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Affordability Is The Real Key To A Sustainable Housing Recovery

By Donna S. Robinson | February 20, 2012

By now everyone agrees that housing needs to turn around in order for the general economy to see any kind of robust recovery. Indeed US housing is a cornerstone of the general economy, because of it's ability to create and sustain a wide variety of jobs. But any significant recovery in housing will require a broad base of participation by those who make up the 99% of Americans who are not wealthy, and who, for the most part, live paycheck to paycheck... when they have a paycheck.

housing affordability

Affordability might be the key, but how much can people really afford? © drubig-photo -

There is ample analysis that demonstrates that one of the primary barriers to a full blown housing recovery is jobs and income. So it seems to be a paradox. We needs more jobs to create more income, but at the same time, without a recovery in housing, we are having problems generating enough jobs that pay a decent income. And recent analysis by the U.S. Government shows that income is down across the board since 2008, even for college graduates with advanced degrees.

This essentially implies that the housing market is entering a new era in which lower cost homes will be a primary key to any housing recovery for the foreseeable future. Even higher income individuals are "down-sizing" their costs of home ownership. The plain fact is income growth is stagnant, and has been for years, when you take inflation into account. With prices for gasoline approaching $4 per gallon as I write this article, costs for food, fuel and other necessities of life are rising just as surely as the value of the dollar is falling. And given the foreclosure shock we're still enduring, the fear of losing a home to foreclosure is causing many would-be buyers to think twice about a home purchase.

Most potential home buyers are stuck between rising costs of living and incomes that simply have not kept pace over the years. The only realistic solution is that home prices have to come down to affordable levels.

But what is an "affordable" level? There are many explanations to be found, as to what "affordable housing" actually means...

The U.S. Government thinks that affordable housing means being able to get a mortgage loan with a low or no down payment, regardless of how much this loan will actually cost the buyer over the life of the mortgage.

In fact, FHA and other types of government insured loans are among the most expensive choices a buyer can make, if they do not understand the costs involved and how to deal with those loans. The Private Mortgage Insurance required for an FHA loan will add around $15,000 to the cost of a $100,000 home, over the life of the loan. After you include interest, your $100,000 home can cost almost $250,000, and we haven't even begun to discuss property taxes and insurance, which will also be added to the buyers monthly payment.

For a mortgage lender, "affordable" means meeting an arbitrary standard such as 36% of the buyers gross income, as an allowable amount for a monthly mortgage payment. In the past this percentage was commonly used as a benchmark. But this figure includes income before taxes and other items such as savings contributions are deducted. That is simply counting money that buyers will not bring home in their weekly paycheck, so many buyers end up with more home than they can comfortably afford.

Mortgage qualifying for married couples usually takes both incomes into account, so a divorce could find couples arguing over who has to take the house, since neither one of them can afford it on one income. Often buyers are qualified at the very top of the range of what is permissible, leaving no financial room for other major lifestyle changes, such as the birth of children or necessities like cars or furniture.

To generate a housing market recovery that will last, one that is not dependent on government generated smoke and mirrors, buyer's should be educated to have realistic expectations about what they can REALLY afford and be encouraged by their mortgage lender and their real estate agent to stay within their personal affordability level.

So what is affordable from a buyers perspective? According to the U.S. Census, the average yearly income in the U.S. was $52,029 as of 2008.

While there are many factors, such as the debt-to-income ratio, that help determine what each individual buyer can afford to pay for "principal, interest, taxes and insurance" - the four essential components of most mortgage payments - the key to rebuilding a robust housing market will mean focusing on homes that can meet the general needs of the average consumer with an average income.

If the professionals in the housing industry will help encourage buyers to make smart decisions and stay within their personal affordability levels,  the housing industry will be rewarded with increasing home sales, more closings, more construction and manufacturing jobs and fewer foreclosures, which will result in even more homes sales and we'll finally have the economic recovery we are so desperately seeking.

Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for She is an active real estate investor who also provides coaching and consulting services. Contact her at [email protected] or call her office at 888-915-9968 to inquire about coaching or consulting, or to request a free copy of her latest book.

Donna S. Robinson has been involved in the real estate industry since 1996. A licensed agent and real estate investor, she is a recognized expert on residential real estate investing. Her course, "Fundamentals & Strategies For Real Estate Investing" is approved for CE credit by the GA Real Estate Commission. She has authored several books on real estate investing, and consults with residential investment companies. She also offers coaching services to real estate investors.

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