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%.
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Offshore Handbook 2014
www.reimag.co.za