Middle-Class Crunch

I always hear about a “middle-class squeeze” but the evidence I saw made me believe that people were just making bad choices. I know that a lot of a family’s income goes towards the mortgage, especially if the houses were purchased within the last 10 years in expensive real estate markets (New York, San Francisco, etc.). However, to me it seemed that people were preferring to buy the $400 Coach bag and pay $10,000’s more for a luxury car rather than save money for a possible layoff or health emergency. But according to this article, it turns out that people are actually spending a lot less on the extras than they were 30 yeas ago. Huh?

So there are 2 main thing happening here: a lot of the luxury items (such as the dishwasher, having 2 family cars, weekend clothes) are a lot cheaper today than they were 30 years ago and a lot of the money people have is actually going to the essentials (health care, mortgage). For example, a mortgage 30 years ago in today’s dollars was about $5820/year, while today it’s about $10,250/year. On the other hand, basic appliances that might still be a luxury in some households (dishwasher) cost almost 1/10th of what they cost 30 years ago. One shocking fact is that incomes are the same now as they were 30 years ago (adjusted to today’s dollars). It’s true that families today have a lot more money because usually both parents work (compared to a single-income family of the mid-1970’s). However, with both parents working, there are usually other expenses—child care, 2 family cars, etc.

My husband and I are dinks—dual income, no kids. It’s a more realistic description of the yuppy (young urban professional). We have good jobs, no debt, a nice savings account, and yet it will be years before we can afford a house in the Bay Area. Granted, we are being slightly conservative—we could probably easily be approved for a loan in which 40% of our gross income goes towards paying off a small, fixer-upper on the bad side of town. But what would happen if one of us lost our job or we had another emergency? So for the time being we will have to be satisfied renting our small townhouse. While our rent increases every few months, it is still at 1/3 of what a mortgage would be.