Pam at Pandagon has an interesting post/Q of the day today about housing costs.
What percentage of your household income goes toward housing?
This was a popular and interesting one over at my pad. The answers are all over the map, with the usual suspect cities completely out of control in terms of affordable housing (to rent or buy).
According to Habitat for Humanity, more than 13 million households pay more than 50 percent of their income for housing. The U.S. Department of Housing and Urban Development web site says that the generally accepted definition of affordability is for a household to pay no more than 30 percent of its annual income on housing.
She even provides a calculator so you can figure out your housing costs-to-income ratio.
Mine work out to about 17% of my income, which is low. But I bought five years ago, when prices were much lower, and I bought in a neighborhood that hadn’t yet become gentrified or of much interest to the people who five years ago would have been buying in Park Slope. I also refused to borrow up to my limit — my bank was willing to give me a half-million-dollar mortgage — and I opted for a fixed interest rate.
Now Park Slope is unaffordable, as is the next neighborhood, Windsor Terrace, so young couples and hipsters are buying in my neighborhood, driving up prices. Houses around here, even the dumpy ones, are going for $900K and up. My apartment would be out of my reach if I were buying now.
Others aren’t as lucky:
In New York, it seems like an emergency to me; look at this article, Rising ‘Stabilized’ Rents Threaten New Yorkers’ Housing. It reports that the median monthly rental rate for a two-bedroom apartment in San Francisco is about $1,360, $940 in Boston and $760 in Chicago. Two thirds of New Yorkers live in rental housing, with the figure rising to 80 percent in Brooklyn, the Bronx and Manhattan, and 29 percent of New York City renters spend more 50% of their income on housing, up from about 25 percent in 2002.
Renters at least don’t have to stay tied to a place that’s too expensive, as buyers sometimes do in a hot market. And as housing prices keep rising, and houses keep selling, you have to wonder just who it is can afford these places. In Pam’s area, she suspects the $500K houses are being bought by people who cashed out of more expensive areas and are scaling back. But here, I suspect that a lot of my neighbors borrowed up to their limits on adjustable rate mortgages or interest-only loans — which are great when interest rates are low or when you’re not planning to hold the property for long, but are gonna hurt when they come due.
As home prices appreciated from ridiculously high to unbelievably higher, more Americans began using mortgages that allowed them to buy more house for less of a monthly payment. Next year, a large portion of those rates move up and homeowners who opted for the exotic mortgages could find their payments doubled. Talk about bloody. They need to find a way to minimize the pain.
Many will refinance their loans. But for others, whose mortgages now exceed the value of their homes or whose debt payments exceed 40 percent of their incomes, there may be no other solution than to get out of their houses. With the housing market cooling, selling it may not be easy. Some may default on their loans.
And these kinds of loans are pervasive, having been sold not as short-term investments, but as “affordability tools” that enabled buyers in insane housing markets to own:
On a personal level, however, there is going to be pain as homeowners struggle to make higher payments. In 2003, of all new mortgages, 10.2 percent were interest-only, meaning the homeowner paid only the interest for the initial period of the loan. According to Loan Performance, a research firm, 26.7 percent of all loans were interest-only last year and another 15.3 percent were payment-option adjustable rate mortgages, which allow homeowners to choose how much they paid each month.
In some areas of the country where homes are expensive, these loans were highly popular. In most California cities, as well as in Denver, Washington, Phoenix and Seattle, interest-only loans represented 40 percent or more of all mortgages issued in 2005.
That’s a recipe for disaster.