Americans spending too much of their money on housing

CNNMoney.com recently reported that too many Americans are spending too much of their money on housing. Some are stretching their dollars to get the nicest homes they can possibly afford. Others are struggling with low wages, underemployment, bad credit, and/or high rental costs that could be unsustainable, individually and societally.

40 million ‘burdened’

The Demand Institute, a non-advocacy and non-profit division of The Conference Board, is a think tank that focuses on understanding how consumer demand changes in industries, countries, and markets. The Institute recently surveyed 10,000 U.S. households and found that nearly 40 million Americans are spending more than 30 percent of their income on housing payments, property taxes and other home expenses. Even worse, 49 percent of renters are finding themselves in this “cost burdened” zone.

Another study released this summer by Harvard’s Joint Center for Housing Study reported that housing costs are near record highs and that 28 percent of renters are “severely” cost-burdened with housing costs eating up at least half of their incomes.

Debt-to-income ratio

When qualifying you for a loan to purchase a home, a bank will look at your debtto-income (DTI) ratios. There are two DTI ratios that are relevant when trying to qualify for a mortgage: front-end ratio and back-end ratio.

Local mortgage expert Karen Jackson of Waterstone Mortgage in West Chester says that the front-end ratio is the percentage of monthly gross income that is taken up by just the new projected monthly “PITI” (principal, interest, taxes, and insurance) payment. The back-end ratio is the percentage taken up by the new payment along with other monthly obligations, such as credit card minimum payments, auto loans, student loans, etc.” Jackson says that the back-end ratio is the one that someone is typically referring to when they use the term “DTI.”

Jackson says that “each type of financing has its own rules for DTI and, for most, the front-end ratio is not nearly as important as the back-end. For most conventional financing,

short-term rate at a record low near zero since 2008 to support the economy.

Friday’s jobs report also raised hopes that Americans’ pay might finally be starting to increase after barely budging since the Great Recession began seven years ago. The average hourly wage rose 9 cents in November to $24.66, the biggest gain in 17 months.

“The wage numbers are a wake-up call for the Fed,” said John Silvia, chief U.S. economist at Wells Fargo Securities.

Silvia noted Fed Chair Janet Yellen has pointed to stagnant wages as a key reason to keep rates low. Higher wages could lead to higher prices, and the Fed might feel compelled to raise rates to limit inflation.

Still, over the past 12 months, hourly pay has risen just 2.1 percent, barely above the 1.7 percent inflation rate. And Scott Anderson, an economist at Bank of the West, noted that inflation remains below the Fed’s 2 percent target rate and will likely remain muted because of declining oil and gas prices. That might give the Fed some leeway to wait.

Investors welcomed Friday’s positive news: The Dow Jones industrial average jumped 66 points to 17,981 in mid-day trading. The yield on the 10-year Treasury note rose to 2.32 percent, from 2.25 percent, a sign that investors foresee a Fed rate increase relatively soon.

Hiring last month was boosted by seasonal hiring related to the holiday shopping season. Retailers added 50,200 jobs, the most in 11 months. Transportation and warehousing gained 16,700.

Shipping companies have announced ambitious plans, after some holiday gifts that were ordered online arrived late last year. UPS has said it expects to add up to 95,000 seasonal workers, up from 85,000 last year. Fed-Ex plans to hire 50,000, up from 40,000.

But in a sign of the economy’s strength, solid job growth ranged across many industries. A measure of industries that added jobs reached its highest point since 1998.

Manufacturers added 28,000 jobs in November, the most in a year, and education and health services 38,000. Professional and technical services, a category that includes higherpaying jobs such as accountants, engineers and architects, gained 37,500 jobs, the most in 3½ years. Construction firms added 20,000.

The surge in hiring comes af ter the economy expanded from April through September at its fastest six-month pace in 11 years. The additional jobs should support steady economic growth in coming months.

Many analysts forecast the economy will grow 3 percent next year. If so, 2015 would mark the first time in a decade that annual growth would reach that threshold.

Even so, the U.S. job market remains far from fully recovered. There are 6.9 million people with parttime jobs, for example, who would prefer full-time work — up from 4.1 million before the recession.

And the pace of job creation hasn’t been fast enough to keep up with population growth. Many people who are out of work have given up searching for jobs — a trend that’s contributed to a lower unemployment rate. Once people stop looking for a job, they’re no longer counted as unemployed, and the rate can decline.

In addition, the number of people who have been out of work for more than six months is 2.8 million, more than double its pre-reces- sion level.

“At this rate, we won’t return to pre-recession labor market health until October 2016 — nearly nine years since the recession began,” said Elise Gould, a senior economist at the liberal Economic Policy Institute.

At the same time, the number of involuntary parttime workers has fallen 13 percent in the past 12 months. And the number of long-term unemployed has declined 30 percent.

Overall, the improving U.S. job market contrasts with weakness elsewhere around the globe. Growth among the 18 European nations in the euro alliance is barely positive, and the eurozone’s unemployment rate is 11.5 percent. Japan is in recession.

China’s growth has slowed as it seeks to rein in excessive lending tied to real estate development. Other large developing countries, including Russia and Brazil, are also straining to grow.

Yet the U.S. economy is much less dependent on exports than are Germany, China and Japan. U.S. growth is fueled more by its large domestic market and free-spending consumers.

That trend helps support the steady U.S. job growth. Most of the industries that have enjoyed the strongest job gains depend on the U.S. market, such as retailers, restaurants, and education and health care.

Seva, a chain of fast-casual spas located mainly inside Wal-Mart stores, has been adding jobs all year while expanding from about 75 to 100 sites. It plans to open more freestanding spas in Georgia and Illinois next year.

CEO Vas Maniatis says its customers have been willing to splurge this year on higher-priced services such as body waxing and facials.

“People want the services,” he said. “They are willing to spend more money.”