Wednesday, March 4, 2009

Are You Middle Class?

If you live in the United States, you probably think that your household wages land you squarely in the category most of us call "middle class." Most people in the U.S. tend to identify themselves this way, even when their incomes are greatly above or greatly below the median level.

For example, if you watch the news, you know that households that make over $100,000 consider themselves middle class and say so, often while fretting about how much they will have to pay in taxes in the course of the coming years. In fact, during the last presidential campaign, some people were very upset that Barack Obama wanted to rescind the Bush tax cuts for households earning over $250,000. They argued that in America today, $250,000 is a solidly middle class income, and that making people who earn this much go back to paying more in taxes was a direct attack on the middle class.

According to data collected by the U.S Census Bureau in 2005, only 15% of the households in the United States earn over $100,000 and only 1.5% of the households in the U.S. earn over $250,000. By any mathematical standard, the top 1.5% of a group of wage-earners cannot be considered to be in the "middle" of any kind of income chart. And yet when asked to self-indentify, most of these folks will call themselves "middle class."

So will most people who make the dead center median household income of $44,389. That figure--$44,389--is the halfway mark, the number at which exactly 50% of the households fall short and 50% exceed the mark. A household earning $44,389, depending on deductions available to them, the number of dependent they can claim, and so forth, will take home around $600-$650 each week.

Usually this household amount is split between two working halves of a married couple, but not always. The median annual income for a man In the U.S. currently is just over $45K and for a woman it is just over $33K. Since most married couples do both work, this means that in many households one member works part-time, or both members make far less than the median. Half of the households in the United States live on less than $45,000 per year.

Almost a third of the households in the U.S. (28.22%) make less than $25,000 each year. That's $25,000 to support the entire household, including dependent children, and even that low annual income doesn't put those households at the official government poverty level. A person making $25,000 per year takes home (depending on available deductions) between $325 and $365 each week.

Why am I bringing this up right now?

It isn't to heap guilt upon people making over $100,000 or over $250,000. If you make that much in your household, that's great. It's better than great. Enjoy every dollar and don't beat yourself up, I'm sure you earned it.

However, if your household earns over $100,000 or over $250,000 and you persist in identifying your situation as "middle class" and like it when others identify you in that way, please do understand that taking such a stance badly skews the economic realities most working people in this country face day in and day out. People who watch a lot of television think that the kind of life that can be purchased with a $100K income is normal and average.

It isn't. Not even close.

No wonder we are in trouble with money in the U.S.

For years American "consumers" have been pushed to achieve a lifestyle that most of us don't come close to making enough money to afford. My feeling is that this is a real and serious problem, and one that just is not being talked about very much, if ever.

An Affordable House?

A friend of mine got into an unpleasant exchange with a realtor over a column they wrote for a blog. It was a sarcastic and they should have known it would draw fire but they were irritated, and one way to deal with irritation is to write what's on my mind.

Anyway, this realtor was explaining that he was still able to put "single moms who make $32K or $33K into $100,000 homes for only about $850 a month" and that his ability to do this was thanks to tax breaks provided by the federal government that help him get houses sold in this troubled market. He also said my friend was stupid, which, admittedly, sometimes they can be. I'll give him that. But that's really beside the point. The point is, that woman can't afford that house.

On the surface, it all sounds fine. Nothing weird or out of line here at all. A rule of thumb in the industry has it that you can take about three times your annual income as a guide for how much to spend on a house. Another way to put it, one you might have heard lately on TV, is that you should shoot for no more than a 31% debt to income ratio.

But the thing is, there is no way in hell most single moms making that amount of money can afford a house with a $850 monthly mortgage payment.

Why not?

OK, let's think this through.

An annual salary of $33,000 will give our imaginary single mom a weekly take home check of between $460 and $500 depending on her deductions, or a monthly take home income of a little over $2,000. Right off the bat, it takes almost two full paychecks to make the mortgage payment. So now we're down to just under $1200 to actually live on for the month.

That's less than $1200 for everything else that isn't a mortgage payment: food, gas, doctor bills (remember those recurrent ear infections kids get when they are under 4?), day care expenses, clothing, utilities, car payment, public school tuition (which in the U.S. is where poor people go but we still have to pay), entertainment, and incidentals.

Let's take a look at a typical budget for our new homeowner Mom:

Food and grocery items--$100 per week (this is a VERY modest food budget for a household with kids) or $430 per month. Utilities (gas, water, electric, trash)--$350 per month (again, I'm guess-timating on the low side--some areas of the country will cost much more), deduction for health insurance shared with employer--$60 per check or $260 per month, gasoline at $25 per fill up (obviously we can't count in it staying that low) with one fill up per week = $130 per month...

You know, we're already up to $1170 in monthly expenses, even estimating on the low side, and I haven't let anybody go to the movies, subscribe to cable television, get sick (even with insurance, it is very easy to rack up $500 or more in medical bills in a single weekend with a sick kid), pay for a cell phone, pay school tuition, or fix the car. Or, for that matter, buy the car. Already we don't have enough money here to support a family, even a small family, in our modest $100,000 home that the bank says this gainfully employed single mom can totally afford.

No problem! Once she has a house, someone will issue her a couple of credit cards, and she can proceed to go deeply into debt like almost all other American families who think they are middle class but don't have incomes adequate to their actual basic needs and expenses.

The banks will skim even more money in interest off of her already grossly inadequate income to cover the risk of unsecured lending, and eventually she will probably default or file for bankruptcy, hopefully not until the kids are raised and have had enough to eat and gotten their ears fixed.

Now Let's Visit That Auto Worker

Auto workers are greedy bastards, aren't they? I’m taking my life in my hands with this one here in the Kokomo, Indiana area but bear with me and kindly put the torches and pitchforks away till I finish.

Luckily, even members of the infamous UAW now start their working lives at about $14 an hour, which is roughly the same as the starting wage at most Toyota or Honda plants. UAW workers still cost GM, Chrysler, and Ford more money than Honda and Toyota workers do, because the American auto industry has been paying for health care and retirement benefits for over 100 years, and the Japanese makers have not. Our government is the only government in the developed free world that makes private industry and private individuals shoulder these costs.

$14 an hour comes to about $29,120 per year. If our auto worker works forty hours each week, he'll make less than our hypothetical single mom who is already rationing diapers. (Stop pooping! Stop!) If he gets some overtime, he'll make a bit more, and if he stays at the plant and builds seniority he'll see pay increases after five or ten or twenty years--or least there was a time in history when this was true. If on the other hand he's laid off frequently--which he definitely will be at first--he'll make a lot less than that for years.

In order to afford any kind of house at all, our auto worker is going to need a wife, and she's going to need to work full-time. How we do know that? We know that because we just discovered that our $33,000 a year single Mom doesn't make enough to float a household if she buys a home that is less expensive than the median U.S. housing price. (As of the fourth quarter of 2008, the median price of an already-existing home in the U.S was $197,100--down from $217,000 in 2005, the year in which our income data was taken).

Now if more than half the people in the U.S make under $50,000 for an entire household, and the median housing price is still $197,000, what does that tell you about the affordability of housing and the level of wages in the U.S. today?

Either people don't make enough money, or homes are overvalued, or both.

I personally think it's both, but that is fodder for another blog.

I just thought it would be interesting to lay all this out so that the next time someone pops off about how "Americans spend too much money," you might have some numbers you could throw at them instead of cuss words.

The fact is, while some people will always spend too much money on foolish things, most American wage earners today do not make enough money right now to cover shelter, food, and transportation. Or, they make enough to just cover all those basics but only if nothing ever goes wrong.

That single Mom making $33,000 a year, what she did was, bought a house for under $40,000. The payment was a bit more than a week's take home pay and the house was small and in a marginal area. It was still very, very hard. It's even harder today, even though her kids are grown and she has a partner now. Everything costs much more than it did even five years ago, and the cost of something going wrong is now staggering. A single visit to the emergency room can result in a five figure bill from the hospital alone if you have no insurance. Even with insurance you can pay thousands.

I think most Americans work hard and want to make a better life for themselves and their children, but the odds are stacked against them right now. In the area of Indiana where I live, if you make $10 an hour, people will say, "That's pretty good." Ten dollars an hour is $20,800 a year if you work 40 hours a week. That's about $330 a week.

One bedroom apartments here start at $725 per month.

I'm not trying to bring you all down, I'm just trying to inject a little reality into a really insane situation. We can all have our ideologies and opinions. There's nothing wrong with that.

But at a certain point you have just come out and to say the obvious:

Money talks, bullshit walks.

What we've got here is an enormous pile of bullshit…and no money. Good thing we've got some shovel ready projects. As the saying goes, “if you can handle a shovel, you'll always have a job.”

But not necessarily a house.

This Old House:

Blueridge Cabin Home:

No comments: