Category Archives: personal finance

The Rent Is Too Damn High!

We're going to have some fun exploring some of the trends in the average American household spending data contained within the 2017 Consumer Expenditure Survey (CEX), where we'll start with what Americans are paying to either own a home or to rent a residence in the United States.

The chart below shows all the historic data recorded for the amount that all American household "consumer units" have paid on average if they're buying a home, where they pay principal and interest on a mortgage, or if they are renting their dwelling from 1984 through 2017.

Average Annual Home Ownership and Rent Expenditures per U.S. Household Consumer Unit, 1984-2017

In this chart, you can see where the cost to buy a home in the U.S. rose rapidly before peaking in 2007, after which, the cost to own crashed until 2016, where it has recently started rising. Meanwhile, we can see that the cost to rent a dwelling has steadily increased without serious interruption from 1984 through 2017, where the rate at which American household expenditures for rent have grown at a faster pace since 2005 than they did in the 20 previous years.

It's important to note here that the data reported by the Consumer Expenditure Survey is spreading all these payments out over all household consumer units in the United States. In 2017, those 130,001,000 households include 48,231,000 that pay rent and 47,129,000 that have mortgages. The remaining 34,641,000 households own homes with no mortgages, and thus have $0 expenditures for either mortgage principal and interest payments or for rent.

We can do some back-of-the-envelope math to work out what the average rent payment or mortgage principal plus interest payment is for the Americans who have these payments. In the case of rent, we can start with 2017's $4,167 average annual expenditures on rented dwellings and multiply it by 130,001,000 households to get the aggregate amount of rent paid in the U.S. according to the 2017 CEX survey of $541,714,167,000. Dividing that amount by 48,231,000 renters gives us an annual average rent of $11,232. To get to the average monthly rental payment for the renters surveyed by the BLS and Census Bureau, we divide by 12 to find out that it is $935 per month.

That figure is lower than the "record-high average of $1,405 per month" rent figure that RentCafe estimated using data from Yardi Matrix covering apartments in cities with over 100,000 residents. The CEX data also covers smaller population centers, so it's reasonable that its reported rent figure would be less than that figure, but we should note that it is also likely a record high.

Looking at mortgage holders, the average principal paid in 2017 was $1,839 and the average mortgage interest and other charges paid was $3,265), which combined for an average mortgage payment of $5,104 for all 130,001,000 American household consumer units. Doing similar math to what we did for rent, we came up with an average monthly mortgage principal plus interest payment of $1,173 for Americans buying their homes, which is about 25% higher than the average monthly payment of American renters. Or if you prefer, in 2017, the average rent in the U.S. costs 80% of what the average payment to a mortgage lender is.

In doing this analysis, we're omitting other costs that are often included in mortgage payments, such as property taxes and homeowner's insurance. We may come back and revisit the topic at some point in the future, but since you've now seen how to do the math, if you want factor those expenditures into it, you're more than welcome to beat us to the punch!

As we close, we'll leave you with the immortal wisdom of Jimmy McMillan, who back in 2010, represented New York's The Rent Is Too Damn High Party in that state's election for governor.

In 2018, he would be a much better governor for New York than any of the current candidates!

References

Szekely, Balazs. National Apartment Rents Hit New Milestone, Demand for Small Apartments Catches Up with Family-Sized Rentals. RentCafe Blog. [Online Article]. 4 July 2018.

Lane, Rachel. U.S. housing rents hit record-high average of $1,405 per month. MoneyWatch. [Online Article]. 6 July 2018.

U.S. Bureau of Labor Statistics and U.S. Census Bureau.  Consumer Expenditure Survey.  Multiyear Tables.  [PDF Documents: 1984-1991, 1992-1999, 2000-2005, 2006-2012, 2013-2017]. Reference Directory: https://www.bls.gov/cex/csxmulti.htm. Accessed 11 September 2018. 

U.S. Bureau of Labor Statistics and U.S. Census Bureau.  Consumer Expenditure Survey.  Table 1702. Housing tenure and type of area. [PDF Document]. Accessed 11 September 2018. 

Visualizing Trends in Major U.S. Household Expenditures

How much, and on what, does the average American household spend each year? And how has that changed over time?

The Consumer Expenditure Survey (CEX) for 2017 has been released, which provides the answers to these questions for each year from 1984 through 2017! Produced as a joint product of the U.S. Bureau of Labor Statistics and the U.S. Census Bureau, the CEX compiles the information collected through tens of thousands of surveys, diaries and interviews with by U.S. households, or "consumer units" as the BLS' data jocks affectionately calls them, which provides a tremendous amount of insight into how they allocate their limited resources.

That data isn't just filed away. The results of each year's CEX are used to determine how to set the relative weightings of different types of expenditures within the Bureau of Labor Statistics' Consumer Price Index, which is used to estimate the rate of inflation in the U.S. economy.

With that introduction now out of the way, let's visualize the major categories of U.S. household expenditures for each year from 1984 through 2017. The following chart shows the average amount that some 130 million American household consumer units have collectively spent on things like housing, transportation, food, financial products, health care, clothing, entertainment, charitable contributions, and education.

Average Annual Expenditures per Consumer Unit, 1984-2017

In the next chart, we show all those same expenditures, but this time as a percent of the average annual expenditures of a U.S. household/consumer unit:

Percent Share of Average Annual Expenditures per Consumer Unit, 1984-2017

Finally, we'll present an update to one of our favorite charts that we've ever made showing how all these expenditures fit together as a percentage share of all expenditures. Here, the expenditures shown on the bottom of the chart (in shades of purple) show those expenditures whose share among the total has increased over time, while the expenditures shown toward the top of the chart (in shades of green) show the household expenses shose share has fallen.

Major Categories of Consumer Spending as Share of Average Annual Expenditures per Consumer Unit, 1984-2017

Here's the list of major categories of consumer expenditures whose share has risen from 1984 through 2017:

  • Housing
  • Financial Products (Life Insurance, Pension Savings, Social Security)
  • Health Care (Health Insurance and Medical Expenses)
  • Charitable Contributions
  • Education

And here's the list of major categories of consumer expenditures whose share has declined over the 34 years for which the data is available:

  • Apparel and Other Products
  • Food and Alcoholic Beverages
  • Transportation
  • Entertainment

Data Sources

U.S. Bureau of Labor Statistics and U.S. Census Bureau.  Consumer Expenditure Survey.  Multiyear Tables.  [PDF Documents: 1984-1991, 1992-1999, 2000-2005, 2006-2012, 2013-2017]. Reference Directory: https://www.bls.gov/cex/csxmulti.htm. Accessed 11 September 2018. 

Tomato Soup, Oil and Inflation

One of the neater things that comes from researching the historic prices of everyday goods is the insights that you can extract from the data, where sometimes, you discover that you can divide a nation's economic history into distinct eras.

Here's an example of what we mean. We started off with the idea that it might be interesting to look at the history of the price of Campbell's Condensed Tomato Soup and also the price of crude oil in the U.S., where we were able to get monthly data for both series back to January 1946, which means that we're capturing the entire post-World War 2 era in the United States.

The reason why we were doing that is because oil, along with tomatoes and steel, can be considered to be one of the three primary ingredients for making Campbell's Condensed Tomato Soup, thanks to its role in fueling the supply, production and distribution networks for making industrial quantities of the iconic product available for sale in the U.S. economy.

So we did, and for the sake of making a more direct comparison between the two sets of prices, we converted the sale price of a typical 10.75-ounce can of Campbell's Condensed Tomato Soup into the equivalent price of a 42-gallon barrel of the product! The following chart shows the results of that math, where we discover that there are three distinct periods in the post-war economy for the United States.

Nominal Average Monthly Prices of One Barrel of West Texas Intermediate Crude Oil and Campbell's Condensed Tomato Soup, January 1946 - June 2018

The three periods are:

  • The post-World War period where the gold standard was in effect, until it was terminated on 15 August 1971.
  • An economic transition period where price controls were arbitrarily used in an attempt to control inflation to various degrees for different products from 15 August 1971 through 30 April 1974 (for food and other products), and through 30 June 1979 (for oil), although some price controls on oil remained in effect until they were fully eliminated on 29 January 1981.
  • The period since 29 January 1981 where neither a gold standard nor price controls have been in use in the U.S. economy.

Although we're looking at nominal prices per barrel for both products, there's enough change in their level over time to make it worthwhile to look at the same historic prices on a logarithmic scale to give a sense of the relative percentage changes that have taken place in the prices of each.

Log-Scale Nominal Average Monthly Prices of One Barrel of West Texas Intermediate Crude Oil and Campbell's Condensed Tomato Soup, January 1946 - June 2018

In this second chart, we see that the price of crude oil has been much more volatile in relative percentage terms than changes in the price of Campbell's Condensed Tomato Soup!

The different eras that we see in these charts are really only evident if you look at the nominal, or actual, prices that people paid for the products at the time they were sold. The following chart adjusts these prices for the effects of inflation, where the results are expressed in terms of constant May 2018 U.S. dollars, where you may be surprised by the historic cost trends for both soup and oil.

Inflation-Adjusted Average Monthly Prices of One Barrel of West Texas Intermediate Crude Oil and Campbell's Condensed Tomato Soup, Constant May 2018 U.S. Dollars, January 1946 - June 2018

If you had the impression that soup is no longer the consumer bargain that it used to be as recently as just over a decade ago, you're right! That adverse price trend is one of the reasons why Campbell's Soups (NYSE: CPB) has been struggling in recent years.

Retailers Target Food Stamp Users in Advertising

Natchez, Miss. Marion Post Wolcott, photographer, Natchez, Mississippi, August 1940. Farm Security Administration/Office of War Information Color Photographs. Prints & Photographs Division. Source: Library of Congress - https://www.loc.gov/item/today-in-history/may-08/

The recent news that a study found that retailers are timing the advertising of number of products, such as soda pop, that are popular with food stamp recipients to coincide with the timing of when the federal government reloads Supplemental Nutrition Assistance Program (SNAP) benefit funds onto their Electronic Benefit Transaction (EBT) cards, ranks right up there with the kinds of stories that come out whenever huffy reporters are shocked to discover that there is gambling going on at their local casino.

Here's another news flash: the same retailers do exactly the same thing with the kinds of products favored by senior citizens, only here, the timing of the ads coincides with when Social Security checks are mailed out each month.

It's the result of something called "market research", and it has been a thing that retailers have been doing for decades to get to know their customers better. Here, retailers who pay attention to the kinds of things that their customers buy throughout the course of a month, and do so so for month after month while also making note of the visible characteristics of their customers, are seeking to find regular and repeating patterns in their consumer behavior. If they identify any such patterns, they will adapt their retailing strategies to accommodate those regular consumers so that they have the kinds of products available to buy when they're shopping for them and, horror of horrors, will use advertising to communicate that they do.

Understanding that is why we found the following comments of an assistant professor of health and social policy at Johns Hopkins University, who helped conduct the study, somewhat amusing:

“People will argue that individuals are ultimately responsible for their choices, but we know that the environment in which we make choices matters,” Moran said. “This study is another example of industry targeting sugary beverage marketing toward lower income families.”

This study is the first to tie food advertising to SNAP distribution patterns. Because food-stamp benefits are dispersed in a lump sum each month, and because many recipients spend those funds within a week of receiving them, stores frequently see higher sales and traffic in the days after benefits get reloaded.

[...]

“I’ve worked with a lot of work with retailers, and I know that retailers are very attuned to when households receive benefits,” Moran said. “When you think about it, it makes a lot of sense: If you operate in a state where everyone receives benefits on the same day, there’s a huge financial incentive on that day to heavily market popular items.”

Moran cautions that her data is only from New York and that patterns may differ in other states. She also can’t say whether grocery stores or soda producers are to blame.

We'll go out on a limb and say that there are almost certainly very similar if not identical patterns in every other state. We'll also say that in addition to grocery stores and soda producers, there's another party, aside from market research firms, behind the pattern Moran has observed: the low income consumers who receive and use SNAP benefits, who are also actively participating in these transactions!

But what to do about this newly perceived problem? Our intrepid researcher has an idea....

Fortunately, Moran said, the fix for this particular problem may be simple: States could issue food stamps on a rolling basis. On the national level, the Department of Agriculture could extend rules for SNAP-approved retailers to include marketing practices.

It's not a bad idea as it goes. Rather than dumping welfare benefits into the economy on the same days each month, the federal government could distribute the same amount of benefits in smaller, more frequent installments, which would introduce less distortion into local economies when compared with the disproportionate monthly spike that the current approach generates.

But shouldn't we also be looking at taking products like soda pop, which is perceived by many to be unhealthy, off the list of approved products that can be bought using SNAP's food stamp benefits? There certainly have been an increasing number of politicians seeking to have the program changed this way, despite studies that suggest little connection between food stamp use and adverse health conditions such as obesity.

But Moran did not back the growing calls to ban soda from the food-stamp program. Public health experts and conservative reformers have asked Congress to include such a ban in the 2018 Farm Bill, which they say would save money and improve nutrition.

Moran argues there's no evidence a ban would cut down on soda-drinking, because SNAP recipients could always just buy beverages with cash. Worse, she said, by ignoring marketing and other systemic issues, the ban would address the symptoms — and not the causes — of the income/nutrition gap.

This is where Moran starts getting into a bit of trouble. What our intrepid researcher doesn't appreciate is that all products that are eligible to be purchased through SNAP food stamp benefits are completely exempt from state and local sales taxes. That sales tax exemption means that SNAP welfare benefit recipients can buy larger quantities of products like soda pop than regular cash-paying non-SNAP households can when spending an identical amount of money.

In other words, when compared with non-SNAP households, many of the households that receive SNAP benefits have an additional financial incentive to buy larger quantities of products like soda pop, where their costs are discounted by the percentage of sales tax that they would otherwise have to pay if they spent cash from their ordinary income - especially in the 35 states that allow their full state and local sales taxes to be levied on the sale of soda.

On a side note, we believe that's the main motive behind many politicians seeking to get soft drinks off the eligibility list for SNAP benefits. It would unquestionably increase state and local government sales tax revenues.

But before we might consider taking steps to remove that welfare-driven financial incentive, we really need to know what impact that stripping the eligibility of soda pop to be paid for with SNAP food stamp benefits might have. As we saw in Philadelphia, when that city taxed soft drinks, it directly coincided with a pronounced increase in the consumption of alcohol-based beverages that became more relatively affordable after the city jacked up the cost of soft drinks with its controversial soda tax, which many people would argue leads to undesirable outcomes.

What we need is a proper experiment. What would it take to get one going?

Bending the Health Care Cost Curve Ever Upward

Did the Affordable Care Act (a.k.a. "Obamacare") succeed in making health care more affordable for the average American household?

Data from the Consumer Expenditure Survey says... no!

Change in Average Annual Health Care Expenditure per Consumer Unit (Household) Since 2008, 2008-2016

Update 1 June 2018: The vertical dashed line in the chart indicates a break in the U.S. Census Bureau's methodology for collecting information about health insurance coverage that was implemented after 2013, where data in the periods before and after this change are not strictly comparable to each other. That said, the Consumer Expenditure Survey's data since 2013 confirms that the Affordable Care Act has failed to restrain the growth of average health insurance costs by American households during the period that it has been in effect.

Although the chart above focuses on what happened after it took effect, in reality, the health care cost curve began bending upward almost immediately after the Affordable Care Act was passed in 2010, leaving millions of Americans who had been promised by the ACA's supporters that it would reduce the cost of their health insurance sorely disappointed.

But that disappointment didn't extend to the people who owned stock in the U.S.' major health insurers, such as Centene (NYSE: CNC), United Healthcare (NYSE: UNH), WellCare (NYSE: WCG), Cigna (NYSE: CI), Humana (NYSE: HUM), Aetna (NYSE: AET), Molina (NYSE: MOH) and Anthem (NYSE: ANTM), where the Affordable Care Act has been a government-granted license to print money since it went into effect after 2013....

Percentage Change in Health Insurer Stock Prices from 2 January 2008 through 25 May 2018

References

U.S. Bureau of Labor Statistics. Consumer Expenditure Survey. Multiyear Tables. [PDF Documents: 2008-2012, 2013-2016]. Accessed 28 May 2018. [Note: Data for 2017 will become available in September 2018.]

Afterword

Added 4 June 2018: Here's a neat chart that accompanied a September 2017 Motley Fool article by Keith Speights:

Average Annual Health Insurance Costs for Family Coverage, Premiums and Deductibles, 2008-2017 - Source: https://www.commercialappeal.com/story/opinion/contributors/2017/09/08/access-health-insurance-but-can-we-afford-it/636570001/

The cost of health insurance, both in premiums and in deductibles, jumped considerably after 2013 when the Affordable Care Act went into effect.