Recently a few articles such as this and this provided some shocking insight into minimum wage and its relation to apartment affordability. The report by the National Low-Income Housing Coalition that is cited shows the number of hours of work required at minimum wage in each state to be able to afford the 2015 Fair Rent of $806. Minimum wage workers would need to clock between 49 and 125 hours to be able to afford the 2015 Fair Rent of $806. Note that 125 hours is more than the 120 hours a worker might expect to clock in an entire month. It is a shocking insight into housing affordability and a tool to incite the national debate for raising the minimum wage across the United States. The study, however, doesn’t tell the whole story.
I recalculated those hours based off of each state’s minimum wage and average rent for a one-bedroom apartment. Using those values, the number of hours worked rises to between 80 and 245 hours. Here are the ten states with the most affordable rent for minimum wage workers.
These are the ten states with the least affordable rent for minimum wage workers.
Yet, I’m not saying we should rush out and raise the minimum wage because of these results. Actually, if you delve into the data there are two other conclusions that one could make. First, you notice there is a positive correlation between rent and minimum wage. It’s hard to say which came first, but it is evidence to support the argument that increasing wages does little to increase affordability because prices simply adjust accordingly. The economic theory suggests that if employers have to increase wages, they will simply pass on that increase to their customers in the form of higher prices. In the end, the increased minimum wage does nothing to change the purchasing power of those wages. I’m not making the argument that you should draw that conclusion from this data, but this data could signal that relationship.
Another point that is often overlooked or neglected for the purpose of political correctness is that minimum wage workers are not living in apartments at this average rental rate. At least, they are not living there alone. Either you have a household working to afford the rent, or more likely, minimum wage workers are living in cheaper apartments. Minimum wage is not the average worker’s salary. It is the absolute left side or minimum of the salary distribution. While average apartment rents get reported, you don’t see the full distribution of rents. In all likelihood, minimum wage workers are living in apartments that cost far less than the average rent. When you make the minimum wage, you don’t get to live in an “average” apartment. When you make an average salary, you don’t get to live in the nicest and most expensive apartment. It’s just a fundamental fact of economics and does not have to be political. If you want to have a nicer apartment, don’t settle for minimum wage employment. Get some extra training and education, get to work on time, do a great job, and soon you will find yourself in a good position for a raise and promotion. Strive to do more than the minimum and be more than the minimum. Also, take some time to look at the data being reported and its interpretation.
Millennials simply are not buying homes at the same rate as previous generations did at the same age. There are a lot of underlying economic and cultural reasons for this gap. I’ve tried to narrow those reasons down into three broad categories.
The mobile age. Picking up and moving to a new city has never been easier. Technology and social media allow you to research a city, find an apartment and roommate, get a job, and meet friends without ever stepping foot inside the city. This shift in the way millennials interact with the world discourages settling down into a particular job or location during your twenties. Millennials as a whole are skeptical of homeownership.
The multigenerational trend fueled by student loan debt and high unemployment or underemployment. I am a university professor. I understand that the cost of college has been increasing at abnormally high rates. I can also tell you it is not because professors are getting big raises but is being driven by a high level of administrative bloat. Get used to it because that is not going away. I amassed a large amount of student loan debt too. It was an investment, and I think my ROI was pretty good. Millennials are not the first generation to be burdened with student loan debt, but the problem with student loan debt comes from the increasing cost of college and the increasing numbers of young adults attending college. Couple this with an economic climate where businesses are hesitant to hire due to high costs and market uncertainty, and buying a home is simply not a financial reality for millennials. In fact, many of them have moved back in with their parents to save money. Unfortunately, the cost of renting is also high because so many people simply don’t have the money for a mortgage downpayment or cannot qualify for a mortgage due to high debt to income ratios.
Home unaffordability. Although mortgage rates remain historically low, homeownership remains unaffordable for many millennials. Some of this is related to economics mentioned in the previous bullet point. The housing market itself, however, is also working against them. Housing markets around the country report the same trend – rising prices and short supply at the lower end of the market. While the luxury housing market struggles in these markets, prices just below the median home value at rising at rates that have not been seen for 10 years. CoreLogic Inc. reported that prices on the bottom 25% of the market were up nearly 11% in August when compared to the previous year. Furthermore, Sam Khater, CoreLogic’s deputy chief economist explains, “You’ve got the front end of a big wave of first-time homebuyers, but the supply of affordable housing is not there to meet that wave.”