Housing Getting Cheaper? Not for Most of Us

With real estate prices plummeting across the country, one might expect some relief from the high cost of housing. But if you wince when you write your rent or mortgage check, you're in good company.

A new report from the Center for Housing Policy finds that some 37 million American families now spend more than 30 percent of income on housing, and of those, about 17 million are spending more than half. That's 15 percent of all households handing over at least half their income to the landlord or bank, up from 14 percent in 2005.
Why? Blame mortgage products like option adjustable rate mortgages (ARMs) that push monthly payments upward, as well as rising energy costs. The price of buying a home may be dropping, but many potential buyers who already own can't take advantage of the bargains because their own property values are declining, often to less than the amount they owe on the mortgage.

To put it into perspective, spending even a third of income on housing is a lot, by historical standards. Back in the 1920s, "a week's wage for a month's rent" was the standard rule of thumb that lenders used to decide how big a mortgage a family could handle. That benchmark became the standard for the Federal Housing Administration mortgage insurance program starting in the 1930s, and later for calculating how much recipients of federal rent subsidies like Section 8 could afford to pay. (The National Low Income Housing Coalition has all the details.)

Thank Congress for boosting the official standard for an acceptable burden to 30 percent of income, with the Housing and Urban-Rural Recovery Act of 1983. Ever since then, despite the urgings of some affordable housing advocates to base the formula on how much a household has left over each month after paying for other essentials, the 30 percent standard has stuck.

By coincidence, the federal Making Home Affordable mortgage modification plan aims for a similar target – to get a household's monthly principal, interest and tax payments down to 31 percent of household income. That's derived from mortgage underwriting standards that conventionally allowed households to borrow between 25 and 35 percent of income (this was before the wild years of stated income loans). That formula has come under fire recently because it conveniently ignores second mortgages and other debts that so many are now struggling with. And unlike the renter formula, that 31 percent doesn't include increasingly painful utility costs.

So how do you know if your housing costs are affordable? The best formula may be the one you figure out for yourself – it's called a household budget.
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