So, you have just been promoted and your employer wants you to move to a new location or you have just finished school and have landed your first job. Where are you going to live, how much is it going to cost, and can you afford it?
With the general nationwide increase in housing costs it has become more difficult to purchase or rent decent affordable housing in a safe neighborhood that is reasonably near your work place. You will need to “do your homework” and be knowledgeable of your local housing market and know what resources are available so you can, ideally, purchase a home or, if that fails, optimize the rental unit you choose.
Nationwide, affordable housing is a diminishing commodity. Just about anywhere in urban California and in the major urban areas of the Northeast, finding an affordable home to purchase or rent is difficult at best.
Affordability, specifically the amount of a household’s income to be spent on housing and then the combination of housing and other recurring debt, is a multi-faceted issue.
Usually the first question a household will ask when deciding what the limit or the definition of what constitutes affordable is, “Can we make these payments and still ‘live?’”
How Much Can You Afford?
The answer to that question is quite variable and idiosyncratic, but the goal is to avoid being “house poor.” The mortgage industry and its government regulators have developed some basic guidelines regarding how much household income should be spent on housing and how much on total debt service. These guidelines are fairly accurate predictors of success or failure whether you are renting or buying your home.
The limits for the monthly house payment and overall debt service are expressed in terms of percentages or ratios. In conventional lending your house payment should be no more than 28 percent to 33 percent of your gross monthly income. Your total debt service, a combination of the proposed housing payment and all your other recurring monthly obligations, should be no more than around 45 percent of your gross monthly income. In the jargon of the mortgage industry you will hear these calculations referred to as the “front” and “back” ratios.
According to an article written by Walter Molony at the National Association of Realtors Web site at www.realtor.org/publicaffairsweb.nsf/pages/homeprices3rdqtr05, the third quarter 2005 median price of an existing single-family home in the United States was $215,900. This was an increase of 14.7 percent from the third quarter of 2004. According to an August 30, 2005, news conference on 2004 income, poverty, and health insurance estimates from the current population survey, Charles Nelson, assistant division chief of the Housing and Household Economic Statistics, said, “Median household money income in the nation in 2004 was $44,400, and was unchanged from 2003 in real terms.” www.census.gov/hhes/www/income/income04/prs05asc.html Using the traditional mortgage industry guidelines regarding house payment limits and total debt service limits, what kind of monthly income does it take to live in the median home?
In today’s interest rate environment, roughly 6.375 percent to 8 percent on a 30-year term loan) a conservative, yet reliable and easy to remember, estimate of a total mortgage payment (principal, interest, taxes, insurance — PITI) is about 1 percent of the mortgage amount (e.g., $2,159 on a loan of $215,900).
In order to keep the monthly house payment below the 33 percent of income guideline it would take monthly income of $6,542, or $78,509 a year, to qualify.
As you can see, a household with a single wage earner making the median income would be $34,109 a year, or $2,842 a month, is short of the income necessary to meet the “front ratio” qualifying guideline. Just for reference, a worker earning $7 an hour, just above minimum wage makes $14,560 a year and starting teachers or military officers make in the vicinity of $30,000.
These hard income facts indicate that having two wage earners per household is just about an economic necessity. With other normal debt, i.e. car payment, student loan payment and/or minimum payments on charge cards, the problem is only amplified.
Lots of Help To Find An Affordable Home
Lenders, employers and government at all levels are aware of the challenges involved in finding affordable housing. Each of these groups work internally and in collaboration between themselves and others to come up with solutions to the problem.
Mortgage lenders, out of a sense of corporate responsibility and in order to comply with Federal Community Reinvestment Act (CRA) regulations regarding affordable lending, have developed numerous aggressive lending programs and outreach strategies. The lending programs and the associated underwriting generally allow borrowing with little or no money down, expanded or more flexible qualifying ratios, reduced fees, discounted or waived Private Mortgage Insurance (PMI), and a more forgiving position on certain credit history flaws.
Most of the bigger lending institutions will also have specific CRA lending departments and specially compensated loan officers and lending consultants.
Many larger employers will have various incentives or benefits to help ease the pain and expense of moving. Some common examples are cost of living adjustments, which can be structured to specific markets or urban areas, relocation services (either internal or contracted) that serve as a clearing house of information on the new location, down payment assistance funds, or even programs to purchase an employee’s old home to enable the purchase of a new home. Even smaller employers will have salary adjustments to facilitate getting their workers into some sort of reasonable housing.
Government at all levels is engaged in and committed to getting citizens into affordable housing. Originally these programs were targeted at the very low end of the economic spectrum, but with the persistent increases in the cost of housing and a rethinking of the definition of government-subsidized housing, the size of their clientele group has increased. There are various government programs, mostly administered and directed at the local level, to provide down payment assistance for purchases and rental assistance for those unable to buy.
In collaborative arrangements between lenders and government, there have been numerous lending programs developed that favor or encourage specific clientele groups with special benefits or incentives and/or that target certain census tracts for increased spending or assistance.
Examples of favored clientele groups are workers whose income is below a federally defined limit, teachers, policemen, firefighters and military. Census tracts that draw special attention are those designated as “under served” (many times rural areas) or those designated as “low income.” An expanding area of collaboration is between government and real estate developers.
In these arrangements government will grant zoning or tax concessions to developers who will earmark or reserve a certain number of housing units as “affordable.” These “affordable” units will be priced significantly below the market value of similar units.
The point of the foregoing discussion is that although there are challenges to getting into affordable housing there are also opportunities and resources available the help master the challenges.
As you plan for your move and try to determine whether to rent or buy, do some basic market research, analysis and evaluation to reduce and minimize the risks and to maximize your housing investment.
You want to determine if the housing market in your new city is “soft” or “hot” and attempt to make an informed purchase or rental decision. Some of the basic indicators are the state of the local economy (is it gaining or losing jobs?); the average length of time it takes to sell a home; the number of new housing starts in the area; the state of the rental market; (would you be able to rent your home and for how much?); and the current status and apparent trends in home values; (what is the local median price, are the values increasing, decreasing, or flat?).
Be creative and aggressive in your market research data gathering. You can find lots of information on the Internet (Fannie Mae, Freddie Mac, VA, HUD Web sites, or a search engine like Google).
I strongly recommend finding a mortgage lender (your current bank is a good place to start) that will do a prequalification analysis for you based on your expected income and your current recurring debt.
Next, I would find out exactly what sort of relocation or housing services your employer provides and whether there are additional benefits that can be negotiated in order to support your quest for decent affordable housing.
Similarly, find out where the local government affordable housing organization or agency is located and how to access their information (look in the “blue” or government pages in the phone book). These local government agencies can be a treasure chest of information.
Enjoy Your New Home
Once you have done the research, find a realtor if you intend to purchase a home, or if you decide to rent, find local source that can actually show you where the properties you can afford are located.
If you have the time, investigate what the road network and traffic patterns are like for your drive to and from work or to and from the grocery store or shopping mall, if you have school-aged children try and find out where the better schools are located, check with local law enforcement an see what the crime statistics look like.
Like anything that is worthwhile, finding decent and affordable housing will take work and effort. My recommendation is to be positive, be motivated, do the work and enjoy your new home.
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