Offshore Guidebook | Real Estate Investor Magazine Offshore Guidebook 2014 | Page 44

USA In a debt culture, this is why it is so important to watch interest rates, especially in less affordable markets where home prices are high relative to local incomes. Real median incomes in the U.S. haven’t climbed since 1999. Practically speaking, American housing costs are a heavier burden today than 15 years ago, hence, the importance of investing in affordable markets for safety and sustainable growth. That is, markets where conventional mortgage payments are ideally no more than 15% of local incomes. How do we calculate affordability by this measure? Here are the steps: Step 1: Research the average home price for the Metro Statistical Area (MSA) you are considering. In this scenario, we’ll call it $190,000 (the average U.S. home price today). Step 2: Resea rch t he average household income for the MSA you are considering. We’ll use $52,000 (the U.S. average) Step 3: Translate the home price ($190,000) into a monthly payment based on today’s debt assumptions Step 4: Divide our monthly loan payment by our monthly household income to arrive at our housing expense ratio. Our scenario: $748 / $4,333 = 17%. Since we used U.S. averages, we could say the average American household spends 17% of their gross household income on housing debt. If we were to encompass all housing costs, we would also include the cost of property taxes, hazard insurance, and homeowner’s association fees, if applicable, to arrive at our true total housing expense which is how lenders calculate debt to income ratios. Note: the maximum housing expense allowable for conforming loans is 28%. 42 Offshore Handbook 2014 www.reimag.co.za