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A house with a white picket fence and a yard used to be the American Dream for many people. Unfortunately, owning a home remains a fantasy for far too many, given wage stagnation and ever-rising housing costs. What causes high cost of living?
Since 1960, the average home price has soared 121% nationwide, while wages have risen by only 29%. Renting is even less affordable, but many remain shackled to their landlords when they can’t save the requisite down payment to purchase. What causes this high cost of living, and is it always a negative thing?
What Factors Do Experts Evaluate When Determining Cost of Living?
Multiple factors determine the cost of living. You probably know that the same apartment in Des Moines will cost several times the monthly price in New York City. However, as exciting as the Big Apple may be, it has its downsides — why the wide disparity?
It isn’t only housing, although that plays a significant role. Public policy also carries some responsibility. Additionally, experts point to the following factors that determine what you pay to hang your hat in your area.
How much it costs to buy or rent a home is one of the biggest causes of high cost of living. Experts recommend that individuals spend no more than 30% of their monthly income on housing.
In many cases, that figure simply isn’t realistic. Someone earning $10 per hour would have to work more than 80 hours a week, every single week, to afford the average median rent for a one-bedroom apartment within the 30% guideline.
Part of the problem lies in the response to the 2008 crash. In the wake of the Great Recession, wealthy investors bought up many foreclosed single-family homes and rented them out, often at prices way higher than tenants would typically pay.
As a result, America has become a renter nation — and millions of Americans find themselves deprived of the traditional means of acquiring familial wealth. Soaring rent prices mean little money left over to save for a down payment.
Renters must also contend with frequent monthly increases. Homeowners with a fixed-rate mortgage, however, enjoy the same payment over the life of their loan.
Home prices have already begun rising again while the pandemic still rages. It’s frightening to think of what might happen at the end of June when the current eviction moratoriums expire and many find themselves with huge bills to pay.
The price of building materials also plays a role. The pandemic meant many people stuck at home decided to tackle improvement projects they previously delayed. The dynamic drove up the price of lumber, meaning new construction costs significantly more now than in previous years.
When new construction costs more, it creates more expensive comparable properties in the same neighborhood. As a result, the value of the region typically increases, and sellers of older homes can likewise demand higher sale prices.
If you have noticed your grocery bill creeping upward lately, you aren’t imagining things. The Consumer Price Index climbed 4.2% in April of this year, which was a significant spike. As a result, major manufacturers such as General Mills and Procter & Gamble raised their prices.
Another factor influencing rising grocery costs is climate change. Wild weather patterns impact crops, sometimes causing substantial losses. Iowa, for example, saw not one but two “500-year” floods within a 15-year period — and that state raises a significant percentage of the nation’s corn.
While rural living costs less in many ways, here’s one area in which urban living reigns supreme. Groceries tend to cost less in big cities because more stores in fewer areas reduce fuel and transportation needs. While you’ll pay more to dine out, you can save if you cook at home. The price of groceries, then, is another of the big causes of high cost of living.
Utility costs are likewise on the rise. Energy prices have increased 25% since 2020. Unfortunately, you have little choice but to pay if you want to keep your lights and heat.
Where you live plays a significant role in utility costs. Those who dwell in states like Arizona and Florida might enjoy low winter bills but pay more in the summer for air conditioning. Folks in the Upper Midwest might spend a small fortune in the winter to keep cozy.
5. Gas, Transportation, and Insurance
If you have ever driven across the country, you probably noticed a significant disparity in gas prices from state to state. Several factors play a role in determining what you pay at the pump:
- Taxes: Some states place higher taxes on fuel to encourage conservation and raise needed revenue.
- Oil production: States that have significant oil reserves often pay less.
- The number of refineries: Likewise, some states have more refineries, meaning they save on costs for getting the fuel to the gas station and, eventually, your vehicle.
States differ in the minimum insurance requirements for driving a car. Nearly all states require you to carry bodily injury and property liability coverage. Some also require personal injury and uninsured/underinsured motorist protection.
There’s a sizable transportation difference between urban and rural living. This disparity offers some individuals a way to slash their monthly living expenses.
Those who live in cities with well-maintained public transportation systems may find they don’t need a car at all. Less than half of the households in New York City own a vehicle, for example, while going without wheels would be unthinkable in many suburban areas. It’s simple enough to walk or catch a bus for most errands and take an Uber or taxi for special occasions when you live in the city.
Those who live in rural areas may gravitate to remote regions for the relatively low cost of land per acre. However, such folks often face lengthy drives into town to get necessities such as groceries. Going off-grid sounds romantic until it’s 9 p.m., you realize you’re out of toilet paper, and the nearest store is a half-hour drive away. Gas prices should factor into the equation when buying such a property.
6. Health Care
When it comes to how health care affects the cost of living, location once again plays the deciding role. Doctor’s visits typically average the same — but getting to the appointment and paying for it are different matters.
Those in rural areas may need to travel considerable distances to access services. They might need to take off work, which can decrease their take-home pay if they are hourly and their employer doesn’t offer paid leave. A visit to a specialist might require an overnight trip and a costly stay at a hotel. Access to health care, then, is one of the biggest causes of high cost of living in these areas.
Rural folks may also have fewer choices when it comes to insurance. Marketplace coverage varies widely from location to location, and some remoter regions may offer only one or two policy choices. If individuals don’t like their options, they don’t have much choice other than to risk going without, facing possible bankruptcy if they get sick or injured.
7. Child Care
Child care prices vary by location. In general, you can expect to pay more anywhere with a higher-than-average cost of living.
One difference is that you might have more options — and various price points — in urban settings. However, you need to evaluate multiple factors besides the cost, such as the school’s reputation and how comfortable you feel with the staff and curriculum.
Some states, such as California and New York, have reputations for high income taxes. Others, such as Texas and Florida, have no state income tax at all.
Likewise, some local municipalities levy an income tax. Many people who live outside of the Big Apple but work within the city limits have discovered this on April 15.
Income taxes aren’t the only government-issued levies to factor into the overall cost of living. Sales tax and property taxes also play significant roles in how much you pay to live in a specific location.
Why Realtors Say, “Location, Location, Location” — or, Is a High Cost of Living Always Negative?
It seems as if rising living costs do little but stifle hope and shatter dreams for the average person. However, are there any positive sides to a high cost of living? Here are some of the privileges that come with the increased sticker price.
Those who live in areas with a high cost of living often enjoy the best schools. The disparity occurs because many states fund public education partially through property taxes. Therefore, locations where homes come with hefty sticker prices often attract top-notch staff and can afford amenities like stadiums and state-of-the-art science labs.
Regions with colleges and universities often have a higher cost of living. Graduates of such institutions can demand higher salaries, allowing them to absorb the sticker price. However, many adjunct staff members who lack competitive salary and benefits packages might find themselves priced out of the communities where they teach.
2. Business Opportunities
Seattle, Washington, has one of the highest costs of living in America, as does Silicon Valley in California. What do these two locations share in common? They are home to some of the leading technology companies in the world.
If you are looking to grow your career, you might need to pay more to live close to your work. However, you can also expect to earn more, allowing you to absorb the added expense. Entrepreneurs, likewise, often do well in such areas. They enjoy a diverse and experienced employee pool from which to grow their enterprises.
3. Cultural Offerings
Some small towns in America seemingly shut down at 9 p.m. every night. Conversely, people refer to the Big Apple as the “city that never sleeps.” If you enjoy a location with an active nightlife, a thriving, if pricey, urban location is your best bet.
Areas with higher costs of living can fund more cultural offerings. You’ll find no shortage of libraries, museums, and public parks with free concerts on weekends. You’ll also find science centers and planetariums for your child’s educational enrichment.
4. Health Care Access
People with certain health conditions might gravitate to urban regions to enjoy improved access to health care. Unfortunately, this dynamic also contributes to disparities in treatment and outcomes. Those who can’t afford housing in locations with high costs of living might have little choice but to go without needed services.
Problems Created by a High Cost of Living
When living costs spiral out of control, the bubble invariably bursts. This phenomenon causes an untold amount of human suffering, often borne by those who can afford it the least.
1. Population Changes
The law of supply and demand doesn’t always work as intended when big-ticket items like housing come into play. When prices skyrocket, fewer can afford to buy homes.
Investors often scoop up properties in such regions, leading to more renters and increased housing insecurity. When rents are too high, a single disaster can mean homelessness — a frightening scenario that has some states extending eviction moratoriums in the pandemic’s wake.
2. Labor Shortages
Even the affluent feel the crunch when living costs soar out of control. When a cashier or stock clerk can no longer afford to live in the community where they work, they’re more likely to accept another job elsewhere than endure a lengthy commute. They can ill afford the requisite gas money on their wages. People living in such areas might feel shortages more quickly in times like the present.
3. Attracting Businesses
Businesses need staff to run their daily operations. Excessively high costs of living may mean they can’t find any entry-level laborers to manage the machines.
Actions Individuals Can Take to Decrease Living Costs
What can you do to decrease your cost of living? Here are four steps to consider:
- Evaluate your unique circumstances: This first step is critical. If you have kidney failure and require dialysis, you may need to live in an urban location with public transportation to take you to appointments. Conversely, if you have multiple children, you might need a house in the country to fit them all.
- Downsize: Minimalism is all the craze for a reason. If you don’t need much space, the smaller your home, the less you will pay.
- Think outside your hometown: Some areas suffer worse inflation than others. If things become too costly where you live, you might consider moving.
- Look for new work: If you get lucky, the right employer might help you with relocation expenses.
- Reduce or eliminate expenses: Finally, sit down with your bank statements and look at where you spend the most. Many institutions now categorize your expenses for you. Perhaps the extra $4,000 you would save toward a down payment in a year is enough to convince you to finally kick that two-pack-a-day habit.
Multiple Factors Answer the “What Causes High Cost of Living” Question
There’s no easy answer to what causes the high cost of living — multiple factors play a role. Your best bet is to evaluate your unique circumstances and take your time seeking out a location that suits your needs.