At church recently, a friend expressed shock that a family might pay $2,500 or so per month for their mortgage. “Their house must be too big,” she said, in essence. I objected, saying such house payments are pretty common. But I wanted to be more specific, so I worked with RealtyTrac to ask the question: how likely is it that a home shopper would end up with a $2,000 or a $2,500 monthly mortgage payment right now?
The answer is pretty shocking, and reveals another reason so many Americans are restless.
Roughly one in six Americans live in a county where they’ll have to pay at least $2,000 per month to afford a median-priced home; about one in 10 need at least $2,500 monthly.
About 49.9 million people live in America’s 60 priciest counties, where $2,000-or-above is the going rate. Most are on the coasts — places like Santa Clara, Calif., where you’d need $3,997 to buy a median-priced home, or Arlington, Vir., where the price is $3,058 monthly. But high monthly costs for average homes can be found nationwide: in Morgan, Utah ($2,235), Williamson, Tenn. ($2,023), and Howard, Maryland ($2,168).
The monthly house payments are calculated using RealtyTrac’s house purchase data in August, assuming buyers use a 30-year fixed mortgage at 4.2 percent (the rate in August), putting 10 percent down, and paying 1.4 percent of the purchase price annually for taxes and insurance. Of course, every home purchase is unique, and changing these assumptions would change the result. For example, the monthly payment excludes potential private mortgage insurance costs. Including it would add another 20 counties and another 7 million people to the dubious $2,000-and-above group. Still, the rough estimates reveal a picture of America’s housing market that explains why so many folks have trouble sleeping at night.
“These numbers demonstrate that home prices have quickly become unaffordable for a substantial portion of the U.S. population,” said Daren Blomquist, vice president of RealtyTrac. “All the efforts to prop up the housing market have worked almost too well, propelling home prices 20, 40, 60 percent higher over the past two and a half years in some markets. While that is good for homeowners now seeing their home equity swelling again … it’s not so good for the traditional first-time homebuyer who doesn’t have a large down payment and is relying on financing.”
Making matters worse: In most of those counties, median incomes don’t support purchase of a median-priced home. If the cutoff is a traditional 28 percent of income devoted to a house payment, there are only four counties where using a median salary to buy a median home wouldn’t leave the family house poor. In Eagle, Colorado, for example, median household income is $68,644, and the median home price is $487,500, leaving a monthly costs of $2,710. To afford that kind of payment at 28 percent, a family would have to earn $116,000 annually.
Stretch the affordability cutoff up to 43 percent, and the picture is less bleak. King County, Washington, moves from unaffordable to affordable when you change that standard. There, median income is $70,391 and median home prices are $396,500, for a payment or $2,204. Still, even by that standard, in 38 of those pricey 60 counties, where nearly 50 million Americans live, median incomes can’t support median monthly home payments.
Mike Cook’s story is typical. He feels like he is on relatively solid footing, too, even though he spends nearly half his income on his mortgage payments — but he was forced to move nearly an hour away to buy that peace of mind. Cook left his apartment in Falls Church, a Washington D.C. suburb, when his rent went up to $2,100 a month. Moving to a home nearby would have cost about $3,500 a month; to get a home at around that payment, he had to move all the way out to Manassas, and now spends an hour on the train each day. The $2,200 payment he makes eats up about 50 percent of his income after taxes.
If Cook’s story, and that kind of math, seems to echo the housing bubble, there’s a good reason, said Logan Mohtashami, a mortgage analyst and senior loan manager at AMC Lending Group. That’s because the housing market is much more fragile than it seems, for a simple reason.
“Main Street America just doesn’t have the income for this market,” he said. “We simply don’t have enough qualified buyers because there’s not enough income.”
Even folks making great money face tough choices. Mohtashami recently worked with a buyer earning $150,000 annually who wanted to keep her monthly payment around $2,500 — but couldn’t do it. She bought a $405,000 condo, and after taxes, insurance, and condo fees are totaled, the real cost is about $3,000.
“There is a hidden story in housing,” he said. “The main thing that doesn’t get talked about enough housing is PITI – principal interest taxes, and insurance. It adds up quickly.”
So quickly that housing is out of reach for most of the growing number of single-income households in America. That has other follow-on effects on the economy, because it delays new household formation — fewer trips to Target, furniture stores, and so on.
But if middle-income Americans are priced out of many markets, why haven’t housing prices plummeted? Because nearly one-third third of buyers pay cash for homes, and a large number of those buyers in places like New York City come from overseas.
“Historically, home buyers are 90 percent mortgages and 10 percent cash. In the last few years, it’s been more like 30 percent cash buyers…there’s your demand,” Mohtashami said.
Of course, there are still plenty of places in the U.S. where mortgage payments can be half that $2,000, or less. The RealtyTrac data reveal that more there are more 800 counties, home to roughly 117 million American, where a monthly payment of $1,000 or less is sufficient to buy a home. Most of them are relatively far from large cities and the two coasts. (In nearly 2,000 U.S. counties, there weren’t enough home sales to generate a median home price)
The data reveals the high-wire act that is the housing market, which remains full of distortions. Higher home values are good for current homeowners, who encountered devastating problems during the height of the housing collapse. At the height of the crash, one in five homes with a mortgage were under water, meaning mortgage holders couldn’t sell their homes and move for employment (without taking a loss), usually couldn’t refinance to take advantage of lower rates, and couldn’t borrow against their properties. Today, the number of under water homes is half that, a boom for owners, but a source of great restlessness for buyers. Meanwhile, the persistent disconnect between wages and home prices makes many places in America unaffordable and unsettling.
Vera Kemerer is one of many Americans who have solved this problem by moving. She left California for Central Michigan and is reaping the financial benefit of the change.
While living in Orange County, monthly total for mortgage, taxes and insurance was $3,200 a month plus $250 association fees,” she said. “Location makes a world of difference in home cost. We have the same size home and much more property. Mortgage with taxes & insurance is currently $1,100 a month. We will have 15 year loan paid off in 6 years. We have been lucky to find comparable jobs and are very happy we left the west coast as we near retirement.”
In the next part of The Restless Project, we’ll begin to ask if Kemerer’s solution is the inevitable for most Americans. Are you ready to move to a cheaper place? Do you feel like you have to? If you live in affordable America, would you like to convince the rest of us to us to move?