Posted on April 29th, 2008 in Mr Mortgage's Personal Opinions/Research

Mr Mortgage here…how much house can you afford?

Click the image for a larger picture

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.

Click the image for a larger picture

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.

Mr Mortgage YouTube Series


Is Now a Good Time to Buy a Home?

Mr Mortgage – Non-mainstream March Existing Home Sales Report

Mr Mortgage – March Foreclosure Crisis

Mr Mortgage – Here Comes the ALT-A Crisis


  1. Problem with DTI’s is that they conceal insufficient residual income in areas with high cost of living expenses. Based on the estimates provided, a typical family of 3 in California would not have sufficient balance left over for family support when factoring expenses for income taxes, health insurance, fuel and food costs, utilities, phone, auto insurance, and typical child care expenses (for borrowers earning $30,000 – $80,000).

    The impact of food and fuel inflation along with higher insurance and child care costs is debilitating for typical families in high cost of living areas, Families whose debt ratios are structured based on FHA or VA standard ratios are basically insolvent.

    Because of the impact of inflation, lenders would be well advised to apply a residual income test.

  2. That’s why they really need to go back to the decades proven 28/36 DTI (28 = mortgage debt 36 = total debt). But, then nobody would qualify. They thought that artificial underwriting engines in combination with FICO solved the DTI problem but in fact, it was just a prolonged period of rising home prices and then in the new century, an easing of credit qualifications.

  3. The table presented is very optimistic and would require a beans diet for most of the payments to be made. I know from personal experience if you throw in a divorce, child support, and monthly health insurance, these numbers don’t add up.
    I make in excess of 120k and live comfortably with a 120k mortgage. I don’t think my comfort level would be met with a quadrupling of my monthly mortgage. I would consider my financial situation as precarious at that point.
    I live in a small city in Arkansas and look around at the new cars, and big houses, that people have acquired in the past 6 years and I am amazed. I know the median income is only 28k for my area but everyone seems to be able to drive a new Yukon and live in a 200k home.
    There is a long way to fall for these people and I don’t think they see the train lights coming down the track.
    I think the first thing we need to do is start to teach our children economics and budgeting. I watched a news report on a couple that had bought a new car every year for the past 5 years. They had rolled the amounts owed for the car being traded in into the new car loan amount. This is the most ignorant thing I have ever heard of. At the time of the article the couple was upside down over 50k for the two cars that they owned. I just don’t get it, or maybe I do and they don’t get it.
    I would like to thank you for your post and keep up the good work.

  4. Thank God some one is saying what I have been trying to say since 2000. Even at 28/36 it is somewhat pushing it (with food, fuel & energy), but has been proven past as accurate. The blood bath in defaults and foreclosures have just begun… So few in the financial sectors understand Ledger and off ledger banking and reporting…

    Simple math. The standard in Mortgage lending has been a P&I 30year fixed rate mortgage. ARMS, OPTION ARMS, I/O’s and creative financing has pushed homeowners into financing 2-3 times the amount they in reality could qualify for (full doc). Stated is a completely different story…

    Thanks Mr. Mortgage for being real and not full of “BULL”..

  5. I think it would be interesting to see your table compared with an example based on the past Alt-A and subprime possibilities.

    How much was a family able to lend assuming they had an income of 100k before all these changes took place? What is the percentage-drop in affordability?

    Thanks for your information. I always look forward to your Youtube-video’s.

  6. I typically really like your posts and videos and like certain parts of this one as well. The only problem with your post, as with the mainstream media is that it is almost entirely focused on the people that live in the NE and CA.

    CA has a big problem, maybe actually bigger than everyone is talking about. Going to be a real nightmare there for many, many years to come. It is so bad, it is effecting the rest of the Country. I certainly have feeling for the people hurt by all of this. You need some real legislature changes out there, perhaps this mess will bring some change. I sincerly doubt it though.

    This is not a reflection of the US as a whole. IE, in TX your tax number is off by 100%, too low. You would actually need significantly more income to qualify for those houses.

    Personally, I think the 38% rule works just fine. People can have a life outside of the house and are not always trying to keep up with the Jones’. I am also a big believer in take the hit now rather than draggin it out. Let the foreclosures and REO’s flood the market, just as they did in the late 80’s. We will recover just fine, we always do.

  7. “Debt-to-Income” is a strange choice of words. In fact your “DTI” figure represents Interest-payments to Income “I-to-I”.

  8. Unfortunately, the broader population appears only to be following the spendthrift example being set by Congress and the Bush Administration. Borrow and Spend. Borrow and Spend. Borrow and Spend. Access to credit is drying up, lending standards are tightening, the proverbial music is soon going to stop; and unfortunately many of these same Americans will be without a chair. Or a new SUV.

  9. I understand about my primary focus being on states few bubble states but agruably those states made/make up 70% of the US housing market and GDP and 80% of the defaults/foreclosures.

  10. There in lies the problem, and you prove my point. Those stats are no where even close to accurate. I am betting whatever statistics you are relying on are based on home values which I believe, (and in using you affordibilty scale), are still 50% overvalued in CA.

    That is about what is needed for the average income to afford the average house in CA.

    Based on the US census CA makes up 11.95% of the US population. The bubble states where most of the problems lie comprise most of the top 8. Subtracting out the states that are not having the problems you come up with 35%.

    Interesting how we keep coming up with the 50% number. By my math, 35% of the population is causing 80% of the problem. Can you agree with this, or do you think I am way off?

  11. The real estate tax amount is great understated. 70×100 3 bedroom homes in Long Island or New Jersey often have 12k a year in property taxes or one thousand a month. Plus median household income is a meaningless number. Median household income of people buying 700K homes is more important, quite often that is a dual income college educated couple. Median income of the entire town includes every clerk, fast food worker and retired person, these people are not in the market for a 700K home so why should their incomes be part of the equation, kinda like saying no one will buy a brand new mercedes cause the median income in the town is only 60K, usually only the people in the top 5% on income buys new mercedes so it matters only what that 5%’s median income is. Town could be a big factory town where 95% of the town are blue collar union people and the other 5% are big executive management. Median income in that town will be quite low as 95% makes under 69K a year but who cares, the 5% of the town making over 150K a year are the only ones buying the benzs anyhow.

  12. Great point about NY. In TX, a 700K house would have taxes closer to $2,000/mo.

    Also great point about the stats. Again focusing on CA, the 70K a year people think they deserve 700K houses. In my neighborhood, the median household income is over 200K and the home values are around 500K. Not too many foreclosures around here.

  13. “Again focusing on CA, the 70K a year people think they deserve 700K houses.”

    In the expensive parts of CA (the SF Bay Area), a 700k house is nothing special. Think 4br, 2ba, around 2000 sqft. That is a mid sized house for your average middle income family.

    I’m not saying that is right, or that someone with 70k income should be buying ANY house, or that prices shouldn’t adjust, but the ‘think they deserve’ comment seemed to imply that these are people trying to live like kings.

    Also, TX doesn’t pay state income taxes, so the overall tax burden balances out. DTI is based on gross income and presumes some portion goes to fed/state taxes.

  14. I guess that sounded bad, you are correct. My assumtions are based upon Mr Mortgages table. There is a real problem in CA and I don’t think creative financing is the answer. Creative financing is one of the culprits in driving prices so high in the first place.

    My real point is that the $700K house in CA simply is not worth $700K. Primarily because there is no one to buy it. The value needs to come down and it is currently hurting a lot of people and will hurt a lot more. It should probabaly be worth $350K. Same house in TX would probabaly be $175.

    Still seems a bit out of line, but a little more down to earth.

  15. No one has 20% down. Try it at 10% or even 5% (FHA) and then compare the incomes needed to qualify with median income for the area. It doesn’t pencil.

  16. SOME people have 20% down – mainly move-up buyers. (At least for now, until prices drop another 20%). The trick is that eventually that trail of buyers leads back to a first time buyer. And the likely first time buyer is probably someone at the mid-income level. And how are THEY going to have 20% down on a $300k ‘starter’ house? I know I had 10%, borrowed from mom.

    Anyway, this madness all started around 1997. Prices should be around 1997 levels in real terms.

    What I’m interested to know, like others, is what $70k supposedly bought in 2006 (with exotics), versus the $300k indicated by the above model? That will tell you how far prices have to fall… 50%???

  17. Interesting article, but I would support a more prudent Debt To Income Ratio. We all know that the Social Security System is in disarray, that Investment and now commerical banks are STEALING and devaluing our savings. After careful analysis I submit that a DTI ratio of no more than 9% is more realistic. If you can pay of debt, walk from debt or refuse to incur debt that will help protect you from being a debt slave or mere property to a bank or loan company. I am now at this ratio, and have FREEDOM. I can buy most anythng I need or want with NO LOAN. I have a MODEST INCOME, YET DECIDED TO PAY ME FIRST INSTEAD OF A LOAN COMPANY. I am saving not by investing but by excluding my income from the INVESTMENT AND COMMERCIAL BANK THIEVES. NO PROFITS from me! If we all do this, we will bring the banking monster down to the abyss. REALLY If I can survive 14 bank cards (now zero) AND IN TEN YEARS AMASS CONSIDERABLE amount of CASH not in a bank—-SO CAN ALL OF US.

    It really only took me ten years to become not only “debt free”, but FREE.

  18. Please visit us at http://www.RunOnTheBank.Org to learn how YOU can JOIN us in getting our economic and personal freedom back from the bankers. WITHDRAW YOUR CASH AND INVESTMENTS—-and do anything with them, but REFUSE to allow Wall street banks to suck your accounts dry. Destroying the cash is better than letting them have it so they can use this power to destroy YOUR freedom. “Self-immolation” of your investments is better than submitting to the evil of banks. I am losing interest, but gaining MY OWN POWER, since I refuse to yield to the LOAN and BANKER MOB.

    http://WWW.RunOnTheBank.ORG latest news daily—we even have survival skills, cooking lessons and a new community of “survivors” instead of DEBT SLAVES. Google keywords “MONEY as DEBT” to see our approach—its a great 42 minute FREE video—on Google.

  19. I live in San Francisco, I make $170K in salary and have $150K to put down for a downpayment. I wouldn’t touch this housing market, or for that matter I wouldn’t have touched the housing market here for the past 5 years. San Francisco is, of course, much more expensive than the bay area as a whole. The starting price for 2 bdr condo in a nice area of San Francisco proper is around $850-900K. it is out of control. I could probably stretch to afford this but would be able to do nothing else. And that’s what most of my friends in their mid 30s have been doing who have bought in the last 2-3 yrs. living and living and living INSIDE their house, like its a prison. they can’t eat out. they can’t go anywhere, but they have a $1M 2 bdr condo because somehow they believed that if they didn’t buy at that time they would never be able to. Guess what? Most of them have 5 or 7 yr IO ARM loans and those will be resetting mostly in 2009-2011. This is so common among affluent ( at least high income) 30 and 40 somthing yr olds here.

    Besides the insanity of the crowd mentality, which i was ridiculed for not buying into, the rental prices are just so much cheaper. Mind you, they are not cheap compared to other areas, but they are compared to mortgages.

    For instance, i rent a 2bdroom apt in Pacific Heights for $2150/mo. Just last month I went to an open house and saw a very similar size and condition condo in the building next door. The condo was listed for an astounding $1.2M. And guess what? It sold in 2 weeks.

    So some rich, or should i say poor, schmoe is handing the bank $200K down and $7000/month to live in the same apt. that i paid a $4000 refundable security deposit and only $2150/mo. And i can walk away no problem at any time.

    This is insanity.

  20. Your chart shows that a bigger problem needs to be addressed and that is the wages of American workforce…..Americans need to look at the root of the problem that was covered up by HELOC’s and credit cards and that is..AMERICANS DON’T EARN ENOUGH…our salaries have not kept up with the demands of housing prices, gas, food, insurance and basic utilities..everything keeps going up by 5-10%, but our salaries are not..That is why many Americans today, unlike our moms and dads have to have multiple jobs in order to cover everyday living..Yes, housing does play a role in our cost of living, however, most Americans today, who are current in their mortgage, are stuggling..and they don’t all have 700K houses and BMW’s..

  21. Kis is onto something important: the prices in the absurdly overpriced areas are supported by the folks that have lived there during the run up. My home is now worth 4 times what I paid for it, so with an affordable loan I can buy something that would take 3 times my income without the huge equity in my current home. But I’m just 10 years from retirement, like many of my Boomer cohorts. Social Security and my 401k’s won’t support that “affordable” loan once I retire, so I would have to sell that megabuck home and move somewhere cheap; many are already doing that. But anyone who bought recently won’t have that big run up in equity, and won’t be able to move up; so eventually there must be a drop in prices to some level of affordability. I think we will see years of gradually declining prices once the big drop (40%?)gets done.

  22. MortgageMan is FOS. Show me a 200k+ neighborhood with 500k houses! Imaginary.

  23. Just as reasonable home prices are tied to family income, reasonable family income is tied to productivity. There is just no viable way to increase income without concomitant productivity increases. Anything else is inflationary.

    Maybe some could work more, probably most simply cannot. Therefore it is unlikely wages will rise to meet current California housing costs, ergo housing prices will continue to come down, moreso as the costs of credit continue to rise.

  24. Kis – Median household income is about $50. So, yeah, they shouldn’t be buying a $300k starter home, they should be buying a home that’s no more than $180k. And if that median household is able to sock away 10% of pre-tax pay and earn an ok return on it, they can save up that down payment in about 7-8 years.

  25. Okay, I went ahead and got the data for my county, just as an example:

    Santa Clara County, CA

    Median Household Income (2006) – 80,838
    Homeowners (2006) – 102,579
    Renters (2006) – 51,912

  26. So, $100k buys a $400k mortgage. Or, with 20% down a $500k home. What is the median home price in Santa Clara? I think it is about $775k. Perfect example but of course, you have to use a smaller srea than a county.

    The fact is in most areas in CA the median cannot buy the median home. Renters have to be counted because they are prospective buyers. Move-up buyers do not exist in great numbers because of they can’t sell.

    Finally, the number of foreclosures dwarf the number of sales therefore there is imbalance there as well. as a matter of fact, there was 43k notices of default in CA last month and only 25k sales. Of those, 38% were bank owned REO sold at substanial discounts.

    I think that indicator is fairly realiable over time. Especially now to show how overvalued things are.

  27. The median home price in Santa Clara County is actually around $600K including condos [the census figures include condo owners, so it is the right comparison], per dataquick ( This implies housing is about 20% overvalued using your formula. That seems about right to me. Housing will probably fall even further than 20% in the area, as it will overshoot on the way down due to the surplus inventory and foreclosures coming into the market.

  28. I would not include condo’s and you must look smaller than a county – have to look at individual cities in the South Bay. I know the Bay Area very well. I am here too. That is only one indicator and nothing is perfect, but honestly I would be surprised if we only held at -20%.

  29. […] Take a look at the following graph from Mr. Mortgage: […]

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  31. Hi! Found your blog on yahoo – thanks for the article but i still don’t get it.




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