House affordability

[LivingAlmostLarge]

A blog I read had a post about housing and some of my favorite parts is reading the comments.

A multiplier of someones income to determine affordability has never made much sense to me, as in the end all that matters is how much they need to pay per a month, which changes wildly with interest rates (which are at historical lows). At a 0 percent an 11x multiplier would be close to affordable, at our current rates I would think it would take a household income of around 100K to support a 800k price point.

OMG this person actually suggested $100k can buy a $800k house! This is the breakdown and his commentary

Income
$100,000 salary = $8,333 per month

House Cost
$800,000 house * 20% down = $160,000
$800,000 – $160,000 = $640k mortgage

Mortgage Payment
$640,000 @ 30 years @ 3.85% = $3,000 month

So with these assumption the total monthly payment would be $3,290 meaning it would clearly be affordable to someone making 3290*3*12: or just $118,440 Then, if you include the tax incentives for somebody at this income bracket (interest + you don’t pay tax on property tax obviously) you would get to around $105K. While maybe slightly over leveraged, it’s not as insane as you make it sound.

Okay I guess this is how housing goes up but from what I'm seeing I am wondering is this how banks are giving out mortgages again? Here people preach 2-3x income for a house. this is insanity.

[sv2007]

I think it's pretty standard to use 30% gross as the max monthly payment for loans. Since the above person suggested a 30-yr fixed mortgage, then it may even be considered conservative.

What I'm worried about is the large amounts of 0%-15% down loans that we are seeing again. Mortgages are getting easy to obtain with so little down payment in many areas of the country.

[dawnwes]

$3,000/mo plus what would amount to about an extra $1,000 in insurance and taxes around here.

Gross: $8,333
Take home: $6,200

Between living expenses, health care, etc....

I can't even imagine paying $4,000 out of $6,200 towards my house.

[sv2007]

It may seem extreme to us savers, but that's what a lot of banks and brokers use as a rule of thumb.

[Singuy]

Yup, mine used a debt to income ratio of 43%. Be prepared for another housing bubble folks..no one learned a thing from the 2008 crisis..oh yeah they don't have to because they are too big to fail.

[dawnwes]

Yup, mine used a debt to income ratio of 43%. Be prepared for another housing bubble folks..no one learned a thing from the 2008 crisis..oh yeah they don't have to because they are too big to fail.

Houses are selling like hotcakes around here. Literally. Houses I found online are sold within days. And for far more than I think they are worth.

A friend is a realtor and he said that anything less than $1M within 2 miles of the downtown area are selling in HOURS, in fact, they already have a list of people who want anything in that area and are willing to pay. These are small houses, under 2,500 sq. ft.

That is not the area we are looking at, but it is telling. This is not supposed to be a high cost of living area, but it is becoming more so.

Dawn

[disneysteve]

no one learned a thing from the 2008 crisis

This is really the most disturbing piece. Neither the public nor the industry learned one damned thing from the housing crash. They didn't tighten lending standards. They didn't increase eligibility criteria to qualify. They didn't adjust debt to income ratios. Basically, nothing at all has changed.

[dawnwes]

This is really the most disturbing piece. Neither the public nor the industry learned one damned thing from the housing crash. They didn't tighten lending standards. They didn't increase eligibility criteria to qualify. They didn't adjust debt to income ratios. Basically, nothing at all has changed.

It is going to be a rude awakening for them in a couple of years, but the hardest part is that it will affect ALL of us, just like it did in 2008, only I personally think this time will be worse. We simply don't have the same resources to pull ourselves out.

[TexasHusker]

This is really the most disturbing piece. Neither the public nor the industry learned one damned thing from the housing crash. They didn't tighten lending standards. They didn't increase eligibility criteria to qualify. They didn't adjust debt to income ratios. Basically, nothing at all has changed.

Actually they did tighten lending standards substantially. Things are nowhere near as loose as they were pre-2008.

[TexasHusker]

Yup, mine used a debt to income ratio of 43%. Be prepared for another housing bubble folks..no one learned a thing from the 2008 crisis..oh yeah they don't have to because they are too big to fail.

43 percent is generally the number used for TOTAL DEBT TO INCOME.

I would be surprised if a bank was using that number for housing...

[disneysteve]

Actually they did tighten lending standards substantially. Things are nowhere near as loose as they were pre-2008.

They tightened them extremely at first, but as time passes, they have been loosening up more and more. I just read an article about this last week. Interest-only loans are back. 3% down payments are back. Limited income documentation loans are back. Sub-prime lending is back. It's taking some time but little by little we're sliding right back into old habits.

[bjl584]

They tightened them extremely at first, but as time passes, they have been loosening up more and more. I just read an article about this last week. Interest-only loans are back. 3% down payments are back. Limited income documentation loans are back. Sub-prime lending is back. It's taking some time but little by little we're sliding right back into old habits.

I have seen this phenomenon first hand. I sold my last house in 2011 and finally just closed on a new one this past July of 2015.

I've been both a seller and a buyer in the past 5 years, and I can definitely attest that a lot of standards, rules, and practices that were in place when I put my old house on the market to the time that I bought my new house have loosened substantially. A lot of the requirements that the buyers of my old house had to meet in 2011 were gone when I was a buyer in 2015.

Easy money is coming back. The housing market is hot right now. Housing is appreciating rapidly. Inventories are low, houses are selling where I live in 2 to 3 weeks after being listed. The only explanation is that banks are loosening regulations and are more willing to write loans. There hasn't been a huge surge in the economy or job market where I live, so incomes haven't gone up dramatically.

[rennigade]

This is really the most disturbing piece. Neither the public nor the industry learned one damned thing from the housing crash. They didn't tighten lending standards. They didn't increase eligibility criteria to qualify. They didn't adjust debt to income ratios. Basically, nothing at all has changed.

Why would it change? All of the big banks/lenders who contributed to that mess were rewarded with bailout money. No one was punished or served jail time. I would do the exact same thing if I were them.

[disneysteve]

Why would it change? All of the big banks/lenders who contributed to that mess were rewarded with bailout money. No one was punished or served jail time. I would do the exact same thing if I were them.

I'm not surprised that the banks haven't changed their ways. And I suppose I shouldn't be surprised that the public didn't learn anything either. The stupidity of the American public never fails to amaze me.

[rennigade]

I'm not surprised that the banks haven't changed their ways. And I suppose I shouldn't be surprised that the public didn't learn anything either. The stupidity of the American public never fails to amaze me.

Agreed. There's just always going to be a percentage of irresponsible people that those who are responsible will have to take care of.

I like to call those people...bottom feeders.