About 52 percent of American households have had to make a sacrifice to be able to manage their rent or mortgage over the past three years, according to the How Housing Matters survey conducted by the MacArthur Foundation. The culprit is affordability of housing. Although house prices have risen 20 percent over the past two years, wages have barely risen. In addition, the slow recovery in employment, especially hard for young adults, has made it harder for them to save for a down payment or pay a mortgage.
The sacrifices people make for housing are serious and include getting extra work, not saving for retirement, reducing health care and healthy eating, increasing credit card debt, or moving to a less safe neighborhood or a place with worse schools.
Also, more people become skeptical when it comes to owning a home. About 43 percent of respondents in the survey say that owning a home is no longer a good long-term investment or one of the best ways to generate wealth. More than 50 percent say buying a home has become less attractive.
One of the concerns for those with a long-term vision is that the future of home values is bleak. Today’s historically low mortgage rates have nowhere to go but to go up, and that’s a bad omen for home values in the future. Home ownership rates, currently at 64.8 percent, have not been as low since the second quarter of 1995.
Housing accessibility ratios
Owning a home involves taking out a substantial loan and the responsibility of maintaining the property. These obligations may require adjustments to your lifestyle, especially if you have been renting.
The amount of housing you can buy depends on two things: the money you have available for down payment and your income. Banks, mortgage lenders and real estate agents will offer to run your numbers and tell you the price of a home you could afford and the mortgage you might have. Their estimates are generally based on front-end and back-end ratios. Here’s how they work:
Initial ratio: The home expense, or initial ratio, shows how much of your gross monthly income (before taxes) would be used to pay the mortgage. As a general rule, the monthly mortgage payment, including principal, interest, real estate taxes, and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense ratio, multiply your annual salary by 0.28 and then divide it by 12. The answer is your maximum monthly housing expense ratio.
Cash ratio: The total debt-to-income ratio, or cash ratio, shows how much of your gross income would go to all of your debt obligations, including mortgages, car loans, child support, and child support. credit cards. , student loans and condominium fees. In general, your total monthly debt should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36 and then divide by 12. The answer is your maximum allowed monthly debt-to-income ratio.
Finally, consider maintenance and repair costs before you buy. My rule is that the total of all housing expenses should not exceed 25 percent of your gross income. Common sense should tell you that with about 25 percent of your gross income going to household expenses and about 25 percent going to income taxes (federal, state and Social Security), this leaves you with only 50 percent of your income to live on, save yourself. for retirement, education of children and all other expenses.
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