This darn house

Those of you who own your own homes know the guilty pleasures of real estate porn. Thanks to sites like Zillow, you can see what your house is worth, what your neighbor’s house is worth, and what the inside of the tract mansion down the street looks like. (A six-screen entertainment room? Really?)

addamsIt has been a decent year for housing, helped by an average 30-year mortgage rate of 4.17% in 2015. But mortgage rates aren’t the only factor that push up housing rates, or even, necessarily, the determining one. Home prices soared in the mid- to late 1980s, when a 30-year mortgage averaged 10.21%.

What matters more is having enough income to qualify for a mortgage. Unless you can find a true cowboy lender — and they’re rare these days — your total mortgage payment needs to be less than 31% of your gross income. Someone who earns $75,000 a year would be able to afford a total monthly mortgage payment of $1,937.50.

Other rules restrict the amount of total debt you can have when applying for a mortgage. But overall, home prices depend on affordability and demand. Baby Boomers could buy houses in the 1980s despite high interest rates because their incomes were rising and home prices were low in the early part of that decade. And they were of the age when a house made sense for raising children.

The National Association of Realtors publishes a housing affordability index, which takes into account the household income, home prices and mortgage rates. The higher the reading, the less affordable homes are for the average family. affordability

As you can see, houses aren’t terribly affordable, despite low mortgage rates. The reason: Real household income has flatlined, and home prices have soared since the start of the housing bust in 2006. Homebuilders have largely concentrated on high-end housing, causing the prices of mid- and low-priced homes to creep out of reach for many families.

With luck, real — that is to say, inflation-adjusted — incomes should improve next year. Korn Ferry Hay expected U.S. workers to get an average raise of 2.7% next year, which is entirely reasonable, given the surge in corporate profits the past five years. And homebuilders are starting to ramp up production of more modestly priced homes.

Millennials, who are a larger generation than Boomers, will be slow to enter the housing market, however. They have too much college debt, and they’re paid too little to buy the few modestly priced homes on the market. Assuming mortgage rates will remain modest, it could be a few years yet before the next housing boom.









One thought on “This darn house

  1. Often, in high-rent locales like our own Washington, DC area, the monthly payment isn’t an obstacle, as renters are practically making a mortgage payment with their monthly rent, but receiving neither the equity-building nor tax-deduction perks which accompany a mortgage. Instead, it’s the downpayment that’s a show-stopper.

    I don’t think it will ever be a good idea to go back to lending to people who can’t service the debt; we know how well that worked out. But, if the government wants to continue to promote home ownership, why don’t we have tax-deferred savings accounts specifically devoted toward building that downpayment? Certainly, put restrictions in place to ensure that the money is used only to purchase a primary residence; that the dwelling is not flipped; and, that the account meets other stringent criteria for tax deferment, just as we do with 529-type accounts, for example.

    Personally, I’d rather see a much flatter income tax, with the mortgage interest deduction removed. If we’re going to keep that deduction, though — under the premise that having more people owning homes makes the economy and the country stronger — then shouldn’t we enable people to get into those homes on a financially sound basis in the first place?


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s