Houses are expensive. Rent is expensive. And some experts are calling this a full-blown housing affordability crisis. Depending on where you live, having anything more than a tiny apartment may seem like a financial impossibility. In densely populated, high-demand urban areas, you need an impressively high salary just to make ends meet. And even in more sparsely populated rural areas and suburbs, you might balk at current housing prices.
How did housing become this expensive?
And more importantly, what can you do about it?
Why Housing Is So Expensive
These are some of the main reasons why housing in the United States is so expensive right now:
- Increasing demand. First, you’re seeing a rise in demand. Our population isn’t increasing as fast as it used to, but it’s still increasing, which means there’s a steady increase in the demand for housing. People are also working from home more frequently, so they’re more interested in investing in a luxurious living space. There are only so many houses currently available, so this surge in buyers naturally results in higher prices.
- Low interest rates.While the Fed has increased interest rates in the past few months, interest rates are still near historic lows, and just a few years ago, they were close to zero. When the Fed lowers interest rates, it allows banks to borrow money incredibly cheaply, which in turn, allows consumers to borrow money at ridiculously low interest rates. Borrowing money at a low interest rate generally means your monthly payment will be lower, and since many home buyers look at the monthly payment, rather than the total purchase price of the home, they’re typically willing to spend more money on a home than they otherwise would. Put simply, lower interest rates lead to higher housing prices, and higher housing prices lead to higher rent prices.
- Inflationary pressure.There’s also inflationary pressure. Thanks in part to a dramatic increase in the money supply, inflation has pushed the costs of everything higher in the past few years. Intelligent investors anticipating this inflation bought up houses at low interest rates, as “good” debt is especially valuable during inflationary times; this contributed to the wave of increased demand. Also, inflation is pushing housing prices higher by itself.
- Regulatory restrictions on new housing. If we wanted to decrease the pressure from these variables, we would incentivize the construction of new housing options. But unfortunately, strict regulations on new housing make this unaffordable in some cases and impossible in others. There isn’t enough new construction to keep up with demand, which means housing inventory is kept artificially low.
All these factors, and others, combined to push prices higher.
Simple Ways to Thrive When Housing Is Expensive
Okay, so what can you do in practical terms? You don’t have any direct control over the housing market; you can’t wave a magic wand and make all the prices come down. You can hypothetically wait until housing prices come down so you can buy something more affordable, but this may be an exercise in futility if housing prices rise according to the same patterns they’ve historically followed.
Instead, consider following these strategies to thrive even when housing is expensive:
- Live below your means.One of the most commonly regurgitated recommendations is to spend no more than 30 percent of your gross (pre-tax) income on housing. While this rule is debatable, it’s an excellent general guideline to start with. Generally, you should strive to live below your means, even if that means making sacrifices or compromises. You may want to live in a two-bedroom house, but if that pushes the 30 percent rule, you may consider living in a one-bedroom house temporarily. If you can afford to spend only 20 percent of your gross income on rent, you can end up with savings every month, which you can then accumulate and use for a down payment on a house of your own.
- Buy, don’t rent (in most cases).Most people benefit from buying, instead of renting. This isn’t true if rent is especially low in a given area or if you’re only going to stay in an area temporarily. But if you want to live somewhere for a while, purchase the real estate yourself; mortgage payments and monthly rent are often similar, but with mortgage payments, you’ll be building equity.
- Consider new alternatives. Have you considered living somewhere else? Cost of living varies dramatically from area to area in the United States. Moving to a different state, or even a different city within your state could allow you to save thousands of dollars a year. And if you’re already working remotely, you may not even have to look for a new job.
- Rent a room/sublet.You may be able to subsidize your housing costs by renting a room or subletting your apartment. Just make sure it’s legal to do this, according to whatever contracts are already in place. In some cases, you may be able to cut your housing costs in half!
- Think long term. Finally, try to think long term. Make cuts and compromises now so you can live a better life in the future.
We are all feeling the pain of higher housing costs, but you shouldn’t have to suffer more than necessary. With these strategies, you can cut your expenses – and forge a path to financial stability.