Chapter 7 – Housing

Chapter 7 – Housing

“Everyone has a fundamental human right to housing, which ensures access to a safe, secure, habitable, and affordable home with freedom from forced eviction.” ~National Economic & Social Rights Initiative[1]

“All of these government factors contributed to creating a situation in which millions of people were buying homes they couldn’t afford, in which the participants experienced the illusion of prosperity, in which billions upon billions were going into bad investments.” ~Forbes.com, 2008[2]

We are finally at the point where we can start discussing how spending our money impacts the financial genome.  In our lives, our expenses range on a spectrum from basic needs of survival to luxuries. How you define each expense is a personal choice; however, shelter is almost always considered a basic need, and is where we’ll start our spending.  A basic need is not to be confused with a basic right, which typically drives a political discussion.

Conventional and modern Certified Financial Planning uses a “28/36 rule,” which states no more than 28% of your monthly income should be on housing costs and no more than 36% of your monthly income should be on debt (includes mortgages, consumer debt, etc.).[3]  Dave Ramsey, a popular financial guidance advisor offers a similar recommendation of no more than 25-35% on housing[4].  Finally, the Bureau of Labor and Statistics determined 2015 average housing expenses were 32.9% of income[5].  So, based of all those numbers, the average real expense and advice is 30%, and that’s the percentage we’ll use.  Before we go further, you should check your housing costs to see how much you spend. Do you spend more on housing than 30%?

Once you’re an adult and no longer live with your parents, housing costs are generally within your control and your income is typically the basis for making that decision.  At about this point, your bias may have already kicked in and you’ve already decided that renting or buying is the best option. Please try and clear your mind of which decision is optimal because it truly comes down to timing, location, and the current financial landscape.  To have the greatest influence on the genome, the key to optimizing your income is to consider the Return on Investment (ROI) of every next dollar you spend. Additionally, when you make a decision to buy or rent, there is an opportunity cost with doing one or the other.  So, the decision to buy versus rent is based on the potential ROI and opportunity cost.

There are many types of housing that we get to choose from.  Due to my military background and my frequent moves, walking through the types of housing I’ve been in will help us navigate through the options many of us have.  The key takeaway is that I started small and moved to bigger, more expensive housing options as my income increased.

The first housing type I lived in as an adult was a military dormitory.  This was an extremely small (maybe 150 sq ft.) 1-bedroom, 1-closet, shared bathroom and kitchenette single’s room. It came furnished already, and I wasn’t required to pay for it—well, sort of.  The military pays for dorms by utilizing the funding the Department of Defense receives from federal taxes. In theory, the estimated cost of the housing is deducted from my pay.

After a couple of years, I moved out of the dorms and into a 1-bedroom apartment which had 1 bathroom, a small living room, and a kitchen.  The apartment was nearly 400 sq ft., which felt big compared to my small dorm room.  Once you move out of the dorms or military housing, you receive a Basic Allowance for Housing (BAH).  For civilians, this is just part of your normal salary. I spent about $350 a month and my salary was $1,200—roughly 30%.

A couple years later, we rented increasingly larger houses; the largest being 1,400 sq ft.  Each time we moved, I ensured that (even with all bills included) we never exceeded 30% of my salary.  The places we rented were slightly bigger or were newer.  We finally bought our first house nearly 4 years ago. Even with all utilities, our monthly housing costs are down to 20% of my salary.  This is the definition of living within your means.  If your housing expenses exceed 30%, then you have less income to go to all the other expenses.  Some people I’ve helped with their personal finances have housing expenses approaching 55% of their income.

Despite all the political missteps and the insatiable greed of lending companies and brokerages, if the public kept housing costs to less than 30%, the United States may have avoided the 2008 financial collapse.  Products like interest-only and punishing adjustable-rate mortgages would have been quickly exposed under the 30% model.  How much are you paying in housing costs?  Let’s look at how spending your salary on housing impacts the financial genome.

For starters, you are part of a $217 TRILLION global real estate market[6].  Isn’t that amazing?  Real estate is the combination of all apartments, townhomes, commercial buildings, residential homes and everything in between.  You have a choice of either renting from a company or an individual or buying your own property.  We must be careful on how we use the word “own” in our lexicon.  Typically, people need a loan to buy a house, and you’ll always need to pay property taxes.  So, while you have a loan, the bank technically owns the property.  It is also important to realize the actual value of a property is based on what a buyer is willing to pay.  Many people confuse this philosophy, thinking there must be an intrinsic value of real estate, making it better or worse than any other investment.

In the following chapters we’ll analyze the specific genome connections we connect to when buying or renting.  For now, consider us entering a new galaxy—the “housing galaxy.”  Housing is incredibly connected between all ranges of government, other individuals, corporations, shareholders, insurance companies, and billionaires.  You impact all of these.

[1] https://www.nesri.org/programs/what-is-the-human-right-to-housing

[2] https://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html

[3] https://www.goodfinancialcents.com/how-much-of-mortgage-house-payment-can-you-afford-based-salary/

[4] http://www.leavedebtbehind.com/frugal-living/budgeting/10-recommended-category-percentages-for-your-family-budget/

[5] https://www.bls.gov/opub/reports/consumer-expenditures/2015/home.htm

[6] http://www.savills.com/_news/article/105347/198559-0/1/2016/world-real-estate-accounts-for-60–of-all-mainstream-assets