I’ll be talking at Portland’s Better Living Show this Friday, March 23 about the concept of financial sustainability. Renters and owners alike must choose how much they think they can afford when it comes to their housing — but owners occasionally over-stretch on the assumption that owning a home has a future savings function or partial investment function, while renters may either spend a large chunk of their monthly nut on housing because they feel they need to live in particular neighborhoods or, if starting out, may simply not have that much of a nut to play with each month.
So, just what are the new considerations for making a decision that makes financial sense for you? Government leaders began talking about “sustainability” with respect to home lending several years ago. Then lenders began lowering the debt ratios (what percentage of your income debt represents) they’d accept from a borrower, as well as what proportion of your income should go toward housing debt. And landlords have their own criteria for what constitutes a rent you can afford–often they don’t want it to exceed 30% of your income.
Indeed, you can say that the whole housing boom, bust, and correction we’re slowly exiting has something to do with indecision on the part of the American government, banks, and households themselves about how much out-of-pocket money we should spend on housing. And how much is a variable amount — if you’re wealthy, and spend 40% of your income on housing, you may have plenty of funds left over for emergencies. If you’re starting out, don’t earn much, and have student loans, spending 40% could be folly. We’ll bat around some ideas about housing spending–and how to think about it.