaffordable housing is due to several different factors. For one, house prices rose 5.6 percent since 2016. But there’s also a lack of inventory on the market, especially for smaller, lower-cost homes. Between 2004 and 2015, completions of single-family homes under 1,800 square feet dropped from 500,000 units to just 136,000.
For renters, the issue becomes even more difficult.
“The problem is most acute for renters,” said Chris Herbert, JCHS’s managing director, in a press release. “More than 11 million renter households paid more than half their incomes for housing in 2015, leaving little room to pay for life’s other necessities.”
The nationwide rental vacancy rate dropped for the seventh year in a row. While that’s good news for landlords, it hurts renters. With such a low vacancy rate, there is increased demand for fewer units, so landlords can raise rental prices.
Impact of unaffordable housing
When so much of your paycheck goes towards a place to sleep at night, you have to reduce spending in other areas to make ends meet.
Some households are forced to lower essential costs like medical care, groceries, or utilities. This strategy can be especially harmful in homes with children.
Nearly 25 million children live in households dealing with a housing cost-burden. To afford a roof over their heads, families may cut back on the quantity or quality of food they purchase, stunting their children’s health and development.
Other families end up forgoing retirement or emergency funds. And for families with student loans, spending so much on housing can mean falling behind on payments and risking default.
Any of these scenarios can have long-lasting consequences and can hurt you for years to come.
Can you afford a house?
In a competitive housing and rental market, finding a home you can afford within the 30 percent threshold can be difficult. Here are five tips that may help:
1. Find a roommate
While it might not be the most appealing option, finding a roommate can dramatically reduce your housing costs. Real estate website Trulia found renters save 13 percent of their income, on average, by adding a roommate to their home. In high-cost areas such as New York or San Francisco, you could save hundreds or even thousands each month.
Beyond your savings on rent, a roommate could also help you cut down on other expenses, including utilities, internet, or household supplies. If you and your roommate can come up with a schedule, you can also cut down on groceries by meal-planning and cooking together.
2. Rent out a room on AirBnB
If a full-time roommate isn’t for you, consider renting out a room (or even just your couch) for a couple of nights a month on AirBnB. Cost-conscious travelers book rooms on the app as an alternative to hotels.
Renting out a room for just a few nights can help increase your cash flow and offset your housing costs, giving you more wiggle room in your budget.
3. Launch a side hustle
If you have a roommate already or have cut back your expenses as far as you can, increasing your income is key to improving your housing situation. If a raise at your full-time job isn’t in the cards, starting a side gig can be a huge help. You can work on your own schedule when you need the money. On average, people with side hustles make $500 a month.
4. Sign up for an income-driven repayment plan
If you have federal student loans and are struggling to keep up with both your housing payments and your loan bill, one option to consider is an income-driven repayment (IDR) plan.
Under an IDR plan, the government caps your payment at a percentage of your discretionary income, reducing your payments.
5. Refinance your loans
If you have high-interest private loans, another option is to refinance your loans to increase your cash flow. By refinancing, you could get a lower interest rate or extend your repayment term, lowering your monthly bill.
The JCHS report highlights how unaffordable housing can affect people in many different ways. If you are thinking about buying a home or renting a new apartment, make sure you understand why it’s so important to stay within the affordable range to protect your long-term finances.
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