At last! After three years, the U.S. Census Bureau has come out with its latest Income and Poverty Report In The United States: 2019. From the report, I’m pleased to announce that the real median household income by race has reached all-time highs for all!
Not only has the real median household income by race reached all-time highs for everyone, but as you’ll also soon see that the rate of increase has accelerated for all races as well.
Let’s have a look at the details to see how high household income figures really were before the pandemic began.
Real Median Household Income By Race
The real median household income for all races has reached $68,703. Well done! Here is the breakdown of real median household income by race as of 2019:
Asian: $98,174 ($29,471 or 43% higher than overall median)
White: $76,057 ($7,354 or 10.7% higher than overall median)
Hispanic: $56,113 ($12,590 or 18.3% lower than overall median)
Black: $45,438 ($23,265 or 33.8% lower than overall median)
As you can see from the chart above, there’s been an acceleration in household income growth since 2016. Although, on a cautionary note, the chart does say data for 2017 and beyond reflect the implementation of an updated processing system. So perhaps the data is not entirely apples-to-apples.
Regardless of this change, it is still great to see all races show an increase in household income since the last U.S. income and poverty report in 2016. The acceleration in household income reflects how strong the U.S. economy really was before the pandemic hit.
I was also surprised to see the Asian median real median household income come close to $100,000. In the past, earning six-figures has meant that you were considered well-off. I’ve shared my thoughts on why the median Asian income is so high. I’d love to hear different perspectives by race as well.
Inflationary Concerns Of The Past
The household income figures provide a hint as to why the Federal Reserve raised the Fed Funds rate in 2019 before changing course. Such a rapid increase in income puts inflationary pressure on the economy. A rapid increase in income is also a part of inflation.
With a higher income, you’re more willing to spend more money on food, clothing, cars, tuition, gas, homes, services, and so forth. When prices of necessities start jumping even faster than wage growth, this is when problems arise for the masses.
Today, with millions of people unemployed or underemployed, inflationary pressure is no longer a concern. Instead of inflationary pressure, we should be more concerned with deflationary pressure.
Deflationary pressure is why the Federal Reserve and the federal government have unleashed trillions of stimulus. Deflationary concerns are why the Fed stated it plans to be more patient about raising interest rates in the future.
The intended consequence of massive monetary expansion is lower interest rates. With lower rates, money tends to flow towards riskier assets like stocks and real estate in hopes of greater returns. However, eventually, the asset allocation shift will stop as valuations become too expensive and the risk:reward tradeoff becomes too great.
As a result, workers should consider accumulating more capital before retiring. While retirees should consider lowering their withdrawal rate and/or developing supplemental income if they want to maintain their retirement lifestyles.
The economy goes in cycles and this future cycle is one of the most uncertain cycles in history.
The Overall Household Income Is Fantastic
The overall household income of $68,703 is up about 30% since 2014. In other words, household income growth has been compounding at a 3% rate for the past five years. If inflation has averaged 2-2.5% a year during this time period, there has been real household income growth since 2014.
Depending on your household size and where you live, $68,703 can provide for a comfortable middle-class lifestyle. My wife and I can probably live fine off $68,703 a year if we had no children and rent a modest 1-bedroom apartment in San Francisco for $3,000 a month.
However, in order to raise one or two kids off $68,703, we would probably have to relocate to where we can rent or own a 3-bedroom home or larger for $2,000 – 3,000 a month.
If you’re a family of four living in Des Moines, Iowa where the median home price is roughly $160,000, you’re good to go earning a household income of $68,703.
The “spreading out of America” is real, which is why I’m an investor in the heartland for the next several decades.
At the same time, I also think there is a massive opportunity to invest in and relocate to big cities. There will inevitably be a snapback in demand, and I think it’s wise to get ahead of the curve.
Below is some more granular detail about median household income by region, type of household, nativity of householder, and MSA status.
Median Sales Price Of Houses
According to the St. Louis Federal Reserve, the median sales price of houses sold in Q22020 was $313,200. Therefore, the real median household would need to earn $104,440 to follow my 30/30/3 home buying rule.
Conversely, it appears the real median household may have violated my rule and spent 4.6X its household income to buy a median-priced home in America.
Given the housing market is strong partially due to a big decline in mortgage rates, we can guess that the median homebuyer is indeed violating my 30/30/3 home buying rule. This should come as no surprise given we’re trying to outperform the median and average American.
That said, after putting 20% down on the median $313,000 home, you’re left with a $250,000 mortgage that only costs $1,124 a month using a conservative 3.5% mortgage rate. $1,124 is only 19% of $5,725, the median monthly real household income, which means at least one home buying rule is being followed.
Even if the household only put 10% down with the same mortgage rate, the mortgage payment would only consist of 22% of its monthly household income.
The Cost Of Everything Else Is Affordable
Once you get your living costs out of the way, your other costs are much easier to manage.
If we want to save on food costs, we can eat less or cheaper food alternatives. If we want to lower our transportation costs, we can buy cheaper cars, take public transportation, ride a bike, carpool, or maybe work from home.
Clothing costs are de minimis. How much more do we really need besides underwear, socks, shoes, shirts, pants, and a jacket?
Electronics are dirt cheap compared to what we now get. Further, electronic devices last a long time. For example, I’m still typing on my MacBook Pro from 2015. I also still have my iPhone 7 from 2016. My hope is to keep these two devices for another three years.
Finally, the cost of education is cheap or free thanks to public schools and the internet. Only the rich or subsidized are comfortably able to attend private schooling now. You may even want to homeschool your children during a pandemic to minimize risk, among other benefits.
How Is Your Household Wage Growth Doing?
After not being in the workforce since 2012, it is a little strange discussing the real median household wage. I feel left out, especially since my healthcare costs and childcare costs are growing rapidly.
However, thankfully, my investments have outperformed inflation and the real median household wage growth since 2012. Therefore, my passive retirement income has also outperformed.
My quest in the new decade is to build more supplemental retirement income to care for my family and buffer our finances from a likely decline.
I’m curious to know how your real median household wage has grown since the last income and poverty report came out in 2016. How has 2020 affected your household income, if at all?
Are you pleased that the real median household income for all races is accelerating higher? Or, do you believe the income gap between races has grown too wide and needs solving?