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Average Joe still can't afford a home
Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn't work.
By Bankrate.com
One of the worst things about today's real estate market is that there doesn't seem to be any silver lining in that big black cloud.
Normally, you'd think dramatically falling prices would make homeownership possible for more moderate-income families.
But even with homes more affordable, the median price in many markets is still out of reach for a median-income family, according to "Paycheck to Paycheck: Wages and the Cost of Housing in America," a study by the Center for Housing Policy, or CHP, in Washington, D.C.
Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations -- registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.
"Even with the housing downturn, the drop in prices still just isn't enough for many workers in traditional backbone occupations to afford houses," says Rebecca Cohen, a CHP research associate.
In many parts of the country, housing increases have outpaced wage growth for almost a decade. Census data released in 2006 revealed that between 2000 and 2005, the burden of housing costs grew sharply.
The Housing Affordability Index measures the cost of housing against median family income. The National Association of Realtors, or NAR, which calculates the index, considers that the typical family makes enough money to buy the typical used home, assuming a 20% down payment and a traditional 30-year mortgage.
In 2000, the NAR pegged the index at 129.2, meaning the typical family had 129% of the income necessary to pay for the typical used house. That figure dropped to 104.9 in June 2007, even though the 2000 median family income of $50,732 rose to $59,157 during the period.
That's because the median price of a home in 2000 was $139,000, but by June 2007 prices peaked at a whopping $229,200. In those seven years, the median price of homes increased 64.9%, while median incomes rose just 16.6%. Recent NAR estimates indicate affordability may finally be moving in the right direction, but it still has a long way to go.
Cohen says there have been other consequences of the overinflation of housing. As the cost of buying a home went up, more families moved into rentals, which drove up rents. When that happens, many local economies have trouble filling lower to mid-range jobs.
The study also found that retail salespeople and food-preparation workers couldn't afford to rent a two-bedroom apartment in any of the markets. It based affordability on the metrics that a family or person should not spend more than 30% of household income on rent and utilities while homeowners should not spend more than 28% of their income on the mortgage, taxes and insurance.
The most recent NAR report projected a January median home price of $198,700 and median family income of $59,858. With a 20% down payment, a 30-year mortgage at 6.2% would mean $973.59 monthly for principal and interest. Assuming $3,600 per year for insurance and property taxes brings the total monthly payment to $1,273.59 -- within the $1,396 maximum threshold, but without factoring in closing costs.
Video on MSN Money
Home financing © Corbis
Should you rent or buy?
The benefits of homeownership are obvious, but renting has its advantages, too. One is that renters typically have more disposable income to spend or put aside for the future.
Lenders have often used formulas such as this to gauge a person's borrowing capacity, but property taxes and insurance can vary widely by region. Cohen says these affordability metrics can also tell different stories based on the number of people in the household.
"A benchmark is just that and should be taken with a grain of salt. If a single person spends 27% of their income on housing, they might be doing great, but if you're a family with five kids, certainly the amount you're able to comfortably spend without cutting into your budget will vary," says Cohen.
Recent mortgage innovations and Americans' appetite for debt have created the illusion that homes are affordable and within reach of anyone, regardless of income. But just because a family purchases a house doesn't mean they can afford it, and those who borrow as much as they can may have to make other budget cuts that affect their financial futures.
Continued: What a lender doesn't know
Mo Barakat, a senior financial adviser at Ameriprise Financial in Los Angeles, uses more conservative formulas. He says a person should spend no more than 20% of income on mortgage payments, 5% on property taxes and insurance and 5% on all other debt, including car loans, credit cards and student loans.
That means a person or family with a $100,000 income should spend no more than $2,083 per month on principal, interest, property taxes and insurance. If saving for college or funding a nice retirement is in the plan, housing payments should be even less.
* MSN Real Estate: Calculate how much house can you afford
The fact that a bank says you can afford a home doesn't necessarily mean you can, Barakat says. A lender is concerned about an applicant's ability to repay debt; it has no interest in whether there's enough money left for the borrower to send children to college or to invest for retirement. Many homeowners fail to recognize this and buy homes at the expense of other liquid assets and investments.
Furthermore, Barakat says, lenders will often allow people to exceed the 30% threshold. And once they do, it almost always has other financial consequences. "There are just too many consequences. You basically lose your savings rate. For the first time since the Great Depression, Americans have a negative savings rate of 4%. It's been captured or stolen by high mortgage payments," says Barakat.
While new homeowners may be happy to have a home, even if that means they're financially overextended, Barakat says their standard of living will actually fall when they buy a home they can't afford.
Cutting back on outings and vacations may decrease the fun in life, but saving less and putting away less for retirement also increases financial risk. There's more financial stress and, without an emergency fund, homeowners can find themselves further in debt when a crisis strikes. Lawrence Yun, chief economist for the NAR, says that in many of the "superstar cities," such as New York, Los Angeles, San Francisco and Washington, D.C., real estate has always commanded a premium. Even with the recent declines in property values, prices remain out of whack with median incomes, Yun says.
Between the two coasts, homes are much more affordable, Yun says. There, he says, it is less about interest rates and prices and more about jobs. Yun points to Dallas, Indianapolis and Milwaukee as the types of markets where most middle-class residents with good credit and decent jobs can afford a median-priced home.
Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, says affordability evaporated in some areas that saw rapid price increases over the past five years. In many parts of the country, home prices have risen to such levels that many middle-class residents have little choice but to move farther outside the city, increasing their commutes.
"If you want that single-family home, swing set and the American Dream, the reality is that in major metro areas, most of us will have to commute in order to enjoy that," says Snaith.
Video on MSN Money
Home financing © Corbis
Should you rent or buy?
The benefits of homeownership are obvious, but renting has its advantages, too. One is that renters typically have more disposable income to spend or put aside for the future.
Celeste Ward, a resident of Martinez, Calif., says she and her husband sold their condo in 2005, when they thought the market was topping out. Now that they have a daughter, they're trying to get into a three-bedroom house but find they can't get back into the market -- even after the price decreases. They considered moving farther inland but plan to rent and wait for the market to fall further.
"We're just waiting and are seeing more desperation from sellers. Many homes are still overpriced, and there are so many out there. We're waiting to maybe get a bank-owned property or something where the seller is really desperate," says Ward.
Barakat agrees people should buy homes when their "personal economies" are ready, not necessarily when the housing market is ready.
In the past, many people were jumping into homes with exotic mortgage products and adjustable-rate mortgages that are now starting to reset. Barakat says that in most cases, people chose adjustable-rate mortgages because they couldn't afford the homes in the first place.
In January, Realty Trac reported default notices, auction sales notices or bank repossessions on 233,000 homes, 57% more homes than in January 2007. For all of 2007, more than 1% of U.S. households faced foreclosure -- almost double the rate of 2006.
Bubbles, while painful, need to burst to purge the excesses, says Barakat. "Many younger people have told me that they have been priced out of the market and that it was not financially healthy (to buy a house). With these current prices, it is now creating an opportunity for future generations to actually afford a home. I welcome that."
This article was reported and written by Craig Guillot for Bankrate.com.
Published April 17, 2008
Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn't work.
By Bankrate.com
One of the worst things about today's real estate market is that there doesn't seem to be any silver lining in that big black cloud.
Normally, you'd think dramatically falling prices would make homeownership possible for more moderate-income families.
But even with homes more affordable, the median price in many markets is still out of reach for a median-income family, according to "Paycheck to Paycheck: Wages and the Cost of Housing in America," a study by the Center for Housing Policy, or CHP, in Washington, D.C.
Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations -- registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.
"Even with the housing downturn, the drop in prices still just isn't enough for many workers in traditional backbone occupations to afford houses," says Rebecca Cohen, a CHP research associate.
In many parts of the country, housing increases have outpaced wage growth for almost a decade. Census data released in 2006 revealed that between 2000 and 2005, the burden of housing costs grew sharply.
The Housing Affordability Index measures the cost of housing against median family income. The National Association of Realtors, or NAR, which calculates the index, considers that the typical family makes enough money to buy the typical used home, assuming a 20% down payment and a traditional 30-year mortgage.
In 2000, the NAR pegged the index at 129.2, meaning the typical family had 129% of the income necessary to pay for the typical used house. That figure dropped to 104.9 in June 2007, even though the 2000 median family income of $50,732 rose to $59,157 during the period.
That's because the median price of a home in 2000 was $139,000, but by June 2007 prices peaked at a whopping $229,200. In those seven years, the median price of homes increased 64.9%, while median incomes rose just 16.6%. Recent NAR estimates indicate affordability may finally be moving in the right direction, but it still has a long way to go.
Cohen says there have been other consequences of the overinflation of housing. As the cost of buying a home went up, more families moved into rentals, which drove up rents. When that happens, many local economies have trouble filling lower to mid-range jobs.
The study also found that retail salespeople and food-preparation workers couldn't afford to rent a two-bedroom apartment in any of the markets. It based affordability on the metrics that a family or person should not spend more than 30% of household income on rent and utilities while homeowners should not spend more than 28% of their income on the mortgage, taxes and insurance.
The most recent NAR report projected a January median home price of $198,700 and median family income of $59,858. With a 20% down payment, a 30-year mortgage at 6.2% would mean $973.59 monthly for principal and interest. Assuming $3,600 per year for insurance and property taxes brings the total monthly payment to $1,273.59 -- within the $1,396 maximum threshold, but without factoring in closing costs.
Video on MSN Money
Home financing © Corbis
Should you rent or buy?
The benefits of homeownership are obvious, but renting has its advantages, too. One is that renters typically have more disposable income to spend or put aside for the future.
Lenders have often used formulas such as this to gauge a person's borrowing capacity, but property taxes and insurance can vary widely by region. Cohen says these affordability metrics can also tell different stories based on the number of people in the household.
"A benchmark is just that and should be taken with a grain of salt. If a single person spends 27% of their income on housing, they might be doing great, but if you're a family with five kids, certainly the amount you're able to comfortably spend without cutting into your budget will vary," says Cohen.
Recent mortgage innovations and Americans' appetite for debt have created the illusion that homes are affordable and within reach of anyone, regardless of income. But just because a family purchases a house doesn't mean they can afford it, and those who borrow as much as they can may have to make other budget cuts that affect their financial futures.
Continued: What a lender doesn't know
Mo Barakat, a senior financial adviser at Ameriprise Financial in Los Angeles, uses more conservative formulas. He says a person should spend no more than 20% of income on mortgage payments, 5% on property taxes and insurance and 5% on all other debt, including car loans, credit cards and student loans.
That means a person or family with a $100,000 income should spend no more than $2,083 per month on principal, interest, property taxes and insurance. If saving for college or funding a nice retirement is in the plan, housing payments should be even less.
* MSN Real Estate: Calculate how much house can you afford
The fact that a bank says you can afford a home doesn't necessarily mean you can, Barakat says. A lender is concerned about an applicant's ability to repay debt; it has no interest in whether there's enough money left for the borrower to send children to college or to invest for retirement. Many homeowners fail to recognize this and buy homes at the expense of other liquid assets and investments.
Furthermore, Barakat says, lenders will often allow people to exceed the 30% threshold. And once they do, it almost always has other financial consequences. "There are just too many consequences. You basically lose your savings rate. For the first time since the Great Depression, Americans have a negative savings rate of 4%. It's been captured or stolen by high mortgage payments," says Barakat.
While new homeowners may be happy to have a home, even if that means they're financially overextended, Barakat says their standard of living will actually fall when they buy a home they can't afford.
Cutting back on outings and vacations may decrease the fun in life, but saving less and putting away less for retirement also increases financial risk. There's more financial stress and, without an emergency fund, homeowners can find themselves further in debt when a crisis strikes. Lawrence Yun, chief economist for the NAR, says that in many of the "superstar cities," such as New York, Los Angeles, San Francisco and Washington, D.C., real estate has always commanded a premium. Even with the recent declines in property values, prices remain out of whack with median incomes, Yun says.
Between the two coasts, homes are much more affordable, Yun says. There, he says, it is less about interest rates and prices and more about jobs. Yun points to Dallas, Indianapolis and Milwaukee as the types of markets where most middle-class residents with good credit and decent jobs can afford a median-priced home.
Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, says affordability evaporated in some areas that saw rapid price increases over the past five years. In many parts of the country, home prices have risen to such levels that many middle-class residents have little choice but to move farther outside the city, increasing their commutes.
"If you want that single-family home, swing set and the American Dream, the reality is that in major metro areas, most of us will have to commute in order to enjoy that," says Snaith.
Video on MSN Money
Home financing © Corbis
Should you rent or buy?
The benefits of homeownership are obvious, but renting has its advantages, too. One is that renters typically have more disposable income to spend or put aside for the future.
Celeste Ward, a resident of Martinez, Calif., says she and her husband sold their condo in 2005, when they thought the market was topping out. Now that they have a daughter, they're trying to get into a three-bedroom house but find they can't get back into the market -- even after the price decreases. They considered moving farther inland but plan to rent and wait for the market to fall further.
"We're just waiting and are seeing more desperation from sellers. Many homes are still overpriced, and there are so many out there. We're waiting to maybe get a bank-owned property or something where the seller is really desperate," says Ward.
Barakat agrees people should buy homes when their "personal economies" are ready, not necessarily when the housing market is ready.
In the past, many people were jumping into homes with exotic mortgage products and adjustable-rate mortgages that are now starting to reset. Barakat says that in most cases, people chose adjustable-rate mortgages because they couldn't afford the homes in the first place.
In January, Realty Trac reported default notices, auction sales notices or bank repossessions on 233,000 homes, 57% more homes than in January 2007. For all of 2007, more than 1% of U.S. households faced foreclosure -- almost double the rate of 2006.
Bubbles, while painful, need to burst to purge the excesses, says Barakat. "Many younger people have told me that they have been priced out of the market and that it was not financially healthy (to buy a house). With these current prices, it is now creating an opportunity for future generations to actually afford a home. I welcome that."
This article was reported and written by Craig Guillot for Bankrate.com.
Published April 17, 2008
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