The economics of multifamily housing is something I understand. The economics of health care is a complete mystery to me. However, I believe the two have a strong correlation going forward.
Apartment rents are a component/percentage of household income. So is medical care. As costs of discretionary items increase (as a percentage of income- things like health care), the location of housing will become more of a focal point.
Multifamily housing close to job centers and transportation hubs is usually more expensive than apartments at further distances from these points. Well, that’s fair; multifamily housing that is closer to jobs requires less money for transportation. Easy trade-off. Easy to understand.
There is no such trade when it comes to health care.
According to the Depart of Labor, in 2007 housing represented 32% of consumer discretionary income. Health care represented 28%
Can that be true? The two things necessary to sustain life are food and shelter. How is it a single discretionary item could possibly be such a big percentage of income???
The American middle class has more to consider however. Consider these facts:
- Many states tax food. Food costs continue to rise often as a function of fuel costs and speculation (did you know both Coke and Pepsi buy corn futures because their products no longer use sugar- they use corn syrup).
- Transportation to our place of work is a necessity. No transportation, no work. We cannot drive a car without state-mandated “must have” auto insurance.
Recently we’ve been in a zero percent inflation environment. This doesn’t seem to slow the increase in health care costs, however. Here is where I see housing and health care colliding:
Increases in health care costs continue to Erode Disposable Income
With medical expenditures taking up a greater percentage of disposable income, this leaves less income for housing. Certainly, we could say the same thing for food, fuel costs or utilities as all impact disposable income.
But health care is the one item where it comes down to your money or your life. Moving to a less expensive location does nothing to impact this costs. From the Los Angeles Times:
Another big California health insurer has stunned individual policyholders with huge rate increases — this time it’s Blue Shield of California seeking cumulative hikes of as much as 59% for tens of thousands of customers March 1. Blue Shield’s action comes less than a year after Anthem Blue Cross tried and failed to raise rates as much as 39% for about 700,000 California customers. By Duke Helfand, Los Angeles Times (2011)
Even though the costs of housing (shelter) has remained stable or decreased in recent years, some how health care costs increases year after year. Why?
One objective of health care reform is to bring health care to a greater percentage of the population. This is a good thing. Politics aside, my belief is care should not be denied to anyone in need. As a Capitalist, however, I recognize we must determine a methodology to pay for said care. Here is another way of saying Health Care will impact housing:
With greater access to medical care Life Spans will increase
Again, another pending collision between health care and housing….. Where are all these people going to live? Where are we on the development path of seniors care versus day care?
Is the residential housing complex (owners, operators and builders) prepared to convert student housing to assisted living as demographics dictate changes? (Sidebar: In some states prison construction is greater than school construction- a damning reflection on our society).
Now that we are living longer concurrent with spending a greater percentage of our income on medical care- what’s the end game? It seems the list of “necessities” gets only longer starting with food and shelter-and some would add cell phone service. The real short list: Food, shelter, utilities, medical, transportation.
I have questions. Yes, our standard of living is better than previous generations. But at what costs? Note the costs of housing is correlated to household income. Many households have two incomes. Is this now a mandated necessity to maintain housing affordability for a middle class standard of living?
One suggestion to remedy spiraling medical costs is proffered by Clayton Christensen (http://www.claytonchristensen.com/) author of the book Disrupting Class.
Doctor Christensen suggest that the high costs of medical care as provided by high costs environments (like hospitals) should not be torn down. Instead, the provision of medical services should expand to lower costs environments, like clinics and in-home treatment through the utilization of technology.
Calling all social science graduate students (and Masters students in Real Estate) for further study…….
Let’s get linked: http://www.linkedin.com/in/johnwilhoit
Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets. Multifamily Insight Vol 2 is set for release in 2015.
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. See http://multifamilyinsight.com.