The Rising Cost of Housing and Its Effect on Consumer Credit

Since 2008-09 the housing prices have continued to rise and in many areas now you see more empty houses than people. This is bad for sellers and at many places values of home went down. It was a good opportunity for renters and buyers. After a decade since then, the picture has changed a lot. Most people want to live in cities and here there are not enough residential places and prices are too high.

This scenario is good for seller and for buyers with a good credit score. But for renters, it is a tough situation and the adjustable rate mortgage is coming back in the market. This makes it difficult for renters to afford entry level houses too. There is a huge demand and waiting list for low income housing and other choices puts pressure on family income.

Continue reading this to know about the effects that rising costs of housing has on consumer credit.

  1. Less disposable income: generally your house must not cost more than your income’s 1/3 part. But most Americans that fall in the category of lower middle class pay almost ½ salary on housing. This means that they have less disposable income. This reduces the profit that companies make in a consumer-based economy. This leads to reduction in number of employees, leading to lesser money.
  2. Roommate dilemma: sharing rooms is a solution to cut housing costs. But there are risks associated with it too. While shared rooms are more affordable, socializing, there are other personal tensions that come with it. If the renter leaves after some time then the homeowner’s finance is wrecked. There can be lack of privacy and dependency on the roommate. The financial risk associated with this can affect personal credit too.

Roommate does not build credit or rental history. It is just personal reference as they do not pay full rent and so they have a bad credit and it does not prove that they can afford a home of their own.

  1. Less savings: increasing costs means less income and savings for pleasure, big purchases and emergencies too. This can cause bad credit habits. They can use credit card for the purchases as they do not have savings. Bad credit leads to lower credit limits and higher rate of interest. They easily max out a card and this impacts their credit score further.
  2. Borrowing: high costs of housing makes people to borrow to live. They use store cards, gas cards etc to cover their daily expenses and at the end of the month they cannot pay the minimum amount also. This leads to rising credit balance and bad credit score.

Apart from that people have to make tough choices in their everyday lives because of less money and savings caused by an increase in the housing costs.

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