Home Affordability: Myth or Reality?
For many young couples, the idea of owning their own house just like their parents is an attractive idea, but in the circumstances in which they find themselves, it's not very realistic. A recent poll conducted by the Associated Press and America On Line Real Estate showed that 80 percent of respondents believe that it is hard for first-time buyers to afford a home. A majority of those polled – 59 percent – also said that they believe it is harder to buy a home now than it was five years ago.
Taking a closer look at the poll reveals that young adults and those that classify themselves as minorities consider the affordability of homes a bigger problem now than five years ago, compared to those over the age of 50 and those that identify themselves as white. Broken down by region, almost 70 percent of those living in the western United States and almost 65 percent of those living in the Northeastern US say that it's harder to buy now than five years ago, compared to only 54 percent of those living in the South and 51 percent of those living in the Midwest. The poll also found that almost half of those surveyed thought that the real estate market in their home area was overpriced compared to the actual worth of the homes.
A recent report by the census bureau seems to back up the findings of the AP/AOL survey. The census report found that approximately one third of all homeowners in the US that have mortgages spent at least 30 percent of their income on housing and housing related costs such as taxes, insurance and utilities. Traditional budgeting guidelines stipulate that you should not pay more than a third of your take-home income on housing or you are putting yourself at significant risk of financial trouble.
The biggest reason for the loss of faith in the affordability of homeownership is the housing bubble that occurred during the middle of the first decade of the 21st century as the result of rampant speculation in housing. One of the most common way to make a quick fortune in real estate was "flipping houses," that is, buying undervalued houses, making some relatively minor repairs on them, and selling them at a premium. Although some of the buyers were obtaining primary residences, many of them were investors who hoped to be able to resell them at even higher prices as the paper value of the housing market was pushed ever upward. As a result, home prices in many areas soared rapidly, but there was no real fundamental increase in the underlying value of the homes.
The problem was made even worse by the system of reselling mortgages electronically and bundling them into securities that were sold as though they were completely safe. Because so many of the mortgages were high-risk non-conforming mortgages such as low-doc and no-doc loans, interest-only loans, and other risky loans that enabled people to get more home than they could really afford, it was inevitable that any shift in the economic situation would get people in trouble. That shift came in the summer of 2008, when rampant speculation in crude oil sent prices at the gas pump spiking over $4 in many markets. People already in tight financial situations suddenly had to choose between the gas to get to work and their house payments. The result was a rash of foreclosures that led to the collapse of the housing market in many areas, with homes left with loans tens or hundreds of thousands of dollars "underwater" (owing more than the house could be sold for), and a resultant lack of the availability of credit.
However, the messy state of the real estate market does not necessarily mean a hopeless situation. Because there are so many homes on the market, and a house that stands unoccupied as a result of foreclosure becomes increasingly vulnerable to vandalism and environmental deterioration the longer it stands, a person who can swing their own financing and who watches the market closely for bargains may well be able to find a nice house at an affordable price. And even if you're not where you can buy, you may be able to negotiate a good rental agreement simply because the owners want somebody reliable in that house so it's not standing vacant and at risk of being broken into and vandalized.
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