Geographic Location As An Accelerant to Wealth Building

Wow, I keep finding more interesting Bloomberg articles that catch my eye.  I recently came across a Bloomberg article where the main discussion point is how hard it is for Millenials to afford new homes, especially in cities on the West and East coasts.  This intuitively always rang true with me but I had never seen much data to support my intuition other than those cost-of-living calculators online (and you never really know the data that’s driving those).

Although the article went on about how Millenials, as a generation, are having a hard time finding homes to buy in places they really want to live – such as the trendy California coast or the bustling cities in New England, I think the main take away for young people who want to reach financial independence is really look at the costs of housing in the place where you are thinking of setting up your life.  Even if you choose to move in a few years you’ll still want to save on housing costs, because an excessive rent/mortgage payment can be the greatest hinderance to your ability to save and invest money.

Take a look at the chart below.  It shows top cities where there is the largest gap between average Millenial earnings and what they would need to earn in order to afford the median home in that area.  The data assumes a 20% down payment and that 1/3 of take-home pay is going toward the house payment.

San Jose may be incredibly beautiful, but say goodbye to owning a home there unless you're willing to bury yourself in debt.

San Jose may be incredibly beautiful, but say goodbye to owning a home there unless you’re willing to bury yourself in debt.

Look at the disparities on the West coast especially.  In San Jose, it would take the average Millenial to earn over $80,000 more than the average wage in the region ($53,000) in order to afford a home.  We’re not talking mini-mansion here either.  The median home value in the region is over $900,000.  $900,000!  It’s difficult to get ahead, even for a high income earning couple who commits to frugal living, to afford a $720,000 mortgage.

Take a look at the full list of cities that were analyzed.  It compares average millenial earnings and average home prices of different cities as the key metrics:

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I’m proud to say my home town of St. Louis is near the top of the list as far as home affordability.  There are also some good cities nearing the top like Kansas City and Indianapolis.  Although it wouldn’t be my first choice, real estate in Detroit is really cheap right now, so if you were so inclined, you could move there and have quite an affordable lifestyle.

One thing this article fails to discuss is that many Millenials simply aren’t focused on buying a home.  Many of my friends definitely see home ownership in their future, but not until they hit their early 30’s at least.  I get this.  Renting provides a lot of flexibility, so one can just pick up on relatively short notice and go to another city, or even country.

The thing is though, there is a correlation between rent prices and home prices anyway.  The ratio certainly varies depending on the city, but when all is said and done, living in Brooklyn will only be somewhat cheaper than living in Manhattan, whereas moving to Indianapolis would provide significant savings on housing costs over both cities.

Although I cannot guarantee it, I am pretty sure my wife and I will spend our lives living in the midwest or southern regions of the country.  We may even stay here in St. Louis long term.  It is simply so much easier to get ahead when you have lower costs to live but don’t sacrifice much in terms of quality housing.

If you add this to the fact that there are many jobs in the midwest and southern regions of the country that still pay relatively well, it is easy to see how a couple with solid jobs can easily afford quality housing (and thus build wealth faster) if they live in the midwest of the south.

I was thinking of this because I just finished reading the late Dr. Stanley’s Stop Acting Rich.  There’s a section near the end of the book where he discusses housing and the relative amount of millionaires that live in different areas of the country.  From p. 265:

I also pointed out that as a proportion of their respective populations the Midwest had a higher concentration of these high-net-worth people…the concentration of millionaires next door in the Midwest is 1.65 times greater than what is expected, given the size of its overall population.  The South is also above the norm with a multiple of 1.2, while California and especially Northeast areas of the United States have less than half the expected number, given their overall household population.

So, statistically there are two to three times more millionaires, adjusted for population size, in the Midwest and the South than there are on the east and west coasts.  Reading this blew my mind because, although I had the intuitive feeling that this was true, it was great to see actual data to confirm this hypothesis.

Sure, a small business owner might be able to charge a little bit more for his or her services in a high cost of living area, but relative to housing costs, the same small business owner gets to keep more of their earnings in the Midwest of South, because all of that profit is not immediately going out the door to pay higher property taxes, rents, and principal payments.

I’ll talk more about this topic in the future, because I feel like I’ve only scratched the surface here.  Housing costs have a profound impact on one’s expenses, and thus a profound impact on one’s ability to build wealth, since housing is one of, if not the largest expense for most people.  For those in the early stages of building wealth like my wife and I, living in the Midwest and southern regions of the country, while making an average or above-average income, is a solid formula for increasing capital for investments.  People underestimate living in these cities because they are not as glamorous, but the relative ease of living is something that I can say, for personal experience, that I am incredibly thankful for and cherish a lot.