Q&A: Affordable Housing

What is “Affordable Housing”?

Q. With so many people losing their homes to foreclosure and the loud discussions about whether or not they should be ‘rescued’ being raised all over the country by folks from all walks of life, perhaps we need to try to figure out what makes a house affordable.  Is ‘affordable’ a term which means a certain price point?  Is affordable different in different parts of the country?  How can person know if a house is affordable? It is all so confusing.

A.  Oh what a difference a few bank closings and a little recession make. Back in the olden days, say 2007, even then the term was elusive, referring to an elusive, unidentified house that the average middle class American could afford. Now we can’t even figure out who is a middle class American much less what is or is not affordable. All our bench marks have shifted. The value of a home today changes almost as frequently as you need to change sheets. Nonetheless, we need to get a handle on this whole affordable thing.

Let’s take the first question: Is affordable a term which means a certain price point?

It is more helpful to look at a home as being affordable in relationship to your overall income rather than a certain dollar amount. All houses are affordable to SOMEBODY. But maybe not affordable to you. Back in the very conservative, distant past, lenders used the guideline for loan approval as 28% of your gross monthly income (amount you earned before taxes) to be allocated for housing expenses. More than that and you could easily fall on hard times if your income shifted a bit. 

Our current crisis was caused in large part by a shift in practice which allowed many homebuyers to commit as much as 50% or more of their income to their housing payment. If you had a healthy savings account, property values remained stable, the creek didn’t rise and your dog didn’t die, then you MIGHT have been okay. But life happens. Your money got ‘funny’ (that’s what Aunt Carolyn calls it when it doesn’t stretch as much as it used to), property values started going down like elevators (every day) and interest rate resets have taken their toll. Now not only can many folk not afford the home where they currently live, they are unsure what is “affordable” for them. Hopefully, this guideline will help you decide. Very simply, if you make enough in 1 week to pay for your housing that should leave you with a comfortable amount to manage the other expenses of your life.

Conservative, traditional lenders have found that as long as the consumer’s total long term debt is no more than 36% of their total gross income then there is enough wiggle room to afford other items which constitute a “reasonable” lifestyle. This rule has proven over the years to help people to have medical coverage, some degree of entertainment as well as build a small savings account.  Rarely would such a consumer end up in default on their mortgage unless there was a total loss of income.  

This then would represent an affordable house payment. Each individual has a unique affordable housing expense amount which would determine what is affordable for this family. I strongly believe it is important to keep home prices as low as possible, to offer a wide range of homes at different price points so that more consumers are able to comfortably afford to own a house and spend less than the  50%+ that many families currently spend to have a roof over their heads. What I have just described is “an affordable house payment” which is the goal for all us.  

The American Dream has almost universally been described as the desire to own a home. Politicians, housing professionals and the general public are encouraged to take a fresh look at our current concept of what achieving that dream means. Are we being successful if we provide the dream to people who can acquire but not retain the home for more than a few years? Are we achieving  our goal if many of the people we get into new homes are paying so much for that home after interest increases and a full tax assessment that 50%-60% of their income is required for basic housing expenses leaving precious little for any of the other necessities of life? Are we really providing affordable housing or housing which appears to be affordable at the beginning because of creative financing ploys which reduce the initial payments by hundreds of dollars per month deluding consumers into believing it is “affordable”? Why are foreclosure rates so high in the FHA arena with many first time buyers? Are the down payment assistance programs leading to more people being home owners (retaining a home for several years) or just  a revolving door of more people who build/buy but are back in the rental market within a couple of years? 

It is time to raise the difficult questions and look for some honest answers in trying to shape what will be done to improve our housing market. It is important to offer “affordable” housing to help stabilize our communities, to allow more consumers to enjoy both the emotional and financial benefits of home ownership. It is a dream worth working toward and saving to achieve. It should be more than a fleeting illusion which disappears and leaves in its wake a disillusioned, frustrated consumer who barely comprehends that the beautiful home and future they envisioned was doomed from the beginning.

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(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)