How-to Monday: What (and where) you can afford
Answer: More places than a year or two ago. But probably not as many as you’d like.
Mortgage financier Freddie Mac recommends against borrowing so much that more than a quarter of your before-tax pay goes to principal and interest. With that in mind, I did some number-crunching to see which communities are affordable for a household with annual income of $90,000 (average for the Baltimore metro area) and a household making $60,000 (about the salary of a registered nurse).
Read on for details, including a chart showing the breakdown by ZIP code.
All this assumes a lot: that the average sale price in ZIP codes during the first half of the year is a good measure of what you can actually buy there. That our two households could get 7 percent interest rates. That they have enough saved to make down payments of 10 percent. (I also threw out any ZIPs with few sales, leaving 107 to compare and contrast.)
The higher-income household can afford homes up to $317,000 — the average in 20724, Laurel. For the $60,000 household, the cutoff is $212,000, or what homes are going for in Aberdeen’s 21001 ZIP.
Most of the communities falling in that affordable zone are in or near the city. Farthest afield for the $60,000 household are Aberdeen and Edgewood. The $90,000 household could get a toehold in every county, but much is out of reach. Fallston, Columbia, Annapolis — too expensive on average. And Clarksville’s $780,000 price tag would eat up 60 percent of the higher-income household’s pay even before taxes. (What about the $60,000 household, you ask? More than 90 percent.)
It’s this sort of gap that has economists predicting more price drops to come here and nationwide. Home prices couldn’t have risen as quickly as they did earlier in the decade if lenders hadn’t tossed out normal underwriting standards, they say, and the guideline-tightening since has pummeled sales.
If it seems needlessly cautious to avoid spending more than 25 percent of your before-tax pay on principal and interest, remember that homeownership comes with other costs, too. Property taxes. Insurance. Maintenance. "You want to be able to afford a water heater if it breaks," says Amy Cutts, deputy chief economist with Freddie Mac. "If you start out too stressed on that mortgage payment, then one little incident can put you over the top."
See the chart below for my analysis. The number of sales and average sale price is what Metropolitan Regional Information Systems recorded during the first six months of this year. Remember, I calculated affordability off a 7 percent interest rate (the average, including fees and points, at the end of the first half of the year) and a 10 percent down payment. (Squinting at the chart? Adjust the size with the magnifying glass.)
Keep in mind that sales prices in some communities range a lot. If the average is out of reach, you might still find a home you can both like and afford.
Wonk option: Click here for an Excel version, which will allow you to change things to fit your situation. If you'd like to know where a $50,000-income buyer could swing a purchase, click on one of the income columns and change the income figure (whether 90000 or 60000) to 50000. Voila! (Just remember to paste your new formula all the way down and not only in the first row.)
Likewise, you can change the number in the interest-rate column. Or, if you want to put down more or less than 10 percent, you can hop into the "90% of price" column and change the 0.9 to, say, 0.8 (that'll reflect what you'd need to borrow with 20 percent down) or 0.97 (for a 3 percent down payment a la FHA).
Have at it!