The first part looked at the affordability of buying items other than a house. The second part will examine the affordability of buying a private home. In addition, we will talk about these two issues:
- Who decides affordability?
- What should happen to people who live in houses they can’t afford?
affordability [to buy a home] to mean…
The ability to purchase your home, with or without a mortgage, so that estimated total costs do not compromise current and projected household budgets, plans, and commitments.
A home is a big commitment
In Canada, from the 1960s to the early 1980s, except for a few brief periods, when you bought your home, you laid the foundation for a significant, predictable, and tax-free capital gain. Normally, when he sold that house, the tax-free gain would be substantially higher than inflation. These days, depending on the time and location, selling your home purchased after the mid-1980s can result in either a profit or a loss. Still, if he didn’t buy to resell, this shouldn’t be a problem.
In the early 1980s, using credit, Americans went on a spending spree. Greed was rampant and, as in many areas of the economy, house prices soured. For example, the Canadian real estate markets in Vancouver and Toronto sizzled until the mid-1980s, when prices fell. The depression lasted almost 10 years. So in 2008, we shouldn’t have been surprised when, following a similar path, US house prices plummeted. Furthermore, we should expect house prices to remain low for a long time.
Though they wouldn’t admit it, they encourage governments to spend irresponsibly. Look how the economy works! Consumers must spend to keep it growing, even if it means using high-cost debt financing. Still, governments continually look to us to spend.
In the 1970s, the United States Congress passed the Community Reinvestment Act…
“…to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.”
In retrospect, safe and sound banking operations, was meant to be read with a “wink, wink” facial expression. Not to be outdone, the Canadian government’s Canada Mortgage and Housing Corporation says that they “…work to improve Canada’s housing finance options, to help Canadians who cannot afford a home on the private market.” .
They have this crazy, irresponsible, absurd statement on their website:
“A way to help [low-to-moderate income] homes is to provide them with a home equity loan so they can qualify for a conventional mortgage. The loan…in effect reduces the qualifying income needed to obtain a mortgage.”
Before you buy a home, understand all the effects of owning a home. Beware of the lie that if you don’t have enough funds today, increases in property value will help you own a home today. At best, it’s a potential trap to keep you in a refinancing cycle. That’s the method of government financing that led to the subprime debacle in America.
Homeownership can involve most or all of these annual expenses (except where otherwise noted):
- Mortgage payment that can go up or down
- Transfer taxes (single)
- property insurance and taxes
- Repair, maintenance, heating and lighting expenses
- One-time legal fees and various small items.
However, renting a home includes a monthly payment with responsibility for maintaining the grounds and often responsibility for heating and lighting. You have no other expenses.
Who decides affordability
Governments try to define affordability for us. They want households to use the same reckless Ponzi-style financing they use to waste taxpayer money. Reject your focus. Each household must decide if he or she can afford to buy a house.
Each of these criteria must be applied before concluding that you can afford to buy a home:
- You are debt free.
- Working with a monthly budget.
- Know your housing needs. For example, will the size of the family increase soon?
- Have at least a 20% down payment for a conventional mortgage.
- Understand and accept the sacrifices necessary to pay the full annual housing costs. What might you have to give up to pay these costs on a regular basis?
- Understand the current and projected state of the economy and the housing market, and feel reasonably comfortable that you will be able to finance your entire housing expenses for six months, even if you were laid off.
What if you must give up your unaffordable home?
To control this challenge, separate two decisions. First, can the homeowner afford his current home? Second, if not, how can we work with her to provide affordable housing?
If the person or family cannot afford the house using my definition, skip to question two. Do not try to give the supposed help by lowering or deferring the mortgage for a few months; that is dishonorable and wasteful. Disgraceful because it gives the impression that the family will be able to keep their home. Then, in a few months the family must leave the house. Then the approach is a waste, because time and money are spent knowing that the family must leave the house.
In these situations, focus on lifestyle advice and financial planning. Emphasize lifestyle issues like affordability, budgeting, the anatomy of a mortgage, and management. Teach the virtues of renting when people can’t afford to buy houses. Yes, it is a virtue. Some ownership arrangements give homeowners significant risks without equity. That’s why so many mortgages in the US are higher than home values.
While receiving counseling on temporary housing, people must work with churches and charities to prepare them to live in rented houses. This could be a long trip; but if people reject the victim path and learn from her mistakes, it could be rewarding.
conclusion
Today, people are rushing to own their homes and getting deep in debt, as housing costs take up a large part of their monthly budgets. Be patient, rent until you can afford to buy. Then you will build a solid financial foundation and reduce financial stress.
Copyright (c) 2011, Michel A. Bell
