Saturday, July 12, 2008
How much house can you afford
In the last half dozen years all of the tradition methods and ratios that were commonly used by lenders (and buyers) to calculate affordability were thrown out the window. A few years of this has everyone thinking a $500k house is a cheap house. It's NOT!
Lets take a look using traditional ratios how much home you can afford. The old quick and dirty method was 2.5 times your yearly income. If you make $100k per year, you can afford a $250k home. Easy, peasy. Now this does not take into consideration interest rates, other debts you might have etc. So the lenders used the 28/36 ratio. Basically 28% of your income for payment, taxes, PMI and insurance. The 36% adds in your other debts like credit cards, student loans and car payments. In the good ole days if you could not make those ratios you rented or found a cheaper house.
Using the quick and easy method of 2.5 times your income you need to make the following to afford the median priced home.
In Corona last month the median priced home was $385k. You need to make $154k per year
In Riverside the median priced home was $284k. You need to make $113k per year.
In Moreno Valley the median priced home was $218k. You need to make $87K per year.
Now taking that Corona home and figuring a 10% down payment and using the 28% ratio lets see what your monthly and yearly needs to be.
Corona at $385k. 10% down ($38.5K plus your closing costs) leaves you $346k to finance. Assuming perfect credit you can get a loan at 6.5% giving a payment of about $2187/mo add in $200 PMI (you put down less than 20%), add in taxes of $450/mo (most newer homes are 1.6% to 1.8%) and another $100/mo for insurance gets you to a grand total of $2937/mo. Using the 28% ratio that means you need to be making $10,489 per month (or $125,871 per year).
Now you can clearly see that using traditional ratios home prices are still FAR too high in most areas for the average or even above average family. Maybe I'm out of touch with how much people make these days. I just don't think there are that many families out there making $125k per year. And who are they planning on selling all those $700k homes to? How many families are making $250k per year. Not many I think.
That's the beauty of numbers. Maybe it's the engineer in me but laying out the numbers sure makes it crystal clear. The prices still have some distance to fall.