MattChepeleff.com » Healthcare

Stay Above the Median

Matt — Fri, 06 Aug 2010 08:43:03 +0000

I’m planning on buying a house with my wife in the (near?) future and we’re in the learning phase of mortgages, financing, PMI, debt-to-income ratios, points, taxes, blah blah blah. It sounds exhausting doesn’t it?

Through the process I’ve thought to myself, maybe we should wait and put 20% down. Then we can get a fixer-upper¹, save on things like private mortgage insurance², and probably get better rates from a wider variety of lenders.

That’s a lot of coin, though. No matter how you dice it.

Figure for a $200,000 home you’re looking at about forty-grand. Median home prices were about $215,000 in 2009³ so this really doesn’t seem like a crazy amount. Now, I suppose you could look for something more affordable, but where I am (in Connecticut) if you’re after a single family home you’re still probably in the $150,000 range – which puts your 20% down-payment at $30,000. This whole 20% really has my attention now and it’s leading to a few questions and lot of frustration.

How did our parents and previous generations (who didn’t have 100% loans and 3.5% down FHA programs) ever get a house?

I don’t recall hearing about my parents or in-laws living with their parents for an extra gajillion⁴ years to save the 20%. I’m sure in their generation did, which is cool, but now I’m convinced there has got to be more to this. Why does 20% seem like so much, or could it just be me?

I thought it’d be smart to start by looking at the numbers. Specifically, I kicked off my investigation by looking at median home values (nationally) over time.

Figure 1
I think there’s a growing trend here ⁵

My thinking went something like this: Perhaps because homes were much cheaper…they also were more affordable. Nay you say? Alright, I give, you’re right – they’d only be more affordable if annual salaries were higher versus home prices than they are now. So let’s look at that next.

Figure 2
Hmm…not quite as obvious what’s happening here ^5/6/7

This graph is showing us unadjusted⁸ median home prices in blue and unadjusted median household income in red.

So, from 1968 to 2002, household income was growing faster than home values.

In green I’m showing a multiplier between median household income and home value – or in other words, “How many times the average salary was the average home value.”

This is another way of painting the same picture, this time using green pixels. You’ll notice that when the blue and red lines get close to each other, the green area grows. If you think about it that makes sense: When home prices (blue) grow faster than income it takes more multiples of your income to buy a house outright.

Here are a couple of interesting stats from the graph above:

Table 1
Unadjusted income and home prices, 1968-2008 ^5/6/7

I think that’s just neat to look at. It doesn’t tell us a ton though. A more insightful and related chart would be one that shows income adjusted for time.

Figure 3
Adjusted median household income, 1968-2008 ^6/7

This is much more useful than the table above and it also reinforces figure 2.

The big takeaway for me here was that from 1998 to 2008 median incomes were flat – at best.

In fact, median household income from 2000 to 2008 never peaked higher than 1999’s figure and 1998 beat out 2008! Ouch, that’s a decade lost.

From 1998 to 2008 the Consumer Price Index rose 32.1% while Median Household Income fell by 1.9%. At the same time, the median price of a home in the U.S. rose by 51.6%.

So, now that I’ve got part of my apparent desire to be an economist out of the way for a few minutes (it’ll resurface before you know it), let’s recap and slowly work our way back to the whole home thing.

We know from comparing income to home values that we’re not quite as well off now as we were back in 1968 and we’ve stopped growing our median income nationally for roughly the last decade.

I suspected there was more to the story when I thought about health insurance. We all know its cost is up, but I personally didn’t know by exactly how much.

Figure 4
Private, employer-sponsored average annual premiums, 1999-2009 ⁹

So clearly these costs are growing “like whoa”⁴. In fact, from 1998 to 2008, those with family coverage through a private, employer-sponsored health insurance saw premiums rise by almost 127% (or at an average year-over-year growth of about 8.2%).

Eight percent growth in health insurance over the past decade far outpaces the rate of growth in income, so we know health insurance is eating into our budgets elsewhere.

Private, employer-backed insurance breaks down into two components we should look at, however. When your company is providing insurance for your family, they pay the bulk of the cost and you pay the difference through co-pays and other out-of-pocket expenses. So, on a month-to-month basis, just how much is insurance taking out of our collective pockets?

Figure 5
Private, employer-sponsored average (family coverage) cost distribution
between employers and employees 1996-2009 ^{Average of 10/11 and 12/13}

As it turns out, while the total cost has shot up like my money tree in my dreams, the allocation of who pays hasn’t changed much at all. I didn’t expect that. The variance for family coverage is 2.85% and for single coverage is 2.40%. This means we’re paying about 1.5% more now than we were in 1998. Not huge, but it doesn’t help when combined with the quickly rising total cost.

As many of us know, the employee portion of these rising costs hurts us directly. We see these costs as they come out of our accounts one at a time. But it also hurts our employers. They’re shouldering the larger portion of this quickly rising cost.

This explains why median income hasn’t risen over the past decades. Our companies rising benefit expense for health insurance has offset any increase they’d otherwise be able to give us as raises.

Well that’s poor news, but it explains things. I think it also brings up another good point, too. For the past decade there’s been a missed opportunity cost we’ve all forgone for the sake of insurance coverage. I’m talking about the income taken out of our pockets on our employers’ side.

I know as an entrepreneur (and someone who has written business planning software that takes into account exactly this kind of benefit expense for you – visit TheIdeaStartup.com for more info on that) that the total cost for resources comes most notably in terms of salary and total benefits.

The total cost of human resources has risen from the company’s perspective – but on the benefit side which means we’re not seeing the increase – it’s not padding our pockets.

Between 1967 and 2008 (a span of 41 years), during 22 years the Consumer Price Index rose while Median Household Income fell. Exactly 0 times did the opposite happen.

I wanted to see what kind of a month to month impact all of this together might have on someone buying a home in 1998 versus buying a home in 2008.

Figure 6
Monthly Expenses and Income in 1998, 2008, and 2018 (est.) ^{Sources/Assumptions below}

This little chart will take some explaining. Let me start by listing off the assumptions and sources of all the data here:

I started with the median household income for 1998 and 2008⁶
I first broke out the monthly mortgage payments, assuming the full 28% debt-to-income ratio¹⁴ would be used. I’m also assuming a 30 year fixed mortgage at 5%, with 10% down and 1.5% property taxes plus PMI. The mortgages are for the respective years’ median home price.
I’m assuming 30% of income goes to non-housing/medical CPI-category costs, adjusted using the CPI over time. This is the red portion of the graph, called “Expenses.” Basically I’m trying to capture the adjusted cost of things like food, clothes, transportation, recreation, education, communication, etc.
Employee paid health insurance expenses are evenly allocated over 12 months using the 2009 average of 26.3% of total health insurance costs being paid by the employee. This works out to $1,382 and $3,354/year, respectively for 1998/2008 (Purple on graph, “Employee H/I”)
Employer paid health insurance works out to $4,211 and $9,325/year, respectively for 1998/2008 (Teal on graph, “Employer H/I”)
Personal savings, in orange, is 4% of gross income.
Taxes, in dark blue, use their appropriate tax rate and assume the standard deduction for both 1998 and 2008.
“Leftover,” in bright yellow, shows the monthly income allocation after the mortgage, expenses, health insurance, savings, and taxes.
For my 2018 estimate I’m:
- Assuming +2.5% year-over-year growth for home values, as compared to the 1998-2008 average of +4.1% growth
- Compounding +1.3% year-over-year growth in income, despite the poor 1998-2008 average of -1.1%
- For health insurance, the 1998-2008 average was +8.2%, but I’m going with +5% year-over-year until 2018, hoping that growth in these costs will slow
- I use an average CPI growth for 2008-2018 of +2.5%. 1998-2008 actual was +2.7%
- I maintain the same 4% savings rate for 2018
- I estimate the 2018 tax rate will be 25% higher than the 2008 tax rate

All of this kind of tells us what we already know, but more concretely and visually (both of which I like!). A new mortgage has and probably will continue to eat up a larger portion of our income. Healthcare is killing us (both out of our families’ pockets and in terms of the lost raises from our employers due to their higher costs). Taxes have been the one component I’ve highlighted that’s actually shrunk since 1998. That helps the 1998-2008 comparison, but I don’t expect massive tax breaks and drops through 2018. I think the effective tax rate will only rise.

But for the past decade, flat growth in income has been a killer. It’s allowed both home and common expenses to consume a larger share of our income. We simply don’t have the “leftover” income we used to have. This has got to change or we’re going to reach a tipping point long before we reach 2018.

So, with that I think I’ve answered where the money our parents generation used to save for a home has gone. I’m pretty sure we’re still on the same road which makes me worried for future generations (specifically, my future kids, I’ll be honest).

I guess all I can do is hope that my family stays above “median.” I always thought the “American Dream” was the ability for you to pull yourself up by your bootstraps and make a life for yourself. Looks like that’ll only work if you’re well “above average” from now on. Isn’t that just a horrible thing to say…and even worse if I’m right?

I hope I’m wrong.

Matt

Last Notes:

I should add that our addiction to credit card debt seems easily explainable when you look at the big picture. If there are more bills and the same amount of money, debt will pile up. See this infographic for more statistics on our national obsession with credit card debt (rest assured I’m not judging, I’m sadly a user myself).

I should also lazily confess that I haven’t even factored in college educations into the above. I didn’t factor in the hundreds or thousands many of us are already paying for our own student loans (looking forward to 2028 when those are done!). I also didn’t factor in the college saving funds we’d all be smart to start early for our own kids. Thinking about that on top of the rest of this makes my head spin.

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11/8/09: I’m happy, kind of.

Matt — Sun, 08 Nov 2009 07:12:01 +0000

I’m pretty happy right now. The House just passed the epic healthcare reform bill and kept public funding of abortions out of it. I’m having a stream of thoughts as I watch this unfold on TV and the web though:

People who complain about the government take over of health care and offer instead that the private sector is a better solution should keep in mind the free market approach got us into this in the first place.

I think the Republican complaint that government shouldn’t get involved is just silly. They make points including government will be wasteful, inefficient, incompetent etc. I understand the concern – but isn’t that also saying that Republicans themselves are probably about half of that problem (other half being the Democrats as we have a lovely 2 party system)? The reality here is the government is already responsible for a lot. A ton. Trillions actually. If we already must trust them with things as important as our national security then perhaps the real issue is holding our government more responsible instead of putting less on their plate. Why can’t our government be afraid of what we think like some other countries – I think that’d be great. A “truer” democracy IMHO.

Related to the last item (if you want to talk about the private sector being more efficient with health care than the public sector): We spend hundreds of billions on wars and if the private sector is so efficient then why don’t we privatize the military too? We allocate hundreds of billions here – we ought to be able to save a ton! Now, this would be a horrible idea – I think most would agree with that – because our security and our health shouldn’t make people rich – it should not be profitable. They’re both (healthcare and security) rights every American is due and should all contribute towards. (Couple notes: I know there are private contracts in Iraq etc so my insinuation that the military is entirely publicly run isn’t entirely true. Also, on the topic of wars – I find it interesting that the GOP was fine charging up the wars on our nation’s charge card – why isn’t our own health worthy of this?)

I hate the lobbies. Some of what the big lobbies get away (on both sides!) should be criminalized. Clink go the handcuffs.

I hate earmarks – it’s going to be a shame when a bunch get tagged along to this bill in the Senate. It’s baloney.

I don’t fully understand how a private system would work better anyway. Any private system will inherently put shareholders over policyholders. How is that an ideal system? Profit cannot serve as the reward, goal, or incentive. Private insurance is a simple operation: less paid in claims/for care = more profit. The system needs to put patients first. I think profits need to be taken out of the equation. Bottom line. But it should be noted that’s not what this bill is going to do. Ugh for me.

The government doesn’t innovate! They’re going to kill us all with crappy care! We’ll let’s keep in mind the government isn’t taking over the system with this new bill. They’re offering a public option with the goal of stimulating competition in an industry enjoying massive profits. Now some say that “It is the U.S. government — via the Energy and Defense departments, the National Institutes of Health, and the Small Business Innovation Research and Small Business Technology Transfer programs [who] provide money to support research and development in government-funded national labs, at universities and in industry that are largely the driving forces for our nation’s innovation.” I believe, like with defense, innovation will continue if the government takes this over.

Is everyone aware that these private insurance companies are printing millions (tens of millions for some) in pure profit every single day! Since the companies are public – look up their quarterly tax filings. The SEC provides us with Edgar online – access to all public filings. Pick an insurance company and pull up their most recent 10-Q (quarterly filing). The drill into the Income Statement – you’re looking for Net Income (or Net Earnings, same thing). Look for the column showing the most recent quarter (3 months) – and keep in mind this figure will be in millions – so 1,000 is really a billion dollars. Now Net Income or Net Earnings are what the company has left over after they paid their bills, interest on debt, employees etc. This is profit – pure and simple. 1 billion per quarter is 11 million a day – in profit, not revenue! Are you really okay with that kind of money going to top investors and to top management (through performance based bonuses) because of your health? I’d bet these profits go more towards the top 2% of earners than the lower class – so who is really cashing in on care here? Um…not me so that’s a problem

This bill isn’t anti-Freedom. You know what’s anti-Freedom? Being a diabetic who can’t get insurance because I was born with a pre-existing condition. Or how about a family who is left without insurance because the mother/father/both lost jobs. Fox News and CSPAN callers fail here.

People love Medicare and Medicaid – whenever you talk about touching those people freak out. I especially hate the commercials with old people complaining that we need to protect the greatest generation’s right to healthcare during retirement. I don’t think we’re kicking you to the curb here – so first off calm down. Secondly, I am paying for your retirement already – keep in mind I am paying Social Security and might not ever see that money out the other end. Also – your generation has charged enough to my generation’s charge card – so zip it and let us in on what you’re fighting so hard to protect. If I had a grandparent alive I might put this more gently – but I don’t and am assuming they understand what I’m saying (plus they have to forgive me in heaven right?)

I like the approach businesses take when making big decisions – you first look for best practices in the market – it’s always a great reference or starting point. It would seem that countries like Italy, the Netherlands, France, the UK etc. would be great places to start. These countries rank towards the top of all the lists – and more importantly they always beat out the US system. It should be noted the most common system in these top countries is a form of nationalized coverage. But again this bill doesn’t even take us that far – so chillax folks.

Cost, cost, cost! We’re spending too much! I understand the concern. But rather than harp on the 1 trillion dollar price tag – let’s keep in mind 2 other really important points. The CBO says (a) health care costs are rising fast and consuming a larger and larger portion of the federal budget and (b) this bill “would yield a net reduction in federal budget deficits of $109 billion over the 2010-2019 period.”

I hate US media. My stance is – you’re always going to remove other’s bias if you go right to the CBO, independent polls, (some) non-US news sources etc. to get your info. It honestly concerns me that people who get their news solely from Bill O’Reilly or Keith Olbermann have the same weight in their vote as some of the rest of us.

That’s all – I’m tired and going to bed. Apologies for typos or grammar errors – it is past 1am right now.