How an 'affordable' home could cost you later
Homes still seem pretty cheap, even with prices rising by 10% or more. But a comfortable monthly payment can hide a painful truth.
You might have seen a report or two lately touting how affordable home buying is, even with prices shooting up more than 10% a year.
Here's a chart, for example, from the big brains at the St. Louis Federal Reserve. You'll see huge leaps in affordability starting in about 2009 and continuing today.
What 'affordable' really means
"Affordable," here, means that a family with the median income can qualify for a mortgage on a median-priced single-family home. The median (half were higher, half lower) income was $51,404 (,pdf file) in February. The national median home price is $176,600.
In fact, buying a home is so manageable today that "the typical buyer earns roughly double the income needed to buy a home in his or her area," according to the National Association of Realtors.
Here's more evidence: This chart, at The Washington Post's Wonkblog (scroll down till you reach Exhibit 2) predicts housing will stay affordable even at interest rates of 5% and 6%. Not until rates for a 30-year fixed rate loan reach 7% will an affordable home cost less than the median price.
Adds the Post:
At a 30-year fixed-rate mortgage rate of about 3.8%, the typical American homebuyer can afford a $279,000 house. That's 45% more than the current price of houses.
There's more to it
Great. But someone's always got to be a wet blanket. This time it's economist Dean Baker at the Center for Economic Policy Research. He sees danger lurking around the corner of all this affordability news.
"Home prices are not affordable," he blogs, here. It takes more than an affordable mortgage to stay safe in real estate today, Baker explained by phone. "You found really high affordability during the bubble years. They were even more affordable than in the '90s." That's because interest rates were lower in the bubble than they were in the '90s.
Affordability -- your ability to buy a home for a mortgage you can afford -- isn't the only issue for homebuyers who want to protect themselves from the real-estate sorrows we've seen in the past five years. Yes, the housing market is healing. But the most recent figures show 21.5% of mortgages still were under water at the end of last year.
When buying, especially in a hot market, think too about what rising home prices and interest rates will do to your ability to re-sell the home in a few years.
Maybe not. If you're happy to stay in that home forever, what does it matter? But if you buy into a too-hot market where prices may eventually collapse, you could end up under water in your affordable home, just as millions of Americans did in the last housing bust.
Double-digit price increases
The potential danger, Baker says, is in those housing markets going gangbusters now, with prices rising by around 20% a year. They're in Phoenix, Las Vegas, along the California coast, in Seattle and Portland, in Florida and along the Eastern seaboard from Washington D.C. north to Boston.
Between January and March this year home prices rose 23% in Phoenix, 22% in San Francisco, 21% in Las Vegas, 19% in Atlanta and Detroit and 17% in Los Angeles, according to the S&P/Case-Shiller Home Price Indices (.pdf file.) The report shows wide variability in home price increases around the country.
In these markets especially, it pays to consider not only affordability but whether home shoppers will be willing or able to buy the place from you at a good price when you put it on the market in three or five or 10 years.
If mortgage rates rise significantly, the pool of people who can afford to buy your home may have significantly shrunk. And if prices fall a lot, as they did a few years ago in those volatile, hot markets, you could find your mortgage under water.
"How many people are going feel good about paying for a house at $300,000 that's worth $220,000," Baker asks. "They may be able to carry it but they'll be throwing $80,000 in the garbage."
More from MSN Money:
- Is it too late to refi? 5 steps to an answer
- Detroit takes huge risk with clean-slate plan
- Why cities are hot and suburbs are not
- Want to buy a house? Take a number
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