Affordability for Late Millennial and Gen-Z college grads
In the next plot I displayed average used car payments, rent payments and public university student loan payments, each as a percentage of the median salary. In a prior project the data suggested that even when considering inflation, each income quantile did make some gains over from increasing efficiencies. This was done by using the consumer inflation calculation. Here I look at unadjusted data and take a look at the data myself to see how the millennial and gen-z generations have fared in recent years by looking at the changes in cost over time. As a note, the income I am using is pre-tax salary.
Note: The rent dataset wasn’t particularly clear about whether it was adjusted or un-adjusted for inflation, so I checked year 2000 data on the historical median monthly rent plot on the ipropertymanagement.com website I used to the mean monthly data. These median numbers were slightly lower than the average, as expected. I also compared these numbers against the census gross housing tables unadjusted United states rental numbers for 1940 and those matched the 1940 values in the historical median monthly rent plot on ipropertymanagement.com, indicating that this website did indeed have unadjusted rents.
Now Let’s get to the data and my findings.
Low Interest Rates Masking Inflated Costs:
Above I plotted the data for used car loans and public university school loans since this is really the only option that would be within the median income budget. Even in this case, with rent, student loan and a used auto loan, this is between 70 and 80% of the median income, which doesn’t account for taxes, food or health insurance. I plot the new car loan and private university loan data further down.
Like with housing costs, while auto prices were skyrocketing around covid, interest rates were relatively low. Since most people obtain loans to pay for a car, the lower interest rates have offset the loan payments, which were even dropping from approximately 2014 until covid hit. Now that interest rates have risen and car prices are rising at a faster rate, people are feeling the pain. I do want to note that this masks the real impact of the higher auto costs and housing costs. I will discuss more below.
Also, student loan rates were also higher around 2008 to 2012 when prices were high, and interest rates had not yet dropped to the historic lows. Then as the interest rates dropped, so did the payments.
Auto Costs
See below the amount being financed for new and used cars. I assume that the amount financed pretty closely reflects purchase prices. During covid we saw new and use car prices spike. In the first year of covid, we saw new car prices spike 10%, followed by a 2.5% spike in 2021 and then another 10% spike in 2022. 2023 saw a very modest drop, .5%. Used cars saw a 6% spike in 2020 followed by a 13.1% spike in 2021 and a 12.7% spike in 2022. 2023 provided a 4.2% drop, but not enough relief. Also, noteworthy is that the initial higher spike was in new cars in 2020. Then there were the issues with the supply chains, we see in 2021 that the larger spike was in used cars.
For people with poor credit, saving to buy a used car in cash is nearly impossible. In March 2022 Powell started raising interest rates, adversely impacting purchasers buying on credit. We can see that there was a slight drop in the price in 2023 for new and used cars, likely to offset the increase in interest.
New Car Prices – Percent Increase
See below the huge 10+% price spikes in 2020 and 2022. Target inflation is often said to be 2%. From 2014 until 2023 when there was a drop in price, YOY price increases were all > 2%.
Used Car Prices – Percent Increase
Below we can see that the > 2% price increases for used cars started in 2018 until 2023 when prices dropped. There were two consecutive 12.5+% price hikes.
Student Loans – Debt and Payments
Below is a plot of the annual cost of public tuition and fees, private tuition and fees and median income. You can see that prior to 1992, a year of both public and private college was less than the median income. In 1992 the median income and the private college tuition and fees line intersect and after that the private school tuition exceeds the median income. Also, you can see that the in 2000 the cost of private tuition takes a steeper increase. For public tuition, the steeper incline comes around 2002.
Below I charted the college repayment loans as a percentage of median salary. Graduates in the 2010 – 2012 timeframe had peak payments resulting from the high costs of college combined with the fact that the interest rates had yet to drop down lower. From 1983 to 2024 this is a 4.8% interest rate every year. This is far greater than the 2% inflation.
What we can see in this plot, is that even though the mid to late 2010s had historically low interest rates, college payments were still higher relative to income than the in the late 1980s when interest rates were historically high.
Rent
While the top plot that showed payments as a percentage of income, I was surprised that the average rent, from 2008 to 2023 moved in the range of 38% to 41%. I had heard advice somewhere that when buying a house people should restrict a home purchase price to 33% of one’s income. This is 41% of salary, pre-tax dollars not actual income. That’s a lot. I have plotted the rent and rent as a percentage of median income from 2000 through 2023 in two plots below. We can see that from 2020 to 2025 rents increased more than 30% in that time. This is approximately 5.9% annual increase during this period. It doesn’t appear to be abating.
Average Monthly Rent in Dollars
Expanding the data set to include the years 2000 to 2008 show that the monthly rent was substantially lower in the early 2000s and the percentage of income was also substantially lower. Specifically, we can see below that in 2000 the average monthly rent was $639 and 35.6% of the median income. In 2009 we see that rents were spiking to a mean of $875 just as the real estate crisis occurred. By 2010 average rents were up to 41% of median income. They started coming down a bit but were back up to 41% of median income by 2023. We can see this spike started with covid.
Average Rent as a Percent of Median Income (Pre-Tax)
Summary
New graduates in the last two decades have been adversely impacted by the great recession of 2008 and also with the covid financial challenges. They were impacted by housing costs, car loan increases and student loans all at the same time. In the case of purchases via loans were substantially impacted by any increases in interest rates, or during the mid to late 2010s they benefited from the dropping interest rates.
We can see housing costs increasing with the 2008 crash and housing costs started increasing at that time in part because building was stopped during the crisis. Construction was again cut back in some cases during covid. Further impacting home and rent prices is the buying up of single-family homes and multi-families by private equity and large corporations since the great recession of 2008.
In addition to the cost of home/ lodging, the cost of cars has skyrocketed in the last few years. Outside of major cities, cars are generally required. Some families may have started to make one car work with more remote workers since covid started. However, as corporations start forcing workers back into the office, this may make one car families an impossibility when both parents/ adults work.
Sources:
Median Personal income from US Federal Reserve: Median Personal Income in the United States (MEPAINUSA646N) | FRED | St. Louis Fed
Rent: https://ipropertymanagement.com/research/average-rent-by-year
Average Total Cost College – https://www.usatoday.com/story/money/2019/05/18/cost-of-college-the-year-you-were-born/39479153/
New Car Auto Loan – Average Amount Financed for New Car Loans at Finance Companies (DTCTLVENANM) | FRED | St. Louis Fed
Used Care Auto Loans – Average Amount Financed for Used Car Loans at Finance Companies (DTCTLVEUANQ) | FRED | St. Louis Fed
Interest Rate – Auto loans – Finance Rate on Consumer Installment Loans at Commercial Banks, New Autos 48 Month Loan (TERMCBAUTO48NS) | FRED | St. Louis Fed
Federal Student Loan Rates – https://www.savingforcollege.com/article/historical-federal-student-interest-rates-and-fees