current affordabilty metrics?

[kev374]

If you take the median househould income of $85,000/yr, that results in a net pay of $5400/month. If we take 40% of gross as a rough guideline for affordability it would limit PITI+HOA to $2800. That would still allow $2600/month for other expenses which is a sizeable amount.

Taking a mortgage with 30yr fixed, 5% down results in a maximum loan amount of $410,000, assuming HOA of $150/month and tax rate of 1.25%.

Currently the median is $680,000 for existing homes which means $270,000 overvaluation or 40%. So we can assume a inflation adjusted correction of 40%, perhaps 10% over the next 4 yrs?

What do you think of this picture?

[no_such_reality]

Overly optimistic.

40% of gross on housing breaks most people.

The guideline is 28% for conservative, and 33% for agressive stances on housing expense.

[temeculaguy]

Ditto, the loans I have had in the past had a ceiling of about 33% gross for housing and 38% to 41% of total debt (housing, cars, cc’s). I also think you are missing a few things on your paycheck example, Where is the health/ dental insurance, 401k, are you sure those taxes are correct (is medicare,ss,disbility included)?

[Bugs]

And your analysis is based on the current interest rates. Higher interest rates will mean lower loan amounts.

[Anonymous]

kev, your approach makes sense: over the long haul, homes prices are related to wherewithal to pay, i.e., income.

Bugs is absolutely right, that real interest rates today are unusually low, and will rise.

I also think that incomes will be coming down during the upcoming Depression (e.g., there is no need to build a single new home for years; folks will be cutting back on discretionary spending to work their way out of their record ~130% debt to disposable income position), putting further downward pressure on home prices.

[Reality]

Where’d you get $85,000 for median income? That seems high.

[kev374]

Where’d you get $85,000 for median income? That seems high.

The stats for cities like Irvine, Lake Forest, Mission Viejo etc. are around $70-85k. I took the upper end just to be optimistic and give the best case scenario to account for some underreporting in income.

[OwnerOfCalifornia]

I think $5400 take-home pay is too high for $85K. A single person/no kids earning that would likely have about $4300-$4400 take-home pay after all taxes, insurance and 6% to 401k.

[Bugs]

At 33% of gross income, a $606,000 home (median among the sales) requires a household income of $153,818, just over double the median incomes in most communities in San Diego County. That’s at a 6% mortgage interest rate, and the 33% underwriting programs would already include consideration of the tax benefits.

At a 7% interest rate the income necessary to buy that median priced home is $168,000/year.

Bear in mind, 33% is the agressive underwriting figure and it requires a borrower with considerable discipline to be able to live on the remaining 67% of their income. At 28% of gross income, a 6% loan requires over $180,000 annual household income and a 7% loan requires just under $200,000/year. That’s pretty steep for a 15-year old tract home of average quality, which is what $600k buys in SD County.

Maybe that’s why less than 10% of the county’s residents make enough money to buy the median priced home at the fixed rate. By my count, 10% of the local population is a looong ways away from the 69% of households in the US who “own” their own homes.

[no_such_reality]

Anybody know when Fannie Mae, Ginnie Mae etc, updated their website affordability calculators and started pimping unaffordable loans?

If you go to Fannie Mae’s MortgageContent.net site and use their Calculator and tell it you have no other debt, they’ll tell you that you can afford a loan with payments equal to 50% of your gross income.

[Author]

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