Americans Spending Too Much on Housing 

By Ryan Dosen

 

CNNMoney.com recently reported that too many Americans are spending too much of their money on housing. Some are stretching their dollars to get the nicest homes they can possibly afford. Others are struggling with low wages, underemployment, bad credit, and/or high rental costs that could be unsustainable, individually and societally.

 

40 Million “Cost Burdened” Americans

The Demand Institute, a non-advocacy and non-profit division of The Conference Board, is a think tank that focuses on understanding how consumer demand changes in industries, countries, and markets. The Institute recently surveyed 10,000 U.S. households and found that nearly 40 million Americans are spending more than 30 percent of their income on housing payments, property taxes and other home expenses. Even worse, 49 percent of renters are finding themselves in this “cost burdened” zone.

Another study released this summer by Harvard’s Joint Center for Housing Study reported that housing costs are near record highs and that 28 percent of renters are “severely” cost-burdened with housing costs eating up at least half of their incomes.

 

Debt-to-Income Ratios

When qualifying you for a loan to purchase a home, a bank will look at your debt-to-income (DTI) ratios. There are two  DTI ratios that are relevant when trying to qualify for a mortgage: front-end ratio and back-end ratio.

Local mortgage expert Karen Jackson of Waterstone Mortgage in West Chester says that the front-end ratio is the percentage of monthly gross income that is taken up by just the new projected monthly “PITI” (principal, interest, taxes, and insurance) payment. The back-end ratio is the percentage taken up by the new payment along with other monthly obligations, such as credit card minimum payments, auto loans, student loans, etc.” Jackson says that the back-end ratio is the one that someone is typically referring to when they use the term “DTI.”

Jackson says that “each type of financing has its own rules for DTI and, for most, the front-end ratio is not nearly as important as the back-end. For most conventional financing, your total DTI cannot exceed 45 percent. For FHA financing, that number is about 57 percent.”

Jackson’s rule of thumb is to try to keep your monthly PITI payment at or below 30 to 35 percent of your monthly income, potentially allowing for 10 percent of your income to go toward other obligations. Of course, in the case of debt, less is more. The less you owe, the more you’ll qualify for.

These ratios and lending standards are set where they are for good reason. Banks and the institutions buying their loans do not want people to go bad on their payments. Foreclosure is time-consuming and expensive. When people have to pay half of their incomes toward housing, Fannie Mae’s data says that there is a risk of default that not acceptable. Basically, those people are in over their heads, even if they don’t yet know it.

Fannie Mae may help and keep you from getting in over your head with an expensive mortgage (simply by having standards that you cannot meet), but you’re on your own when it comes to rents. Do your math. If you’re thinking about paying half your paycheck for a rental, you probably already know this, but it’s going to be a rough ride.

 

Renters Left Longing

Despite the struggles of many, a great number of experts see today’s home prices as relatively affordable given the accommodative interest rates being held down by the monetary policies of the Federal Reserve. However, those rates won’t stay down forever, especially with the QE3 now fading into the distance.

Jeremy Burbank of The Demand Institute joins the consensus, noting that “home ownership has become more affordable, but many renters have still been unable to transition into home owners.” The Institute says that more than half of surveyed renters want to purchase a home.

 

Blame Game

Too many Americans are in over their heads when it comes to housing expenses. For many, it is their own fault, because they have overextended themselves. Even more are probably in the position because of rising rents, stagnant wages, underemployment, high food and gas costs, or any number of the budgetary concerns Americans have faced in the wake of the Great Recession.

Whoever or whatever is to blame is less important than the solution. People need to live more within their means and the economy needs to continue improving so that people can afford to put a house over their family’s heads. The economic battle is trending in the right direction, and the powers that be are continuing to provide accommodative conditions for continued growth.  As for the battle to change mindsets, we may be fighting a losing battle with the natural human (and quintessentially American) desire for more.

 

— Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester. Contact Ryan Dosen for buyer or seller representation or for more perspective on the local and national real estate market by emailing rdosen@megillhomes.com or calling 610-399-0338. Please also visit The Wayne Megill Team blog at www.PAHomesAndRealEstate.com.

 

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

 

 

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.