Tag Archives: Ann Arbor

(Revised) The Renters Dilemma

To rent or to buy? It can be a major dilemma and life decision, especially for young professionals in their 20s. And now the choice is becoming more and more complex as demand for rentals continues to skyrocket and, as a result, the price of monthly rent. A recent New York Times article shed light on the issue, explaining how the middle class simply can’t afford rentals like they used to.

Traditionally, renters aimed to spend no more than 30% of their income on housing and utilities. This benchmark is important as it allows for other important categories on a budget such as savings. The rental website Zillow conducted a study this week that examined how rental rates have been increasing and are now approaching or exceeding this 30% line in many cities. This issue is especially important for soon-to-be graduates, as pricey rent may stretch budgets and have a series of side affects. For one, saving for retirement and paying back student loans are often the first things to go in order to maintain a certain lifestyle for today. Both have severe consequences due to interest accruing. For savings, losing years of compounding on retirement accounts is crippling for goals of having an adequate amount of future wealth. On the contrary, paying the minimum in loans rather than a targeted monthly payment could end up costing thousands down the road as the higher balance continues to punish the lender via interest costs. Alternatively, it is possible to save money in other places – like buying cheaper, more unhealthy food. I recently wrote a blog post examining why the easy access to junk food is a huge threat to the U.S. population that can be found here. A graph showing trends for rental and mortgage rates is shown below:

Screen Shot 2014-04-16 at 9.53.05 PM

 

 

Of course, high rental rates aren’t just a problem for those headed to the real world. Ann Arbor’s off campus housing can be expensive and hard-to-find, and these increases in rent prices are going to have serious consequences for college students in the area. As shown in the graph below featuring Ann Arbor-specific data, Ann Arbor rental rates already are close to 35%. With many students either working part-time or using loans to pay rent, raising rates further could cause housing located near campus to cease being an option for many students.

 

Screen Shot 2014-04-16 at 9.52.27 PM

 

But what can be done? The other feature on the above graphs is the affordability of taking a mortgage. Unlike rental affordability, mortgages have seen a favorable trend since the recession. One potential option for students is to purchase an off-campus home. While this may seem extreme, especially for those planning to leave Michigan following their graduation, it could have a plethora of benefits. Most importantly, the thousands accrued in rent over the years wouldn’t be going to a bloodthirsty Ann Arbor housing company. Instead, those monthly payments would be available in asset value down the road.

Sure, I personally recommend living as close to campus as possible and enjoying the once-in-a-lifetime college experience. Commuting to school would be a completely different lifestyle and would turn many (including myself) away. However, having a home partially paid off coming out of college would be an absolute game changer and set a student far ahead from their peers. To conclude, I wanted to offer an actual example of buying rather than leasing as a student. A cousin going to school in Wisconsin decided to partner with two others and purchase a “fixer-upper” three years ago. Recently while home for the holidays, he mentioned to me that his group now own three homes in the area and he has yet to pay a cent in rent while in college.

While it may not be for everyone, a radical change could be on the horizon for student living. With rental rates across the country skyrocketing, it may be time to take a risk and choose to buy, not rent.

The Renters Dilemma

To rent or to buy? A major dilemma for many, especially those in their 20s. The decision is becoming more and more complex as demand for rentals continues to skyrocket and, as a result, the price of monthly rent. A recent New York Times article shed light on the issue, explaining how the middle class simply can’t afford rentals like they used to.

Traditionally, renters aimed to spend no more than 30% of their income on housing and utilities. This benchmark is important as it allows for other important categories on a budget such as savings. The rental website Zillow conducted a study this week that examined how rental rates have been increasing and are now approaching or exceeding this 30% line in many cities. This issue is especially important for soon-to-be graduates, as pricey rent may stretch budgets and have a series of side affects. For one, saving for retirement and paying back student loans are often the first things to go in order to maintain a certain lifestyle for today. Both have severe consequences due to interest accruing. For savings, losing ten years of compounding on retirement accounts is crippling for the future. Paying the minimum in loans could end up costing thousands down the road as the higher balance continues to raise interest costs. Alternatively, it is possible to save money in other places, like buying cheaper, more unhealthy food. I recently wrote a blog post related – why easy to obtain junk food is a huge threat to the U.S. population – that can be found here. A graph showing trends for rental and mortgage rates is shown below:

Screen Shot 2014-04-16 at 9.53.05 PM

 

Of course, high rental rates aren’t just a problem for those headed to the real world. Ann Arbor’s off campus housing can be expensive and hard-to-find, and these increases in rent prices are going to have serious consequences for college students in the area. As shown in the graph below featuring Ann Arbor-specific data, Ann Arbor rental rates already are close to 35%. With many students either working part-time or using loans to pay for their rent, raising rates further could cause living close to campus to cease being an option for many students.

 

Screen Shot 2014-04-16 at 9.52.27 PM

 

But what can be done? The other feature on the above graphs is the affordability of taking a mortgage. Unlike rental affordability, mortgages have seen a favorable trend since the recession. One potential option for students is to purchase a home off-campus. While this may seem extreme, it could have a plethora of benefits. Most importantly, the thousands accrued in rent over the years wouldn’t be going to a bloodthirsty Ann Arbor housing company. Instead, those monthly payments would be available in asset value down the road.

Sure, I absolutely recommend living as close to campus as possible and enjoying the once-in-a-lifetime college experience. Commuting to school would be a completely different lifestyle and would turn many (including myself) away. However, having a home partially paid off coming out of college would be an absolute game changer and set a student far ahead from their peers. To conclude, I wanted to offer an actual example of buying rather than leasing as a student. A cousin going to school in Wisconsin decided to partner with two others and purchase a “fixer-upper” three years ago. Recently while home for the holidays, he mentioned to me that his group now own three homes in the area and he has yet to pay a cent in rent while in college.

While it may not be for everyone, a radical change could be on the horizon for student living. With rental rates across the country skyrocketing, it may be time to take a risk and choose to buy, not rent.

President Obama comes to town

The big news in Ann Arbor today is the Presidential entourage that can be found on Hoover Street, the site of the Intramural Sports Building where President Barack Obama is speaking about his proposed increase in the federal minimum wage. The President’s proposal is to increase wages to $10.10 across the country in order to increase the ability for families to escape poverty. The jump is significant – a 39% increase from the current rate – and could drastically change the scope of the job market.

I have written a few posts about this proposed increase in wage (you can find the most recent one here). However, rather than continuing to examine the President’s plan, I want to offer a new resolution to the issue. First, it is important to realize that the United States is a vast and diverse country. Trying to pinpoint a single fair living wage for those in Manhattan and those in rural Iowa is impossible. Simply look at the cost of living map below to realize how a single wage point wouldn’t make sense.

uscostofliving

So if $10.10 across the board isn’t the answer, what is? There is a definite need, at least in the majority of areas in the U.S., to increase the minimum wage. It’s simply not feasible to live working 40 hours a week at a weekly gross income of $290. To some extent, the current system is performing as it should. 13 states voted to increase their wages at the start of 2014. However, a solution is needed to solve the urban vs rural disparity. One reasonable answer is to leave it in the hands of the local city governments. If the city of Ann Arbor and its residents determine that a $10 wage is right for the community, it makes sense to change it. In the meantime, the neighboring city of Ypsilanti, where costs of living are lower, could go on offering wages at an $8 level. This allows the natural supply and demand forces of each individual market to work and find the equilibrium price point.

In a complex United States economy, it simply isn’t possible to solve problems with a “one-size-fits-all” solution. It is important that our government allows the system to work, and for local issues to be solved with localized solutions. While our President’s efforts to help bring struggling families above the poverty line is valiant, the true solution is to encourage cities to find the wage that is right for them and give them the tools to do so.