TENANT AND HOMEOWNER EXPENDITURES: UNCOVERING THE TRUE COSTS OF HOMEOWNERSHIP

Russell N. James

Andy Carswell

Cliff A. Robb

$$$$

The standard economic model of consumer behavior and some problems

with it

THE PROBLEM

• Housing = largest budget category in household.

+ Other Expenses:home maintenance

repair costs

water & trash

property taxes

insurance expenses

Can = Big Money / Miscalculations

OBJECTIVES OF THE STUDY

• Comparison of Housing Related Expenditures: Renting vs. Owning

• Percentage of Housing Costs: Renting vs. Owning

RESEARCH QUESTIONS ADDRESSED

• In what areas do tenants’ housing-related expenditures differ from housing-related expenditures of homeowners with a mortgage?

• How do total housing costs differ (absolutely and as a % of income) for similar tenants and homeowners with a mortgage?

• Misjudging homeownership costs can lead to increased foreclosure risk.

SOME OF THE OBVIOUS EXTRA COSTS OF HOMEOWNERSHIP

• Mortgage interest

• Property taxes

• Property insurance

SOME OF THE NOT-SO-OBVIOUS EXTRA COSTS OF HOMEOWNERSHIP

• Home maintenance

• Utility costs

• Excess energy costs

• Furniture and appliances

RESEARCH PROCEDURES

• Consumer Expenditure Survey (CE)

• 1995-2005 Data

DATA AND METHODOLOGY• Consumer

Expenditure Survey• N = 162,610• Direct comparison of

renters and homeowners with a mortgage

• Analysis of rent vs. non-principal mortgage payments

• Additional expenses related to housing also analyzed

Figure 1

Total Housing Expenditures as a Percentage of Pre-Tax Income1995-2005 Consumer Expenditure Survey (n=162,610)

10%

15%

20%

25%

30%

35%

40%

45%

50%

Pre-Tax Income (inflation-adjusted to 2005 dollars)

Per

cen

tage

of

Inco

me

to H

ousi

ng

Exp

end

itu

res

Owner w/ Mortgage

Renter

Variable Unsubsidized Renter

Homeowner w/ Mortgage

n 62,803 89,479

Rent / mortgage (non-principal) $1,236 ($1,040) $1,239 ($1,302)

Property tax n/a $358 ($519)

Maintenance, repairs, insurance $3* ($79) $249 ($928)

Household furnishings & equipment $134* ($467) $336 ($985)

No gas/electric/oil (included in rent) 18% n/a

No water (included in rent) 74% n/a

Gas/Electric/Oil (not included) $160* ($177) $326 ($248)

Water (not included) $22* ($57) $84 ($102)

Total housing expenditure $1,826* $3,103

Rent or mortgage interest as a % of total housing expenditures

67.7%* 39.9%

Total expenditures $4,878* $8,852

Housing as % of total expenditures 37.4%* 35.1%

SHARE OF HOUSING EXPENDITURES DEVOTED TO MAINTENANCE

(homeowners w/ mortgage)

5.50%

5.70%

5.90%

6.10%

6.30%

6.50%

6.70%

6.90%

7.10%

7.30%

7.50%

10k to<20K

20K to<30K

30K to<40K

40K to<50K

50K to<60K

60K to<70K

70K to<80K

80K to<90K

90K to<100K

100K+

Household Income

Rent v. Mortgage Gap

PINK = Share of housing expenditures to rent (renters)

BLUE = Share of housing expenditures to mortgage interest (homeowners w/ mortgage)

YELLOW = Gap

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

10k to<20K

20K to<30K

30K to<40K

40K to<50K

50K to<60K

60K to<70K

70K to<80K

80K to<90K

90K to<100K

100K+

Household Income

Variable Unsubsidized Renter

Homeowner w/ Mortgage

Liquid assets $2,436* $10,843

Married 32.6%* 71.7%

Single male 29.5%* 10.9%

Single female 37.6%* 17.4%

White 78.3%* 86.8%

Age 39.7* (16.6) 45.9 (12.6)

No. of household members 2.3* (1.5) 3.0 (1.5)

Bedrooms 2.0* (1.03) 3.2 (0.86)

Bathrooms 1.2* (0.47) 1.8 (0.70)

Half Bathrooms 0.1* (1.24) 0.4 (0.55)

Other rooms 2.3* (1.05) 3.6 (1.55)

Est. % using deduction (income <$40k) 0 27%

Est. % using deduction (income >$40k) 0 79%

Net deduction benefit (income<$40k) $21.30

Net deduction benefit (income>$40k) $374.44

IMPLICATIONS FOR CONSUMER EDUCATION

• Educating consumers about the “hidden costs” of home ownership is crucial.

• Emphasis should be toward low-income renters transitioning to home ownership.

DISCUSSION POINTS

• Do first time homebuyers accurately project costs?

• Does the increase in foreclosures add even more to HO costs?

• Do homeownership counselors accurately incorporate such costs into their sessions?