The red-hot housing market in booming cities across the country has made the dream of owning a home out of reach, not only for low-income families but also for white-collar professionals.
“Many of the overheated real estate markets throughout the country have become unaffordable for the majority of the population,” said Jack McCabe, a housing industry analyst in Deerfield Beach. “Many people are paying well over 50 percent of their income for shelter. It leaves no money for savings or sometimes even for recreation.”
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In California, the situation has long been the worst: Only 17 percent of households could afford a home with a median price tag in April, according to the California Association of Realtors.
The average family in Florida earns nearly $44,000, which fell 26 percent short of the amount needed to finance a median-priced home last year, according to a study by the Federal Deposit Insurance Corp.
National statistics show that families can afford a home in many other cities around the country. The typical household earns about $56,323, enough to buy a home costing $250,900 and 133 percent of what’s needed to afford the median-priced home of $188,800, said Walter Molony, a spokesman for the National Association of Realtors.
Real estate appreciation is typically location centered. More people want to live in California and Florida as opposed to Butte, Montana. As a result, locations located in popular areas escalate more in price. In addition, in a city like New York where space is at a premium, prices tend to escalate faster than other areas.
Let’s place this appreciation in perspective. Wages have grown at a .29% compound inflation-adjusted rate over the last 5 years. According to a Federal Deposit Insurance Corporation report titled US Home Prices: Does Bust Always Follow Boom?, there were 55 housing markets experiencing a “boom” in 2004. The report “defined a “boom” market as one in which inflation-adjusted prices rose by at least 30 percent in a three-year period.” In 2003, were 33 “boom” markets, making the year-over-year increase a whopping 72%.
In other words, the real estate boom in certain areas is now pricing homes out of reach for the middle class. This partially explains the use of more exotic mortgage instruments such as interest only loans and adjustable rate mortgages. However, these types of mortgages also carry a larger risk, as their payments can spike in a rapidly increasing interest rate environment. In other words, should rates spike, we could see a rapid increase in the number of foreclosures.
http://news.yahoo.com/news?tmpl=story&cid=530&e=1&u=/ap/20050710/ap_on_bi_ge/unaffordabl
e_american_dream
http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi.html
