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!
Comments
Thanks for all the hard work, Jamie. It seems obvious at this point that first time home buyers are by and large priced out of the market. In fact, the Maryland Association of Realtors reckons that, in Q2 2008, first-time home buyers only had 51.4% of the income needed to buy a starter home.
http://tinyurl.com/6hysve
It's really an interesting phenomenon where everyone seems to be in denial that any property they own might be dropping in value. I've seen estate sales sitting on the MLS for over a year. Estate sales! People usually try to unload these as quickly as possible.
As I've been saying, it's going to take years to climb out of this mess. And if one of the big commercial banks fails (I'm looking at you, WaMu), it'll be very difficult to find a loan for some time. This is because if WaMu fails, it will wipe out the FDIC, which will have to be bailed out by Treasury, as it doesn't have enough cash on hand to cover WaMu's deposit base. Expect numerous bank runs if this happens, forcing more banks into peril.
It's only going to get much worse before it gets any better. In the past 6 months, we've seen 60% of the big Wall Street IB's go down, Fannie and Freddie bailed out, and now it looks like AIG, the nation's largest insurer, might fail. Over the past week, the foundation of the global financial sector has been shaken badly.
The nightmare scenario is that end up like Japan and fall into a liquidity trap. This will lead to a very long recession with policymakers powerless to control it. I think a depression is actually preferable to this outcome.
But at least we'll all have our shimmering granite countertops. They'll last forever, right?
Posted by: Chas Mackay | September 15, 2008 7:21 AM
As I look at the aftermath of this fiasco, I am struck by the enormity of the greed that caused this.
Everyone who took part in this bubble is to blame. Unfortunately, those of us who are innocent will have to pay for the mistakes of others. That is pitable.
Posted by: Anon | September 15, 2008 11:34 AM
..a smile and flourishing neighborhoods...it seems your pic is from 2015;)
Posted by: January1954 | September 15, 2008 9:02 PM
Hey, if I didn't smile, I'd get ribbed for looking too serious. (That happened to Consuming Interests columnist Dan Thanh Dang.)
Posted by: Jamie Smith Hopkins | September 15, 2008 9:11 PM
Thanks for this analysis - something people have forgotten these past 8 years or so.
But I don't quite know how you came up with these upper limits. With a household income of $90K pre-tax, there's no way I'd want a mortgage over $300K.
To stay within that 25% limit you mention, it really is best to stick to 2.5x salary with 20% down. That would leave a very manageable mortage that would allow for savings and property maintenance and property taxes. There's a reason that was the standard for so long. If you can't come up with 20% down, then you need an even cheaper house.
So with an income of $100K, that's a $250K house, with 50k down. Mortgage would be very reasonable on $200K and you could add a couple hundred a month for property taxes and maintenance and hit your 25% take-home pay mark.
Posted by: J | September 18, 2008 9:57 AM
The less you put down, the less house you can afford -- normally, at least. I picked 10 percent down because so many first-time buyers say 20 percent is exceedingly difficult in this market.
Here's the difference in monthly payments for Laurel's $317,000 average price: With 10 percent down, it's $1,900 or 25 percent of before-tax pay for the $90k household. With 20 percent down, it's $1,689 or 23 percent of before-tax pay.
I think it's useful to take current interest rates into account, which is why I didn't go with the 2.5 times pay rule-of-thumb. It would have been easier on me -- less to calculate -- but interest rates are an important part of the buying process.
Posted by: Jamie Smith Hopkins | September 18, 2008 10:26 AM