Conventional wisdom–and many formulae used by government agencies 't, non-profits, and financial advisors–measures housing “affordability” by taking the housing payment, dividing it by income, and looking for a number below x% (often 35-40%).
SIS’s thread on the CA mortgage discount at The $100,000 mortgage discount for California homeowners is one example of this, but there are many others.
This seems a very crude way to measure affordability. The following variables are all important:
-How high is the income to begin with? A high income individual can afford to spend a larger % of that on housing costs, all else equal, as they don’t need as much income for non-housing necessities.
-How much of the housing payment is equity? When interest rates are often 2-4%, even the earlier payments on a 30-year mortgage can include as much principle as interest. That equity can be often be borrowed against in the event of future financial hardship. Alternatively, it makes selling the house at a gain a much easier prospect.
-What do appreciation prospects look like? We were reminded by the post-2007 housing crisis that values drop as well as rise, and planning on a given level of appreciation is not prudent. Having said that, one can make an educated guess about the likely prospects of housing prices change in a given market segment. If they are promising the risks of devoting a larger share of income to housing drop.
How much does a pricier house payment contribute to quality of life? For many, a decent house in a peaceful neighborhood can bring enormous satisfaction. And getting that kind of lodging in a place like Seattle, an Francisco, or New York is going to require a higher share of average income than in most other places. Such a person may reasonably decide to keep transportation costs low, not dine out much, buy few clothes or toys, et cetera-- in exchange for the digs they love. Is such a person in 'unaffordable" housing if they devote 50% or more of their income to it? Often,no. And unlike some of the above reasons, this one is largely applicable to renting as well as buying.
Here in Seattle I see examples of this all around me. Routinely, friends and neighbors purchase “unaffordable” housing, and some rent “unaffordably” also. More often than not, this has seemed an entirely reasonable decision on financial grounds. Now if only we Seattlites had access to that CA program… :
Do you or someone close to you pay over 40% of their income towards housing costs?
If so, how comfortable do _you_feel about that?