Can You Afford to Buy a Home?

Can You Afford to Buy a Home?

More Americans Can Own a Home of Their Own

Forty acres and a mule were the American entitlement in the nineteenth century. In the twentieth century, it’s a home of one’s own. But can you afford one in the 21st century? As home prices soared in the 1970s and 1980s, fewer and fewer Americans could afford to purchase a home. At the end of the 20th century 64 percent of U.S. households owned their homes, down from 66 percent in 1980.

Young adults trying to scrape together enough for their first down payment had a hard time. Only 39 percent of households headed by people under the age of 35 owned their residences in 1999, down from 41 percent in 1982. The drop-off in home ownership was sharper among households headed by people aged 35 to 39. Home ownership fell to 63 percent from 68 percent in 1982. The housing affordability crunch affected older people as well.

Things seem to be taking a turn for the better in the 1990s. Lower interest rates mean smaller monthly mortgage payments for all buyers, and the purchasing power of home buyers reached its highest point in two decades in February 1994, according to the National Association of Realtors Housing Affordability Index, which measures affordability factors. But the index for first-time purchasers wasn’t as rosy. A typical first-time buyer still fell short of qualifying for a conventional mortgage on a $90,900 starter home. But someone earning $24,098 – the median income for prime first time buyers, could afford a home costing $83,500.

Roxborough street, Rosedale. Photo by Elena

How much of a house you can afford – or, indeed, whether you can afford one at all – depends a lot on where you live. Each year, Lomas Mortgage USA ranks 50 states by the percentage of household income that goes to monthly payments on a conventionally financed purchase. The most affordable states, according to Lomas’s 1994 survey: Wyoming, where on average only 14.5 percent of household income goes to pay the mortgage; Nebraska (15.5 percent), and Idaho (15.6 percent). At the other end of the scale is California (26.6 percent), Hawai’i (26.7 percent), and Virginia (23.6 percent). Generally, you’ll spend more of your household income meeting the mortgage if you live on the East Coast, less in the Western and Sothern states.

Housing in a big city can be just as affordable as a place in the boonies – if you pick your city carefully. The most affordable metro markets, according to the Lomas survey, are Tampa (14.3 percent of household income should be enough to cover monthly mortgage payments, taxes, and insurance), Houston (16.4 percent), and St. Louis.

The least affordable included Los Angeles (26.6 percent), San Francisco (26 percent) and, of course, New York (24.1 percent). Housing costs in some of the country’s boom towns are, well – booming. Expect to pay around a quarter of your household income to cover the mortgage in Salt Lake City and around Paget Sound, the area that surrounds Seatle.

Whatever the median household income (which the Lomas survey factors into its considerations), some cities are just plain expensive. The priciest market in the country in 1994, as it has been for some time now, was Honolulu, Hawai’i, where the median price increases in the top markets have been leveling off in recent years. In Honolulu , for example, the median price dropped almost 1 percent in 1994. The biggest bargain in 1994 was in Cedar Falls, Iowa. The median price was $55,000. But you better hurry – the median price jumped almost 5 percent last year.

More house, smaller payments

As price increases have moderated, mortgage rates dropped, and median family income increased, housing has become more affordable for many Americans. The National Association of Realtors composite Housing Affordability index measures affordability for all home buyers. When the index measures 100, a family earning the medium income has exactly the amount needed to purchase a median-priced resale home, using conventional financing and a 20 percent down payment. Thus in 1994, the composite index shows that half the families in the nation had at least 134,3 percent of the income needed to qualify for the purchase of a home with a median price of $109,400. The typical family could afford a home costing $147,000.

(Text written in 1994).