One of the worst things about the overall real estate market today is that there doesn’t seem to be any silver lining behind that big black cloud.

Normally, you’d think dramatically falling prices would make homeownership a reality for more moderate-income families.

But even with homes more affordable, the median price is still out of reach for a median-income family in many markets, according to “Paycheck to Paycheck: Wages and the Cost of Housing in America,” a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in more than 200 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is unaffordable for all of the five-fastest growing occupations — registered nurses, retail salespeople, customer service representatives, food preparation workers and office clerks. Even registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

“Affordability may finally be moving in the right direction but still has a long way to go.”

“Even with the housing downturn, the drop in prices still just isn’t enough for many workers in traditional backbone occupations to afford houses,” says Rebecca Cohen, a CHP research associate.

In many parts of the country, the housing increases have outpaced wage growth for almost a decade. Census data released in 2006 revealed that between 2000 and 2005, the burden of housing costs grew sharply.

The Housing Affordability Index measures the cost of housing against median family income. The National Association of Realtors, or NAR, which calculates the index, considers that the typical family makes enough money to buy the typical used home, as long as the family can make a 20-percent down payment. In the year 2000, the NAR pegged the index at 129.2, which means the typical family had 129 percent of the income necessary to pay for the typical used house. That figure dropped to 104.9 in June 2007, even though the 2000 median family income of $50,732 rose to $59,157 during the same period. That’s because the median price of a home in 2000 was $139,000, but by June 2007 prices peaked at a whopping $229,200. In those seven years, the median price of homes had risen 64.8 percent, while median incomes had only risen 16.6 percent.

NAR estimates in January 2008 indicate affordability may finally be moving in the right direction, but it still has a long way to go.

Cohen says there have also been other consequences of the overinflation of housing. As the cost of purchasing a home went up, more families moved into rentals, which also put pressure on that market and drove up rents. When that happens, many local economies have trouble filling lower to mid-range jobs. The study also found that retail salespeople and food preparation workers couldn’t afford the rent on a two-bedroom apartment in any of the 210 markets studied.

The CHP study based affordability on the metrics that a family or person should not spend more than 30 percent of their household income on rent and utilities while homeowners should not spend more than 28 percent of their income on the mortgage, taxes and insurance. The most recent NAR report projected a January 2008 median home price of $198,700 and median family income of $59,858. With a 20 percent down payment, a 30-year mortgage at 6.2 percent would mean $973.59 monthly for principal and interest. Assuming $3,600 per year for insurance and property taxes brings the total monthly payment to $1,273.59 — barely within the $1,396 maximum threshold, without factoring in any closing costs.

Lenders have often used formulas such as this to gauge a person’s lending capacity, but property taxes and insurance can vary drastically by region. Cohen says these affordability metrics can also show different stories based on the number of dependents in the house.

“Just because a bank says you can afford a home doesn’t always mean you can.”

“A benchmark is just that and should be taken with a grain of salt. If a single person spends 27 percent of their income on housing, they might be doing great, but if you’re a family with five kids, certainly the amount you’re able to comfortably spend without cutting into your budget will vary,” says Cohen.

Consequences of unaffordable housing

Recent mortgage innovations and Americans’ appetite for debt has created an illusion that homes are affordable and within reach of any income. But just because someone purchases a house doesn’t mean they can afford it, and those that maximize their lending capacity will often have to make other budget cuts that can affect their financial futures.

Mo Barakat, a senior financial adviser at Ameriprise Financial in Los Angeles, uses more conservative formulas. He says a person should spend no more than 20 percent of income on mortgage payments, 5 percent on property taxes and insurance and 5 percent on all other debt including car loans, credit cards and student loans. That means a person or family with a $100,000 income should spend no more than $2,083 per month on principal, interest, property taxes and insurance. If saving for college or funding a nice retirement is in the plan, housing payments should be even less.

“The lender does not know the totality of their financial situation in terms of their monthly budget and financial habits. It is the borrower’s personal responsibility in terms of borrowing money and meeting their other financial goals,” says Barakat.

In other words, just because a bank says you can afford a home doesn’t always mean you can. A lender is concerned about an applicant’s ability to repay the debt but it has no interest in if there’s enough money left over to send children to college or invest for retirement. Many homeowners fail to see this and buy homes at the expense of sacrificing other liquid assets and investments. Furthermore, Barakat says, lenders will often allow people to exceed the 30 percent threshold, but once they do, it almost always has other financial impacts.

“There are just too many consequences. You basically lose your savings rate. For the first time since the Great Depression, Americans have a negative savings rate of 4 percent. It’s been captured or stolen by high mortgage payments,” says Barakat.

While new homeowners may be happy to have a home, even if that means they’re financially overextending themselves, Barakat says a person’s standard of living will actually fall when they buy an unaffordable home. Saving less, putting away less for retirement, cutting back on outings and vacations isn’t just decreasing the fun on life, it’s increasing financial risk. There’s more financial stress and, without an emergency fund, homeowners can find themselves further in debt when a crisis strikes.

“If you want that single-family home, swing set and the American dream, the reality is that in major metro areas, most of us will have to commute in order to enjoy that.”

“Now Americans have greater risk, less security, negative savings and are unable to meet emergency expenses with cash reserves. It means that the American dream starts to get modified,” says Barakat.

Bad for sellers, good for buyers

Lawrence Yun, chief economist for the NAR, says that in many of the “superstar cities,” such as New York, Los Angeles, San Francisco and Washington, D.C., real estate has always commanded a significant premium. Even with the recent declines in property values, Yun says that when compared to median incomes, housing values in these cities will likely always be out of whack. While the recent declines still haven’t put homes within reach of most residents in these markets, it is a step in favor of buyers.

“Some of those high-profile markets are encountering up to a 10 percent price decline. Certainly, it’s still not affordable, but at least it is better now than it was a year ago,” says Yun.

Between the two coasts in Middle America, Yun says homes are much more affordable when compared with median incomes. There, he says, it is less about interest rates and prices and more about jobs. Yun points to markets such as Dallas, Indianapolis and Milwaukee, where most middle-class residents with good credit and decent jobs can afford median home prices.

Sean Snaith, who holds Ph.D. in economics and is director of the Institute for Economic Competitiveness at the University of Central Florida, says affordability evaporated in some areas that saw rapid price increases over the past five years. In many parts of the country, home prices have risen to such levels that many middle-class residents have no choice but to move farther outside the city radius and expand their commutes. He points to Washington, D.C.’s expansion into Virginia and Maryland and Los Angeles’ constant expansion inland as prime examples.

“If you want that single-family home, swing set and the American dream, the reality is that in major metro areas, most of us will have to commute in order to enjoy that,” says Snaith.

Celeste Ward, a resident of Martinez, Calif., says she and her husband sold their condo in 2005 when they thought the market was topping out. Now that they have a daughter, they’re trying to get into a three-bedroom property but find they can’t get back into the market after the price decreases. They have considered moving farther inland but are planning to rent and wait until the market falls even further.

“We’re just waiting and are seeing more desperation from sellers. Many homes are still overpriced and there are so many out there. We’re waiting to maybe get a bank-owned property or something where the seller is really desperate,” says Ward.

Barakat agrees people should buy homes when their “personal economies” are ready, not necessarily when the housing market is ready. In the past, many people were jumping into homes with exotic mortgage products and adjustable rate mortgages that are now starting to reset. Barakat says that in most cases, people chose adjustable rate mortgages because they couldn’t afford the home in the first place. In January 2008, Realty Trac reported default notices, auction sales notices or bank repossessions on 233,000 homes, 57 percent more homes than in January 2007. For all of 2007, more than 1 percent of all U.S. households faced foreclosure — almost double the rate of 2006. While the fallout of financial illiteracy is going to affect many homeowners, it will also create new opportunities for new generations.

“Many younger people have told me that they have been priced out of the market and that it was not financially healthy (to buy a house). With these current prices, it is now creating an opportunity for future generations to actually afford a home. I welcome that. Bubbles, while painful, need to burst to get rid of the excess,” says Barakat.

Craig Guillot is a freelance writer in New Orleans.

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