Much of the housing meltdown can be attributed to a flagrant disregard for the general guidelines of housing affordability that have been in place for decades. Many argue that an easing of the rules was necessary to increase homeownership especially in high-cost regions like Long Island. No one can deny that we were all excited that homes were selling like hotcakes and that everyone’s equity was increasing allowing us all oodles of cash to spend. Spending is great for the economy, a win-win situation.
Unfortunately mortgage brokers and other unscrupulous lenders turned that ‘easing’ inch into a yard and here we are. Now that lenders have returned to strict adherence of the guidelines it appears that suddenly no one can get loans. Financial experts have taken to assuring us that the credit crunch is overblown and that those with good credit can still get loans. But given the current conditions, how much house can anyone really afford on Long Island?
Most of us are still of the mindset that a household making $100,000 is doing well. According to the real estate affordability math, that is simply not the case when it comes to homeownership on Long Island. The basic rule of thumb is/has been that aspiring homeowners should spend no more than 28% of their gross income on housing and have a 10% down payment. (Since we are only finding a rough estimate of affordability, we can disregard the other factors that do come in to play like creditworthiness; the amount of long term debt such as student loans, credit cards, car payments and the like.)
Using simple math, 28% of $100,000 allows for $28,000 a year on housing costs or about $2330 a month. If we subtract an approximate monthly average of $500 for real estate taxes and insurance, $1800 a month is available for principal and interest. Assuming an interest rate of 7%, our $100k earning homeowner(s) can borrow $270,000, essentially affording a house for $300,000 with a 10% down payment of $30,000.
Considering that the median home price is currently $440,000 in Nassau County and $360,000 in Suffolk County, this potential homeowner faces a difficult search. The median prices have dropped at least $15% from their highs but unfortunately they are still too high for most of us. Many of us could not afford to buy the very homes that we are in if we were starting out on that path today given the current prices. Somewhere along the line the ratio of the median income to the median home price went way out of whack. We will have to be patient while the market corrects.
Markets rebound, they always do…well, they always have.
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