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Home Economics: Affordability and the “Tiny House”

Yesterday the Huffington Post  reported that 68 percent of “small-space dwellers” (we must come up with a better term for them) do not have a mortgage, as opposed to 23 percent of all home owners in the United States. The article reposts a well-circulated poster by The Tiny Life blog:

 

o-TINY-HOUSE-570

 

 

This blog is not about Huffington Post-slash-pseudo-news-bashing, though I will point out that this statistic should not be news in itself. A Tiny House, at an average cost below 10% (!) of a standard house, would most likely be purchased without a mortgage in the first place because it costs less to buy it outright than to put down the typical 20% downpayment  on an average house. Less than half of that downpayment, actually. Also, if you only spend so little on your house, you should have more in your savings account. Alongside other low-hanging fruit, like the fact that a tiny home sleeps one or two, while the average home sleeps four (or perhaps more today?), it goes without saying that the statistics should be taken with a grain of salt.

However, the Tiny House people, and the Huffington post do highlight a crucial benefit to downsizing your living space – it’s cheap! As housing makes up the largest portion of our expenses, it makes sense that cutting back by a significant fraction in this category will improve your financial health.

Making housing more affordable – and being open to options that are more affordable – can have real impacts local economies, densities, and urban environments. Neighborhoods can allow an economically diverse cross-section of the population to live close to urban centers; density because urban space is scarce and expensive.

The question of how affordable a house is interesting. The average American spent 26.3 percent of annual income on housing in 2009, according to the Bureau of Labor Statistics. This is more than other developed countries.

BLS_Housing_chart1

 

 

If you go to any number of online calculators that tell you how much house you can afford, most of these calculators will assume around 28 percent of your overall income will go toward a mortgage right off the bat. A house sometimes falls under what economists consider a superior good. This means as your income increases, you will buy more of it. Thus, whether you make $40k or $200k a year, you will spend what you can on a house, making the percentage of  income toward housing fairly constant (around 24-33% for Americans; typically the less you make, the higher percentage you spend on housing).

But once you move above the poverty line, why does this need to be constant? The average income in America is just over $50k. That, according to the Census Bureau,  means the median home price of $221k is around 4.3x annual income.  Zillow’s Mortgage Calculator figures this would result in an annual mortgage expenditure of about $14,400 (20% down, 30 years, 4.5% fixed) = 28.2% of annual income.

A typical Tiny House, while not practical for everyone, could cost as little as $23,000, according to the graphic. Humor me and assume you could get a similar 30-year fixed mortgage for this house. Your annual mortgage expenditure would be $2,200 = 4.3% of annual income.

In between these two examples is $12,200 / year (~24% of annual income for the average American).

I would argue that the tiny house is an extreme low (but possible) example, and the 28% of income is approaching an upper limit for average Americans post-bubble. I’d also argue that the space in between is huge. The reason a house is a superior good is because it’s a “goal” purchase. People expect to buy as much as they can afford; it is a (if not the) priority of making and saving money. It’s a measure of quality of living. Why save money if you can buy a bigger house?

But if you can match your quality of living with a smaller and cheaper house, then what are the possibilities? A house in the middle of these two examples still means an extra $6,100/year for the average American.  That’s an extra swanky three-week international vacation, a used car, or a really sweet bicycle per year. Or, perhaps something that would make your smaller house not feel like a compromise. Between I hope this blog will eventually explore what other priorities that I see “small-space dwellers” have over house size.

So, why do we feel compelled to max-out on a house? Is this a social tendency? At what point do we transition from needing to wanting more space? Are other countries different? More importantly, is there a way to change the attitude, and possibly remove square footage from the superior good category?

In any case, this looks to be a common theme in discussions about small houses and density in the future. Also, Tiny Houses will most definitely be a recurring feature, as they claim movement status (presumably 50+ people). It will be interesting to see in what direction(s) that goes.

 

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