Largest Expense is Still Housing

Based on the new Consumer Expenditure Survey, housing’s share of average spending increased over a full percentage point from 32.7% to 33.8%, making it the continued king of cash flow consideration for the average consumer.

Not only is it the largest expense, but in prior consumer surveys the consumer feels they have the least 'control' over their housing related expenses. Energy costs, property taxes, home owners insurance, mortgage interest, all tend to create a feeling that housing expenses are totally outside their control... which is an accurate statement for most house owners. Their options are to sell the house and rent, or to consider more closely monitoring their housing related expenses, controlling the things they can control, letting the rest go. That's a form of liability management, just helping people consider what they can, and clarifying for them what they can't.

One interesting consideration of the CES study is the expenses are considered interest only for all expenses, so principal does not show up as an expense to the consumer, yet they do feel it in their overall cash flow. As you can see from the chart, the level of pain is relatively higher for the lower income earners, but still makes up over 30% for the high income earner. This trend is actually pushing home ownership rates in the US down, and putting more pressure on rents, as the median rent in the US jumped 6% in 2006 after stay relatively flat for many years. If that increases, selling and renting becomes less attractive as well.

When you consider the emotional impact of the lost equity, you can see why consumers want more guidance if their real wealth declines, even if it is simply letting them know that things will be ok. The forthcoming mortgage resets in the first quarter of this year will continue to put upward pressure on housing related expenses and further challenge savings ability of the typical consumer.