38% Housing Debt-to-Income Ratio Nightmare

Posted on November 16th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

38% HOUSING DEBT-TO-INCOME RATIO NIGHTMARE

Household Income = $75,000 per year

Less

38% Housing Expense = $28,500 per year

35% Fed & State Taxes = $26,250 per year

Disposable income = $20,250 per year or $1,687 per month

How the hell does a household SAVE MONEY AND pay for utilities (power, water, cable, garbage), insurance (car, life, health), gas, food, car payment, fuel, clothes, household maintenance and more on $1687 per month? How do they save an emergency fund or take even a drive away trip for the weekend? Some of you may argue that nobody making $75k really pays 35% Fed and state taxes but then I would argue that MOST people’s debt levels are many times higher than they should be for their income bracket.

Folks, a 38% housing DTI will ruin you especially if Obama raises taxes. It is better to walk away. Why not – your credit will be trashed for years but not as long as the real estate market will be trashed and how long you will be stuck upside down in your home.

Now, let’s look at this with 28/36 time-tested debt-to-income ratios. $2k per month income after housing expense work for a family making $75k per year.

28% Housing Expense = $21,000 per year

Disposable income = $27,750 per year or $2,312 per month

To further argue my point that debts are so large even if I am off base a bit on the $75k tax bracket…

What “essentials” do the Boomers invest all this borrowed money in every year? The U.S. Census bureau provides the answers:

•    $200 billion on furniture, appliances     ($1,900 per household annually)
•    $400 billion on vehicle purchases     ($3,800 per household annually)
•    $425 billion at restaurants             ($4,000 per household annually)
•    $9 billion at Starbucks             ($85 per household annually)
•    $250 billion on clothing             ($2,400 per household annually)
•    $100 billion on electronics             ($950 per household annually)
•    $60 billion on lottery tickets         ($600 per household annually)
•    $100 billion at gambling casinos         ($950 per household annually)
•    $60 billion on alcohol             ($600 per household annually)
•    $40 billion on smoking             ($400 per household annually)
•    $32 billion on spectator sports         ($300 per household annually)
•    $150 billion on entertainment         ($1,400 per household annually)
•    $100 billion on education             ($950 per household annually)
•    $300 billion to charity             ($2,900 per household annually)

More Mr Mortgage Research

10 Responses to “38% Housing Debt-to-Income Ratio Nightmare”

  1. May I ask how you get $40,000 in taxes?
    Our household income is $77,000, and we paid about $5,000 total (Fed+State+local) last year.
    We have two kids and do not itemize.

    Thank you

  2. it doesn’t matter if I am off a bit on the tax bracket from state to state. Nationally that income falls at 28% married jointly and state taxes come on top of that. In CA, top tape is 37% less standard deductions. BUT, debt is much greater than most think. Therefore, even if disposable is a little higher monthly out go to debt is multiples higher. Check this out…

    What “essentials” do the Boomers invest all this borrowed money in every year? The U.S. Census bureau provides the answers:

    • $200 billion on furniture, appliances ($1,900 per household annually)
    • $400 billion on vehicle purchases ($3,800 per household annually)
    • $425 billion at restaurants ($4,000 per household annually)
    • $9 billion at Starbucks ($85 per household annually)
    • $250 billion on clothing ($2,400 per household annually)
    • $100 billion on electronics ($950 per household annually)
    • $60 billion on lottery tickets ($600 per household annually)
    • $100 billion at gambling casinos ($950 per household annually)
    • $60 billion on alcohol ($600 per household annually)
    • $40 billion on smoking ($400 per household annually)
    • $32 billion on spectator sports ($300 per household annually)
    • $150 billion on entertainment ($1,400 per household annually)
    • $100 billion on education ($950 per household annually)
    • $300 billion to charity ($2,900 per household annually)

  3. adding that all together you’re looking at ~$1770/mo. That doesnt factor in the 2 most expensive things on my budget: health insurance and gasoline. Add both of those, and you’re easily over the ~$2300/mo disposable.
    Add in other necessities in life (insurance, savings) and you’re magically in debt!

  4. Bout time this was said. First of all, why they use “gross income” is beyond me.Work it off the net numbers, that is really the money you have. then its a little closer to reality.
    Out of our gross 4342 check we are getting 2929. Big difference.
    So that 28% really ends up at 50% or more of net. Then the kids car clothes etc etc etc and we are now paycheck to paycheck. The DTI is way to high. Look at the history of % of income spent on housing in the past vs. today. I know Mr. M has that info somewhere, cause I saw it here. Nice graph and a real wake up call.

  5. Mr. Mortgage, you are hitting right at the heart of the problem. This is not a housing crisis, this is an economic one. The consumer is 70% of our economy. If that consumer is now trapped in an overpriced home with an overpriced housing payment, then the consumer has basically been withdrawn from the economic picture of the US economic consumer engine.

    Your a numbers guy and I am a numbers guy and we know that the numbers do not lie. There is no possibility of an economic recovery because we can both see that other than subsistence, the entire earning power of the consumer has been captured by the banking industry. The consumer has been trapped into being a debt slave in an investment that will never work out.

    With the home holders monthly payment consuming nearly all his take home pay, THIS LEAVES NO MONEY TO BE SPENT AT OTHER BUSINESSES.

    The end result is massive layoffs and business failures bomb shelling all around us. That is why I say this is about saving California and housing is now a secondary concern. If we do not get people to start defaulting immediately and spending money in the California economy we are going to turn from the Golden State into the Ghetto State.

    What you are looking at is an economic emergency that if not corrected now will steamroll us in the first quarter.

  6. I am glad to see some realistic numbers being put forth on this blog. I am not rich by any means, but I am certainly above the median in the IE (where I live) and can barely get by. Here are my numbers (wife and I together) just to help illustrate the point of this thread:

    Gross Monthly Income: ~ $8400
    Net Monthly Income after taxes, med ins, and 401k (6%): ~ $6100

    28% of our gross would be $2352 and 36% of our net would be $2196. Our subidivsion has a pretty high prop tax which comes out to ~ $750 a month. This means that to abide by the 28/36 standard, we would have to have a principal/interest/insurance payment of $1446-1602 depending on which number you use. A 250k mortgage at 6.5% for 30 years would give a P&I payment of $1580 which falls into the acceptable range. Unfortunately, our mortgage is significantly higher than this which is why we are struggling.

    However when you take a look at how many mortgages there are in the IE which are more than $250k, and the number of people who make less than $100k, it is clear that this market has a lot further to drop. Principal reductions are the clear road to recovery because the numbers simply do not lie. The amount of overleaveraged homeowners is staggering and the $h1t will hit the fan soon.

    We better slow the fan down a bit to lessen the effect of the inevitable or it will touch all of us.

  7. My last job, prior to working for myself had a yearly salary of$99,995. After Fed, State, FICA, 401K (at 5%) and everything else pulled out my take home was 52% of the gross. Every check saw 48% gone.

    I don’t find using 35% an unreasonable number.

  8. “My last job, prior to working for myself had a yearly salary of$99,995. After Fed, State, FICA, 401K (at 5%) and everything else pulled out my take home was 52% of the gross. Every check saw 48% gone.

    I don’t find using 35% an unreasonable number.”

    So out of your 99995 you took home $51,997. At 35% mp would be $34998.25 or 2917 per month. That leaves a total of $16,999 to live on for a year. $1416 a month. No way. Unless you like being broke alone and with no kids. Thats less than 50 bucks a day to live on and pay your bills.

  9. DebtKills,

    I don’t know how you were taxed at 48%. Were you claiming single with no exemptions? It really doesn’t matter though, your numbers are certainly realistic and they further illustrate how the income vs. expense ratios in this country are so F’ed up. For comparison, I claim married w/4 which is probably why we have such a drastic net income difference. I actually have a friend who makes the same as me who is getting divorced and is expected to now live on ~ $2500 take home pay here in socal. Kind of sucks to have to get a studio apt and eat top ramen when you make $100k. God help us if Obama raises taxes any further.

  10. I am a lender in NJ you know the home of the highest taxes in the country lol I have read the recent comments and find them interesting. I like the ratios that Mr M came up with. I am also a VA automatic lender and the Vetrans Administration still qualifies people using residual income and takes into consideration income taxes in all the applicable states family members that must be cared for and must have enough residual income to qualify for a home. Obviously a person that makes more money could have more residual income then a person who has less income but I think this would be a start to getting back on track.

    Additionally, I am all for modifications and agree we should help individuals directly. I am not in agreement for letting the individual who got the modification walk away 5 or 10 years from now and not repay the original loan back and make a profit before the original balance was paid. Not on my tax dollar. If the banks modify you the values in the neighborhood do not drop therefore in theory you still may have an equity position now or in the future.

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