Posted on April 29th, 2008 in Mr Mortgage's Personal Opinions/Research
Mr Mortgage here…how much house can you afford?
This simple table below illustrates how so much affordability has been lost in the past year. Without exotic loan programs/guidelines such as interest only, stated income, zero down, 2nd mortgages to replace down payment, higher debt-to-income (DTI) ratios, Pay Option ARMs etc, we have gone back to a 30-yr fixed rate society overnight.
While this is likely a good thing in the long run, it is horrible for housing prices, especially is regions where values got out of control. The problem is obvious…it has become difficult for the median household income to buy the median priced home in many cities in America using a 30-year fixed rate loan. Obviously, at some point in the past, the median income could buy the median home and that is where we are headed again. The problem is, it likely will not be due to income rising.
Take a look at the chart (above/below) and locate your household income under ‘Income Needed to Qualify’ in the second row. Then, in the first row, see how much mortgage loan you can afford.
Next, find the average home price in your city, zip code or neighborhood to see if you could afford to re-buy there, or look through online home listings to see what you can afford to buy. For those currently paying exotic loan payments, such as teasers, it is a shock how little house they can afford. Also keep in mind when figuring out how much you can afford, that a large down payment is needed in most cases of at least 10%. If you look at the bottom of the grid, I use 20% down to establish the purchase price.
The following is a link to the nation’s MSA’s (Metropolitan Statistical Areas) from the NRA. These data cannot be relied upon to find the average home prices in your neighborhood because each survey region is too large and real estate in always local. But, it is good to see broader values in your region. Is your income enough to buy the median home price in your region?
EXAMPLE – BIG TROUBLE IN THE BAY AREA…Below presents a problem for many regions in the nation, such as the San Francisco Bay Area where median household income is $70,700 and the median home sales price $770,000. According the chart below, a home price of $770k requires a whopping $155,000 down, a $620k loan and annual income of $160k. $70,700 does not buy you much – less than that of the current median home price. What percentage of the population actually earns $160k per year? Answer: very little.
The grid above factors in conservative mortgage rates at zero points, average taxes and insurance factors, a reasonable debt-to-income ratio of 40% and meager ‘other’ household monthly payments of $250. This is not an offer to lend and I am not a licensed real estate broker. This is for example only. Call a mortgage broker or your bank for current mortgage rates for your particular scenario.
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