Housing costs leave millennials hurting

Interest rates are finally rising and it’s more expensive to borrow money now to buy a house. But living in Middle Tennessee — surrounded as we are by cranes, homes under construction and ever-denser traffic thanks to all the newcomers — may skew our ideas on the housing market. You may have heard about the rule that says housing should account for no more than 30 percent of your income. Is that rule of thumb still valid?

Where 30 percent came from

The ratio traces its beginning back to Massachusetts Senator Edward Brooke, who was the first African-American to be popularly elected to the Senate since the Civil War. The Brooke Amendment capped rent in public housing at 25 percent of residents’ income. Congress increased that rent ceiling to 30 percent in 1981 when they were faced with a budget crisis. That number has stayed the same since then, thus the 30 percent rule of thumb.

What millennials pay for housing

Last year the National Endowment on Financial Education partnered with Parents magazine to conduct a survey on the financial struggles of millennial-age parents. They found that 40 percent of millennial parents’ monthly incomes were going toward housing. Astonishingly, one-fifth of those were paying between 50 percent and 59 percent, and 8 percent were paying 60 percent to 74 percent. The vast majority of those in their early 30s and younger are paying rent, not a mortgage. Rental rates have soared since 2005, making it harder for renters to build a down payment for a home.

• Related: How public housing will ease Nashville's housing crunch
• Related: 4 things to do regarding gentrification, housing, taxes

Housing market continues to lag

There are reasons to believe that the situation could get worse. Although housing starts and building permits are up this year, thanks to the upward ticking of the economy, housing continues to lag the business cycle and longer-term data suggests that there are not enough homes to satisfy the demand of millennials — driving up prices. As the Global Wealth and Investment Management division of Bank of America Merrill Lynch reported in its March 24 letter from the CIO, many undocumented construction workers left during the recession and may not return due to immigration reform. Given that labor represents 25 percent of a home’s sales price, a labor shortage could further drive up housing costs.

A pricey proposition

We’re all aware of, and perhaps exhausted hearing about, today’s staggering student debt. However, I bring up that $1.3 trillion figure to make a point. If 40 percent or more of your monthly income is earmarked for housing and you’ve also got $300 to $500 in monthly student loan bills, a huge chunk of your budget could be servicing debt alone. That leaves precious little for food, transportation and childcare, let alone saving and investing.

Recalculating the housing math

Here are some tips if you want a home but are at your financial limits:

• Get smaller and further away. If too much of your budget is going toward housing, whether you rent or own, consider decreasing your square footage and lengthening your commute. If you’re looking to purchase, you don’t have to buy as much house as you’re approved for. In fact, that could turn out disastrously. 
• Refinance. Rates are going up, but they may be lower than your current rate. If you’re paying 5 percent or more in interest on your mortgage, have good credit and plan to live in your home five years or longer, it might make sense to refinance. Get a quote and crunch the numbers.
• Stick to a budget and a financial plan. Be disciplined, but accept that you will make mistakes. Learn from them and stay the course. If you need help, talk to a financial planner. 
• See long, not short. As shocking as it may be to hear it, a person can in fact live without Starbucks, eating out, designer clothes, cable television and many other non-essentials. These things might make you happy in the moment, but years of it could add up to financial agony. As a financial adviser, I’ve never met a client who regretted tightening his or her belt earlier in life. I’ve met plenty who sorely regretted not doing it.

Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other week in The Tennessean.