Via Naked Capitalism

The Wall Street Journal has an important story on how people with what seems like pretty good household incomes are getting more and more indebted in keeping a middle class lifestyle.

The Journal gives a sympathetic portrayal, using some recent work by Georgetown law professor Adam Levitin to show how much significant costs have risen relative to wages

From the story:

Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau. When inflation is taken into account, that is just above the 1999 level. Over a longer stretch—the three decades through 2017—incomes are up 14% in inflation-adjusted terms.

Average housing prices, however, swelled 290% over those three decades in inflation-adjusted terms, according to an analysis by Adam Levitin, a Georgetown Law professor who studies bankruptcy, financial regulation and consumer finance.

Average tuition at public four-year colleges went up 311%, adjusted for inflation, by his calculation. And average per capita personal health-care expenditures rose about 51% in real terms over a slightly shorter period, 1990 to 2017.

The article gives a layperson-friendly version of a traditional economist’s argument in favor of easy access to consumer debt, namely “smoothing of expenditures.” That’s a polite way of saying going into debt to buy education, or a car, or a vacation, or Christmas presents.

The problem, of course, is that that view assumes that future income will be there. In a world where the average job tenure is only a bit over four years, anything other than very modest use of debt runs the risk of getting caught on a treadmill, particularly with so many lenders set up to kick already not-low interest rates up to penalty levels in the event of a late payment.

Of course, in the bad old days of my youth, most people saved to buy a car or a vacation or presents. But young people weren’t carrying student debt millstones. If they went to coastal cities to build their careers or enjoy an urban lifestyle, the cost premium over living in a city in the heartlands wasn’t as high as it is now (save maybe for San Francisco and New York, which have long been very expensive relative to the rest of the US).

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Arguably things are better on some fronts:

Counting all kinds of debt, including mortgages, consumers aren’t nearly as debt-burdened as they once were. In the fourth quarter of 2007, the last year before the financial crisis struck, households devoted 13.2% of their disposable income to debt service. In the first quarter of 2019, that number was 9.9%, largely due to low interest rates.

Partly because of widespread refinancing, mortgage payments since the start of 2017 have claimed the smallest slice of disposable personal income in decades, in the low 4% range, according to Fed data.

The reason this is less meaningful than it might seem is that the rise in health insurance and medical care costs have eaten away at disposable income. In addition, with interest rates super low, saving enough to have an adequate income in retirement becomes more daunting. And parents are pressured to save to help put their kids though college.

The article gives a high-level profile of two struggling couples. The first:

Jonathan Guzman and Mayra Finol earn about $130,000 a year, combined, in technology jobs. Though that is more than double the median, debt from their years at St. John’s University in New York has been hard to overcome.

The two 28-year-olds in West Hartford, Conn., have about $51,000 in student debt, plus $18,000 in auto loans and $50,000 across eight credit cards. Adding financial pressure are a baby daughter and a mortgage of around $270,000….

They no longer dine out several times a week. Other hits to their budget were hard to avoid, such as a wrecked car that forced them to borrow more.

Ms. Finol hasn’t used her T.J. Maxx credit card in more than a year. She makes the minimum monthly payment on its balance of approximately $7,500. Her monthly statement says if she continues at this pace, she will need about 23 years to pay it off.

Earlier this year, Mr. Guzman put his credit cards in a Ziploc bag with water and placed it in the freezer. In May, however, they went to two weddings, and needed a card to cover the cost of a gift and a rental car.

Mr. Guzman removed one of the credit cards from the freezer. “A lot of things came at once,” he said. Since then, he’s taken the rest of them out, too.

The Wall Street Journal was hostile, deeming the couple having bought a new car back in the day as opposed to an under $10,000 used car and going to weddings when they were so heavily indebted as profligate.

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But even if that’s narrowly true, it misses a bigger picture, which is their budget-buster was almost certainly having a child. And US society is strongly oriented towards young people having children, as witnessed by the fact that fertility treatments are covered by health insurance. We don’t know the size of their house, but it’s almost certain the Guzmans bought a place that was bigger and/or in a “better” neighborhood because they planned to become parents.

A corroborating anecdote: a friend whose Yale-graduate son married a fellow Yalie is torn over whether or not to have children. They are kid-crazy, but to be able to afford a bigger house, they’d have to live so far from their jobs that they’d each have a one-way commute of an hour+ when things went well. And that sort of time sink doesn’t mesh well with attentive parenting.

Another story where the housing demands of having a child further stress shaky finances:

Elizabeth and Andy Bauerle have been trying to buy a house for seven years without success, despite having combined income of about $155,000—in the top 20% of households, according to census data.

The two 34-year-olds face a common conundrum. Their jobs are in the Seattle metro area…

The Bauerles have $30,000 in their down-payment fund, but the kind of house they want—a two-bedroom, two-bath with a yard—starts at around $600,000 in and around Seattle.

They figure they would need to make a down payment of $70,000 to keep the mortgage payment manageable, given their other obligations. These include student-loan debt of about $88,000 that consumes around $1,000 of income every month.

Ms. Bauerle said about half of their take-home pay goes out the door for that plus $1,750 in rent and $1,200 in child care for their son. “Four thousand dollars of our income is immediately spoken for,” she said.

Like many families, they have stretched out the monthly payments on an auto loan. They have a 2013 Subaru, bought used three years ago. They won’t write the last $240 monthly check on the car until it is about nine years old.

The problem with renting is of course that renters are exposed to escalating lease costs and don’t build equity, although housing market volatility means that isn’t a given. One of my siblings bought his house in 2007 and even though he lives in an affluent university town, it’s only in the last year that his house is worth more than he paid for it.

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The story also fails to mention another wealth-sapper, that of divorce. Couples that stay married do best in net worth terms.

One solution might be more communal living (retirement centers are a commercial response to this need) but technology, schooling, and other forms of acculturation seem to be weakening social skills and encouraging more isolation. So while there may be local exceptions, on a collective level, we are working against our best interest on many levels.


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