How much discretionary income do you have left after you’ve paid the monthly bills? Would that change if you were a homeowner instead of a renter, or vice versa?
PropertyShark and RENTCafé considered this question with a study of 52 urban areas. Using data from the Census Bureau and the U.S. Department of Labor, discretionary income was calculated by subtracting basic living costs and housing costs from the median family income in each city. Discretionary income represents your pool of potential savings.
According to the study, homeowners fare better than renters when it comes to having extra discretionary income.
Six of the homeowner markets averaged a monthly debt instead of an income, ranging from a $67 deficit in New Orleans, LA, to a $1,219 monthly loss in Miami, FL. Memphis, TN (-$146), Philadelphia, PA (-$719), Cleveland, OH (-$842), and Detroit, MI (-$905), round out the areas with homeowner deficits.
On the other side of the ledger, 58 percent of the homeowner markets show monthly discretionary incomes over $1,000 and three markets have discretionary incomes over $3,000. Manhattan, NY, leads with $4,692, followed by San Jose, CA, at $3,501 and Washington, DC, at $3,285.
The story is very different for renters. Only twelve of the 52 markets show any discretionary income at all, led by Virginia Beach, VA, at $883. The next highest figure is Austin, TX, at $265. Eleven of the renter’s markets have a monthly debt over $1,000, and two have monthly debts over $2,000: Boston, MA, with a $2,244 deficit and Brooklyn, NY, at $2,091 in the hole.
The PropertyShark study’s conclusion — buy a house to increase your savings — seems strange, but in urban markets where rent can take up large chunks of your income, this logic makes sense.
If you have enough money to be able to afford a home, your household is probably at or above the median income level and you can handle monthly mortgage payments — or you’re older and have already paid off your home. Conversely, if you’re renting, you’re more likely to be at or below the median income level but are still making high rent payments that take up a larger share of your income.
Renters are generally at a disadvantage, since the majority of mortgage loans have fixed interest rates while rents continue to rise. Once a homeowner gets beyond the down-payment-saving phase and actually buys a home, they can enjoy predictability in their housing costs.
How can renters bridge this gap? The obvious way is to find a job that pays considerably more than the median income, but that’s not practical for many urban residents. Renters who aspire to be homeowners will need to take exceptional measures in most cities, such as doubling or tripling up in the same rental space or consider moving to a lower cost-of-living market that still provides a suitably high wage.
The use of median incomes may be skewing homeowner data, given that all of the top five cities for homeowner savings also have high median household incomes (over $9,000 per month). However, homeowners still tend to struggle in certain markets because of very low median household incomes and relatively high costs of living (such as Miami).
How does your household compare? Regardless of your income or your home ownership status, if your discretionary income is low — or outright non-existent — it’s time to revisit the budget and make some changes. With some planning and discipline, you can accumulate more savings at the end of the month. What you do with your savings is up to you.
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