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State of Households

The financial state of US households has improved, but challenges including underemployment and stagnant wages persist. Action by policymakers and bankers can make a difference.

The overall financial state of households nationwide and regionally improved mildly in 2015 compared to that of 2014 and 2013, but low- and moderate-income families shared in less of that improvement than others, and many households faced emerging and persisting financial challenges, according to local experts and a recent Federal Reserve Board of Governors report.

Locally, mortgage delinquencies are down generally, as are foreclosure rates, and a few metropolitan statistical areas (MSAs) are enjoying increased home values, Cleveland Fed community development research analyst Brett Barkley says, citing the Bank’s Community Stabilization Index. The index provides a relative measure of housing market conditions in MSAs throughout the Cleveland Fed’s region of Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky.

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However, “different metropolitan statistical areas are experiencing different things,” Barkley notes. The same is true of neighborhoods within those MSAs.

“The American Community Survey showed that roughly 50 percent to 70 percent of low-income renters are housing-cost burdened compared to around 10 percent of non-low-income renters,” says Barkley.

Being housing-cost burdened is defined as spending more than 30 percent of one’s income on rent and housing costs, including utilities.

Barkley notes, too, that more than 30 percent of low- and moderate-income households in the Cleveland Fed’s region have had one or more collections actions in the past 2 years, a figure which is double the 15 percent of middle- and upper-income households that did. It’s clear some households have stretched their borrowing, perhaps to meet expenses, he says.

There’s a divide, too, in who can take advantage of the present opportunities in the housing market, says Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland.

“There are some people who are participating in a renewed economy,” he says. “All of a sudden, the housing market in Northeast Ohio is back on fire, and people are looking to buy and have access to credit, but, generally, that is not equally divided among either economic class or race.”

The Federal Reserve Board also reveals a mixed picture of the financial state of US families in its latest Report on the Economic Well-Being of US Households in 2015, based on a survey it conducted in October and November 2015.

Regionally, the reasons for continued financial struggles include stagnant wages and underemployment.

Individuals with lower incomes, people with parents of modest financial means, and racial and ethnic minorities reported greater financial challenges, the survey found, and 21 percent of respondents with a high school degree or less said they were worse off financially compared to their situations 12 months ago. Fifteen percent of respondents with at least a bachelor’s degree reported the same.

“The new survey findings shed important light on the economic and financial security of American families 7 years into the recovery,” Federal Reserve Board Governor Lael Brainard says in a release. “Despite some signs of improvement overall, 46 percent say they would struggle to meet emergency expenses of $400, and 22 percent of workers say they are juggling 2 or more jobs. It's important to identify the reasons why so many families face continued financial struggles and to find ways to help them overcome [such struggles].”

Persistent challenges

Regionally, the reasons for continued financial struggles include stagnant wages and underemployment, sources say. Even in the face of continued decline in the unemployment rate, concern about jobs has been the number 1 issue for several years running, as identified by community leaders polled by the Cleveland Fed’s Issues and Insights survey.

“The main reason people cite jobs is that people are finding work but without very good benefits, or it’s part-time and they are needing to work multiple jobs,” Barkley says.

While clients of Neighborhood Housing Services of Greater Cleveland have higher credit scores and savings in general than they did 2 years ago, Tisler also observes jobs-related hurdles.

“I don’t think people are seeing any cost-of-living adjustments or increases in their salaries, and there’s still an incredible amount of underemployment,” says Tisler, whose organization administers programs toward homeownership in 3 counties in Northeast Ohio. “What we’re seeing is if people are moving from a position, it’s either to the same [type of pay and position] or below as opposed to a move up.”

In its latest survey on US households’ economic well-being, the Federal Reserve Board found that optimism about future income growth in the coming year is tempered compared to that seen in the 2014 survey.

Barkley can’t say he’s surprised.

“We’re hearing in Cleveland, in Cuyahoga County, a lot of talk of homeowners’ having disposable income to reinvest in their homes, to update and conceivably increase the property value of their homes, but they’re not doing it,” he says.

Though this lack of reinvestment speaks primarily to expectations regarding the local housing market, it could reflect income-related concerns, as well, Barkley notes.

“If people are bracing for lower income levels, they may be less willing to invest in their homes, especially if they’re not sure they’re going to get a return on that investment,” Barkley says.

An insufficient amount of affordable housing is another challenge for local households, according to Barkley. The Issues and Insights survey results published in April 2015 revealed that housing affordability ranked among community leaders’ top 3 concerns for the first time. The next year, it ranked the same, second only to jobs.

The cities in which housing affordability is emerging as a challenge in this region (Cincinnati and Pittsburgh, to name 2) are places generally thought to be affordable, Barkley notes.

“I hear a lot of talk in national media about housing affordability and gentrification in cities like New York or San Francisco,” he says. “But even among middle-of-the-road markets in the Fourth District, we’re seeing these concerns.”

How policymakers can help

An emerging challenge for households regionally is an inability to pay property taxes, say Barkley and Tisler. Tisler says property tax foreclosures are nearing the level of mortgage foreclosures.

“Property taxes are something that people are really talking about in terms of what is hurting them,” Tisler says.

Lou Tisler
Lou Tisler

Property taxes are something that people are really talking about in terms of what is hurting them.

“In Ohio, in other midwestern states, the way that municipalities fund schools is through property taxes,” Tisler adds. “As states continue to cut back on local government funds, cities must make up [the funds for] basic services, so people continue to see their property taxes go up. Also, as we recover, housing values on a 3-year basis are going up [and causing taxes owed to rise]. So you get the double whammy.”

Because of tax hardships, those who secured tax abatements are likely to sell when those abatements conclude, Tisler predicts.

Another newer difficulty for households is how lenders now consider student loan debt in evaluating mortgage readiness, Tisler says. Before, if someone’s student loans were in deferment, bankers didn’t include them in debt-to-income ratio considerations. Today, they include a percentage of that debt in the calculation.

“That has placed a chill on purchasing homes for those who are burdened by student loans,” Tisler says.

Intentional policymaking and investments can improve the state of households, say both Barkley and Tisler. So, too, would financial education for more people, Tisler adds.

A lot of these issues facing households are just so structural and hard to overcome without changes in our policy environment.

Brett Barkley
Brett Barkley

“A lot of these issues facing households are just so structural and hard to overcome without changes in our policy environment,” Barkley says. “There’s a part for households to play in thinking about how they can equip themselves for the economy, but there’s a big role to be played by policymakers and different stakeholders, from nonprofits and banks doing the investing to local governments guiding programs that assist and help people get the skills they need to find and maintain a job, especially in low- and moderate-income communities.”

Sometimes, part of finding and maintaining a job is simply being able to get to work, Barkley says. Civic leaders and elected officials echoed this sentiment in June at the 2016 Regional Workforce Development Forum, citing increased transit funding to connect low-income residents with employment opportunities as a key need in the region’s future workforce policy.

Where bankers are involved, increasing households’ access to affordable capital is key, Tisler asserts.

“First, it was the Wild West, and then it was no one without a 740 credit score could get a mortgage,” he says. “I think the pendulum is starting to swing a little bit to the middle.”

Tisler advocates, too, for increased oversight of lenders who are making “little slices to people’s economic well-being,” citing check-cashing services, auto title lenders, and others. And, he adds, the state of households also rests in the hands of those issuing paychecks.

“To move the economy, people need to get paid,” he says. “If businesses want to make money because people are spending it, then their employees need to get paid a living wage.”

Sum and substance: Underemployment and stagnant wages continue to challenge US households, but, overall, Americans reported mild improvement in their financial state in 2015 compared to that of recent years.

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A Cleveland Fed analysis finds that jobs in Northeast Ohio are least accessible for the people who need them most. Read A Long Ride to Work: Job Access and Public Transportation in Northeast Ohio.

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