How much house can you afford now?
September 15, 2009 · Tagged with Loans
The era of the McMansion is over, but how far exactly is the next step down?
With the real estate market still in flux after the subprime mortgage crisis, many potential home buyers are confused over which listings they should be scouting. That’s because the math that once guided their decisions about what buyers can afford has been through the ringer and back again.
There are more than 1.5 million cautionary tales for getting in too deep. That’s how many U.S. properties received a foreclosure filing during the first half of 2009, according to RealtyTrac. And as of December, one in every five American mortgage holders owed more on their mortgage than the value of their home, according to First American Core Logic. With the market still fluctuating, real estate is far from a sure bet as an investment.
Of course, for those with an appetite for risk, there are plenty of opportunities. Interest rates are low, and so are prices. The S&P Case-Shiller 20-city index of home prices suggests they are roughly at 2003 levels. Although the decline has started to slow, in an uncertain market, the question of how much house you can afford may be more important than ever before.
The old guidelines were fairly loose and straightforward. Spend roughly three and a half times your annual salary on the house, and make monthly payments somewhere between 25% and 33% of your monthly salary. In the years leading up to the bust, easy credit left a lot of wiggle room here.
Now, after all of the ups and downs, those basic guidelines are the same, but the gatekeepers have grown stricter about making you stick to them. Lenders have tightened mortgage criteria in the new, post-bubble housing market. Even if your own financial situation hasn’t changed, you may find you’re not able to access as much credit as you might have a couple of years ago at the height of the boom.
Given the current low prices, these tighter standards may represent an overcorrection from the excesses of the subprime boom, says Ryan Tomazin, COO of Integrated Asset Services, a privately held default real estate and mortgage-service provider. “Affordability is almost as high as it’s ever been, but what the banks are allowing people to purchase is still far more conservative than what people could afford,” Tomazin says.