How to buy a home without a mortgage
Mr. Wonk, my math-minded but not-housing-obsessed husband, wondered the other day what people did before mortgages. "How long would it take for typical people to buy the typical house just by saving up?" he asked.
"Oh, I can figure that out!" I said -- and then realized that I'd need to settle on an average annual interest rate for the savings and the annual increase (if any) to income and home prices. Trained economists are still arguing over how long it'll take for prices to stabilize. I'm not about to wade in with my crystal ball.
So I did a simpler calculation -- how long it would take if home prices, incomes and bank account rates all remain stagnant.
In the Baltimore metro area, the median household income (meaning half make less and half make more) is about $68,000. The median home price in November was about $248,000.
If that typical family was really disciplined and managed to save 20 percent a year before taxes -- $13,600 -- then it would have enough to buy the typical home outright in a little over 18 years. Putting away 10 percent a year would mean a home purchase in about 36 years. Five percent, or $3,400? Seventy-three years.
Wow, you might be saying -- that's why mortgages are useful. Or perhaps: "Wow -- home prices are way out of whack."
Which is it, I wondered, so I did the same calculation for incomes and prices in 1999, pre-boom.
How long -- again assuming that nothing (not prices, not income, not interest rates) changed?
Thirteen years for the 20-percent-a-year savers. Fifty-one years for the 5-percent-a-year folks.
Faster, most definitely. But still a long wait.