Housing burden grows critical for millions in
U.S.
Investors Business Daily
By Kristen Gerencher
Last Updated: 5/3/2005
SAN FRANCISCO (MarketWatch) -- The quick pace of house-price growth is showing its darker side.
The number of working U.S. families parting with more than half their income to put a roof over their heads jumped 76% in five years -- to 4.2 million in 2003 from 2.4 million in 1997, according to a report from Freddie Mac, Century Housing and the National Housing Conference (NHC.) The number includes both renters and homeowners.
Another 800,000 either live in inadequate housing or have both problems -- a severe cost burden and dilapidated conditions -- for a total of 5 million working families that have a crushing housing burden.
These working families aren't necessarily poor. They include those with full-time jobs that pay the minimum wage of $10,700 a year and go up to those earning as much as 120% of the area's median income.
Overall, about 14.1 million low- to moderate-income families, including the elderly and young unemployed people, faced a critical housing need in 2003, meaning they either paid more than half their income for shelter or lived in substandard conditions.
Most of those 14.1 million Americans struggled to make the mortgage or rent -- 85% had a severe cost burden compared with 15% who were living in dilapidated digs, according to the analysis, which was based on a survey of 18,000 working families from the U.S. Department of Housing and Urban Development.
What's more, immigrant families were 75% more likely to fork over half their pay for housing compared with their native-born counterparts. Many government programs base their housing assistance assessments around 30% of income, a figure many financial planners also advise clients to stick to when budgeting for housing costs.
"Critical housing needs are pervasive and more persistent than people might think," said Barbara Lipman, research director for the Center for Housing Policy, the research arm of NHC. "They're found in all parts of the country; they're in suburbs as well as cities; they're homeowners as well as renters."
Among working families, more than 53% of homeowners had critical housing needs compared with nearly 45% of renters in 2003.
The growth of severe cost burdens for low- and moderate-income people reflects a convergence of factors such as several years of low mortgage rates, tight housing supply, rapidly escalating home prices and stagnant wages, she said. Many working families are employed as firefighters, police, teachers and health-care workers earning traditional pay without incentives such as stock options or bonuses.
A rise in mortgage interest rates may push more families into the 50% housing payment-to-income category because of the recent popularity of adjustable-rate mortgages, Lipman said. See related story on mortgage-industry concerns.
The benchmark 30-year mortgage is 5.78% on average, according to Freddie Mac's April 28 survey.
Feeling the squeeze
Those who see half their income pay for housing aren't likely to be the newest homeowners who had to meet underwriting requirements, Lipman said.
Rather, they may be people who lost their jobs and got lower paying jobs, families who lost a wage earner or saw a steep hike in their property taxes. "Something happened either on the income side or the cost side to make their housing more expensive."
To be sure, some landlords may not be picky about how much income tenants pay in rent as long as they meet their obligations. And a number of lenders have programs that offer more lenient mortgage terms to potential home buyers than the typical 30% income guide.
While housing affordability is a big problem, most people remain in a more conservative payment-to-income ratio than the kind represented in the analysis, said David Lereah, chief economist for the National Association of Realtors.
"For people to go over 50%, something's going on with the lending system because lenders should not be permitting that. I've got raised eyebrows on that."
Some people may not be ready to purchase in the first place, he said. "They may be better off postponing and saving money for a larger down payment so the mortgage payment's lower [and] it takes less of their income to make the mortgage payment."
The national average price of a single-family home rose 10.7% last year, the first year for double-digit price appreciation since 1979, according to Freddie Mac. Pacific coast and Western states saw the most rapid increase at 17.7% compared with just 4.3% for the West South Central region consisting of Arkansas, Louisiana, Texas and Oklahoma.
House-price growth is expected to moderate the second half of this year, slowing to 7% average appreciation nationwide for 2005 and to 5% in 2006, Freddie Mac Chief Economist Frank Nothaft said.
Where the problems are
Housing affordability problems are growing fastest in the Midwest and South, though they're greatest in the Northeast and West, according to the NHC analysis.
It's not just low- and moderate-income families struggling with high housing costs. Another 4.3 million families who don't qualify as having critical housing needs put up with long commutes and crowding; 2.7 million of them have one-way commutes of 45 minutes or longer.
The report reaffirms that home prices have been outstripping income in many markets, pricing many people out despite financial incentives mortgage lenders have dangled in recent years, said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.
"There have been considerable efforts in recent years to try to address rising home prices through lowering down payment requirements, being more flexible with these debt-to-income ratios, providing adjustable-rate financing and financing that lowers the cost at the front end," he said.
"All those things have helped but can only do so much, and if the basic supply-demand pressure stays in place, these financial options are going to reach their natural limitations."
"We need policies that encourage private rental units, particularly older units, to stay on the market and provide decent and yet cheaper dwellings for people than they're otherwise going to have," Fishbein said.
Communities may warm up to the idea of supporting new apartment construction if they could change their perceptions of tenants, he said.
Such new supply could make housing more affordable in some areas. "We have to be a lot more creative about rental housing. We have to provide people with homeownership-like benefits in some cooperative and quasi-ownership forms that will change what people think of as rental housing."
Moderating expectations
In Fort Collins, Colo., local restrictions on building and unprecedented demand are pushing prices beyond many people's comfort zone, said Chris McElroy, an area Realtor who was chair of the Housing Opportunity Advisory Board of the National Association of Realtors last year.
He estimates 10% to 20% of residents spend 50% or more of their incomes on housing. The region's average price for a single family home is $252,000, he said.
Demand continues to outpace supply, McElroy said. "It's going to get worse before it gets better... It's projected we'll have a shortfall of between 2 million to 3 million homes in the next seven to 10 years."
Some potential home buyers with big dreams and moderate means need to revise their goals, he said. "We talk about their expectations about what they're looking for in a home. If that doesn't match with what they can afford, then it might be a town home or a 2-bedroom home. It starts them in a chain of homeownership."
He recommended people looking to see whether they can afford a house visit www.KCHomePrograms.com for an overview of assistance programs targeted to various populations.