Yes, You Can Afford A House

I know we’ve been saying over and over that home affordability is soaring to record levels, but a report today from John Burns Real Estate Consulting really puts it into hard numbers, which I thought I’d share.

Let’s start with the big number: the cost of homeownership has fallen 43 percent from the peak in this cycle, with more than half of that due to the decline in home prices and the rest due to lower mortgage rates and increases in income.

Okay, so what does that mean on a real monthly payment basis, because the base sticker price is often less important than the actual amount of the check we’re going to write at the end of every month. How much of your income are you going to spend each month to pay for the house? (Assume that you put 20 percent down on a conforming loan).

In Oakland, CA you will pay 28 percent of your income. That’s down from 84 percent at the peak of the market. I realize, that’s one of the most drastic change scenarios.

But how about here in Washington DC? You are now going to pay 25 percent of your income on your home. That’s down from 53 percent at the end of 2005.

In Nashville you will now pay 22 percent of your income, down from 31 percent in 2007, and in Philadelphia you will now pay 28 percent of your income, down from 36 percent.

Now for my fave: in Los Angeles you will now pay 45 percent of your income on a home. That’s a lot right. Well at the peak of the market, in August 2007, you were paying 102 percent, yup, more than your income, on your home.

So for those of you sitting out there on the fence, waiting for prices to be ever-so-favorable, open your eyes! Prices may fall more, but you’re already in a pretty good place. Historically, a 31 percent debt-to-income ratio on your mortgage was considered fiscally healthy.

Questions? Comments?