The typical household in the Baltimore metro area earns about $71,000. Buyers getting a low-down-payment FHA mortgage can comfortably afford a $250,000 house with today's rates as long as they make at least $65,000, by themselves or as part of a couple.
Some of you took issue with the "comfortably" that's placed oh-so-innocently right before "afford." Reader Jay, noting property taxes and other housing costs, wrote: "Wouldn't a $250K home in Baltimore City end up in monthly payments of 50% plus of a $71K income? Isn't that how the country ended up in the housing crisis that it's in -- people spending way more than they should on their homes?"
No question, Jay, that was a big part of the problem. (Also cash-out refinancing, but that's another story.) More about the "comfortably" in a moment. First, here's how I calculated affordability:
First, I needed a reasonable spend-no-more-than-this figure. There's some debate on that, but affordable-housing advocates usually say your housing costs are too high if they're sucking up more than 30 or 33 percent of your before-tax income.
But that really should include all costs -- including maintenance, which can vary tremendously from house to house. I wanted to look at principal and interest only.
I chatted with Frank E. Nothaft, chief economist with Freddie Mac, to find a better -- lower -- threshold. We discussed the popular "28 percent on mortgage payments" rule of thumb, but he says that ought to include property taxes, hazard insurance and mortgage insurance.
His suggestion for a threshold: 25 percent -- a quarter -- of pre-tax income on principal and interest.
So I set off (in a number-crunching sense) to see how much income someone would need to spend no more than that on a $250,000 house. And not someone putting down 10 or 20 percent, either, but someone making the 3.5 percent minimum down payment on an FHA-insured mortgage.
With a 5.5 percent interest rate, this buyer would spend $1,370 a month on principal and interest for a $250,000 house. That's 25 percent of pre-tax income for someone making about $65,000.
As you can see, I wasn't looking for reasons to increase the threshold -- more the opposite. It occurred to me that I might get a call from an industry pro complaining that I was being too conservative, so I threw in the "comfortably" before "afford" to show that I wasn't trying to push the affordability envelope to the bursting point.
I should have remembered that reasonable complaints about what's really affordable can come from both directions.
The bigger point I wanted to make -- and I hope it didn't get lost in adjectives -- is that a large number of people can't comfortably afford a house if it's more than $250,000. So it's pretty amazing that just 24 percent of listings in May 2006 were under that amount.
What do you consider the line between affordable and unaffordable? I know some buyers have two figures in mind -- the amount they can borrow and the lower amount they're willing to borrow. What's your willing-to-borrow number?