Profile picture for SoCal Engr

What is an "Affordable Home"...

I've seen many comments on housing prices coming down to an "affordable level", and have seen "affordable" defined in terms of cost:income ratios. The ratios I have seen are typically 2:1, 3:1 and sometimes 4:1. Being a numbes person, I did some crunching of my own and came up with the following "basic afforability ratios". This is not a definitive identification of ratios, but I thought they might be of interest, as well as the assumptions used. At worst, they provide a common starting point for arguing what "affordable" means.

              5.0%  5.5%  6.0%  6.5%  7.0%
    28%    5.2     4.9     4.6     4.4     4.2
    33%    6.1     5.9     5.5     5.2     5.0

The percentages across the top are mortgage rates, and the percentages on the left are front-end ratios (mortage payment divided by gross monthly income). These ratios are based on the following assumptions...

  1. The mortgage product is a conforming 30-year fixed rate mortage.
  2. The buyer is putting 20% down, financing 80%.
  3. Closing costs of 3% are directly paid by the buyer (i.e., not added to the mortgage).

  • December 06 2008 - US
  • 0
    0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Be a Good Neighbor. Be respectful and on-topic. No spam or self-promotion! See our Good Neighbor Policy.

 
 

Answers (20)

Profile picture for SoCal Engr

An example of the calculations used to derive the ratio for a 6.5% mortgage and a 28% front-end ratio is shown below.

  Income   28%    41%  Other Debt  Payment    Loan    Rate     Value    Ratio
  10,000     233     342       108             232      36,750  6.5%    44,277   4.4
  20,000     467     683       217             465      73,500  6.5%    88,554   4.4
  30,000     700  1,025       325             697    110,250  6.5%  132,831   4.4
  40,000     933  1,367       433             929    147,000  6.5%  177,108   4.4
  50,000  1,167  1,708       542          1,161    183,750  6.5%  221,386   4.4

In this example, "Income" is "gross annual income", "Loan" is the amount financed, and "Value" is the actual cost of the house. For any who do the math, "Loan" is 83% of "Value". This is because these calculations assume that the closing costs are paid "out of pocket", so the buyer actually has to bring more than the 20% down to the table.

Note:   "Other Debts" is the amount/$10K of recurring monthly debt that can be supported with a 41% back-end ratio. This will decrease if a front-end ratio of 33% is used. If recurring monthly debts exceed this number, then the buyer should consider that they may not be ready to buy, or that they need to decrease their "affordabilty ratio" to reflect their specific debt profile.

  • December 06 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for SoCal Engr

Forgot...

 

Don't forget to include property tax and home owner's insurance into the back-end ratio when determining your back-end ratio.

  • December 06 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Nicely done, socal_engr, I hope everyone appreciates your hard work. Best wishes, Jim

  • December 06 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Good job socal_engr!

  • December 06 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for SoCal Engr

Looking at the spreadsheet, I realized there is another "affordability ratio" buried in the information. This is the loan:income ratios, shown below.

 

             5.0%  5.5%  6.0%  6.5%  7.0%
    28%   4.3     4.1     3.9      3.7     3.5 
    33%   5.1     4.8     4.6      4.4     4.1

 

The percentages retain their original meaning, but the ratios now represent a ratio between the loan amount and gross annual income. This would be useful in situations where the buyer has additional funds to put against the house. In this case, the ratio would be used to determine the size of loan that could be considered "affordable", and then the available funds would be added to this to back into the target range for a house.

 

Example: At 6.0%, the affordable loan range is 3.9-4.6. With an annual gross income of $50K, this works out to a loan of $195K-$230K. Adding the funds available for a down payment (minus 3% of the loan amount for closing) results in a target range of "affordable house prices". In this case, assuming $75K to apply againt the down and closing, the guide numbers would be $264K-to-$298K.

 

Example: Using the same annual income of $50K and the basic ratios from the first posting (i.e., assuming 20% down and 3% closing costs), the guide numbers would be $230K-$275K (using ratios of 4.6:1 and 5.5:1.

  • December 06 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for SoCal Engr

 

Last post on this (wife is looking over my shoulder and shaking her head...)

 

With all the discussion about possible 4.5% rates for purchases, the following ratios apply...

 

             House  Loan

    28%    5.5     4.6

    33%    6.4     5.4

 

The "House" column applies to the cost:income ratio. The "Loan" column applies to the loan:income ratio.

  • December 06 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for rhonda42

What bothers me about using your "gross annual income" is that it ignores income tax. For some, this could be a significant number. People should really consider their affordability based on their post-tax income.

  • December 07 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for subverter

Help!! My wife is pestering me to buy a home and I can't for the life of me explain that it is a bad idea. Aside from all the facts about the market, I need a real devastating attack on the myth of home ownership. One that an econ/quant jock could put together.

 

For example, if you were to say, "Dear, buying a home now requires 20% down. That money applied in other liquid instruments could earn a higher yield than a home. Moreover, that opportunity cost + the risk of losing that downpayment + the rising cost of interest rates, restictionn of HELOCs, etc. could mean that we couldn't get our money out even if the home DIDNT lose value. Moreover, the cost of selling costs, upkeep and property taxes combine to make owning a home a remarkably BAD investment a this point."

 

For a bit of back story, my wife and I bought a home in 2005. I freaked out about the market and was lucky enough to turn it 18 months later for a 215K gain. That same house today has depreciated by at least 50K. The current owners sunk an additional 150K in the home. The likelihood that they will see a dime out of that remodel is unlikely. So my point to her was this: we'd have lost part of our downpayment were we to sell that same house today, only 12 months later. Instead of being up, we'd be upside down. And btw, property taxes are on the rise. Many states and counties are deep in the red. And guess where they are coming for the money. you got it, home owners.

 

She seems to think that a mortgage interest deduction wipes out all ills. But point of fact, we are now renting a home that would be 2x as expensive to buy (the monthlies.) Not to mention that the house next door has been sitting on the market for 6+ months, reduced by 100K and no takers. It is now vacant. And this is an area w/ 1M+ homes.

 

Women want their nests but this is no time to be stupid w/ cash. We're saving about 2K as I figure it, per mo, NOT OWNING a home. I try and try to impress this on her, but I've failed each time. She KEEPS on pestering me to look at homes and sends me links from MLS. I'm frankly tired of explaining this to her.

 

Does anyone here have a clearer way to put this situation into perspective to her? What are the risks and opportunity costs of buying now and believing the realtor hype? She's made friends with agents and they are completely snowing her. I've put my foot down about this, but I look like the ogre.

 

Thanks for your help fellow Zillows!

  • December 07 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for Lady Chattel

Uh, subverter---are you gonna post this in every thread?    Me thinks maybe we have a baiter on our hands, ugh.

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

subverter

You buy for her the 10 cara diamond, then tell her that, there no more money for buy the house.

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for Mark75NYC

"Help!! My wife is pestering me to buy a home and I can't for the life of me explain that it is a bad idea."

 

You guys can do this ...

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for Hate
  • Hate
  • 300 contributions

I can still rent for cheaper than owning, and with less risk, so why would I buy right now? Houses where I live are still way too high. Sorry, I'm not spending $325k for an average house. All the garbage is $250k or less, but it needs so much work that it ends up costing just as much. My wife and I would love to own our own house...but we're not about to buy high and end up with $30k of negative equity 2 years from now. Sellers are still being far too unrealistic in their asking prices and 99% of them are utterly clueless as to where the market is right now.

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for jimmy57

"I can still rent for cheaper than owning, and with less risk, so why would I buy right now?"

 

Exactly. Whatever lower interest rates give -- lower job security and shruken stock values take away, and then some.  The pool of potential buyers shrinks as the faltering economy fosters a move to "safe harbors" and away from consumption.  I think the days when house salesmen can get buyers off the fence with interest-rate arguments are largely behind us.

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Buying your own home is not a rational thing-

and should not be considered as such. It's

where you put your whole life- and family. JG

[content removed by moderator for being self promotional]

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Buying your own home is not a rational thing-

and should not be considered as such. It's

where you put your whole life- and family. JG

[content removed by moderator for being self promotional]

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for jimmy57

Please go back and read the Anti-Spamming notice at the top of the topics, Jerry.  Flagged.

  • December 08 2008
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for subverter

I posted this in several places bc zillow didn't let me create a Topic heading. Moreover, submitting something at the bottom of a loooong ass thread meant that less than most people would ever see it.

 

This is not troll bait.

  • December 08 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for Lady Chattel

Home: place to reside, holder of your things.  The great thing about my memories--they will go with me wherever I go for the rest of my life!!!  I have great memories from my last 3 homes, and I have great ones from the last year in my rental.  Having my name on a lein didn't make those memories that much better or momentous.  In fact, I will look at pictures taken in my rental and think to how smart and prudent we were. 

 

On a funny note: my oldest daughter is learning about colonial history: they had to learn what debt is. They even had a descrpition of how a person buys a house or a car and how colonists became debted to England and what not.   So I showed her what the avg salary in our county was and what the avg price for a home should be relative to that pay, then showed her what the avg price for a home was.  Then I proceeded to show her what a home would have cost us last summer had we bought.   Yes, my 9yr old saw the wisdom of renting and gave me a high five.......so subverter, if your wife can't see the wisdom, eeeekkkk!!

  • December 09 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for FatNoah

A home isn't just about the best financial move.  I was working at a law firm that would pay my way through law school, hook me up with a salary in the mid 100's after graduation, etc. but I ended up going back to my previous career.  Was it the best move financially?  No.  Was it the best move for my lifestyle?  Hell yeah! 

 

Financials are an important part of the buy/rent decision, but not the only part.  It's also about your lifestyle.  If you want a house and can legitimately afford it, go for it.  If you want to time the market, wait a bit longer.    Right time, wrong time, etc. depend on your reasons for buying a house to begin with...

 

  • December 09 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for digiphaze

How many people making 50,000 today have 40+ thousand for a downpayment?

 

I'm making well above that, but being that I've only been in the work force for 2 years, I certainly don't have 40,000 laying around for a down payment.  Home prices are still WAY too high.  My area in particular is full of people who are still in lala land.  I can't even afford a mobile home here.  A run down run at that.

 

I think people need to start realizing you have 3 to 4 years of new home buyers (whom were priced out before they even entered the market) who are stuck waiting for prices to drop enough that they can afford a decent starter home where the 20% down is more like 15 to 20 thousand rather than 40,000.  Or they will never get a home.

  • December 10 2008
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.