Now may not be the time to buy your dream home

Many Americans look forward to owning their own home one day.  It’s the mark of success to quite a large portion of the population here – it means that you’ve graduated past the renting phase in your life.  There’s nothing wrong with thinking this way at all – it’s just important not to let it blind you.

All over the place, borrowers are defaulting on their mortgages, banks are foreclosing, and property values are plummeting.  We’re just past the breaking point of the real estate “bubble”, and values are on their way down in many parts of the country.

Several of the areas where I’d like to buy a house are so overpriced that it’s only a matter of time before things cool off, and prices correct themselves.  For example, for Maryland, the state median income for households is about $56,000.  Decent sized homes in nice ( relatively safe, low crime, non BFE ) areas *start* at $300,000.  One can realistically expect to spend $400,000 to buy a nice home in such an area.

Now, bear with me, if you will.  Let’s say a particular family earns the median income of $56,000 per year.  After federal, state, and local income taxes, they’ll be looking at clearing about $39,200 ( at a 30% combined tax rate ).  That’s about $3,266 per month in after-tax income. 

Now, back to the home.  If this particular family was exceptionally good at saving, and was able to put down 10% ( $40,000 ) on their home, they’ll be financing a cool $360,000.  Assuming no property taxes, fees, or closing costs of any kind ( obscene to assume, yes ), and an interest rate of 6.5%, these folks will be looking at a monthly mortgage payment of $2275.44 per month.  That leaves them with $990.56 every month to pay for health care, food, cars, insurance, clothing, electricity, gasoline, and all the other expenses that life throws at us.  Not exactly realistic, is it?

There are worse examples, but Maryland is a close-to-home example for me.  There are many such parts of the country where home prices simply aren’t in line with incomes.  The exotic loans of the past few years helped put people into homes they cannot realistically afford under normal circumstances.  The coming months and years will see many more foreclosures, and subsequent price drops.  If you can hold out for a few more years, you may see a much brighter picture on the housing front.