Homes Are So Expensive In These Cities, You'd Need An 80% Down Payment Just To Afford The Mortgage

Yahoo

a day ago

Benzinga and Yahoo Finance LLC may earn commission or revenue on some items through the links below.
The severity of America's housing affordability crisis has reached a frightening extreme, according to Realtor.com's most recent affordability benchmark report.
The report, which was released in June, shows that buyers in the most expensive housing markets in the U.S. would need to put up to 80% down to get an affordable mortgage payment. Economists consider an "affordable" mortgage in the U.S. as one where the borrower earns a monthly salary that is roughly triple the monthly payment.
Shop Top Mortgage Rates
Personalized rates in minutes
A quicker path to financial freedom
Your Path to Homeownership
This formula is often referred to as the "30% rule." Most lenders use it as a baseline threshold for mortgage affordability because borrowers are much more likely to be delinquent or default on their mortgage when the total payment exceeds 30% of their income.
Don't Miss:
The same firms that backed Uber, Venmo and eBay are investing in this pre-IPO company disrupting a $1.8T market —
'Scrolling To UBI' — Deloitte's #1 fastest-growing software company allows users to earn money on their phones.
For much of the 20th century, buyers could qualify for mortgages under the 30% rule by making a down payment ranging from 3% to 20%. Unfortunately, high home prices and interest rates have combined to turn that paradigm on its head in many U.S. markets.
Realtor.com based its findings on data from its May housing market report. It showed that buyers who put 20% down on a mortgage with a 6.82% interest rate – the median U.S. interest rate when the report data was compiled – would spend 44.2% of their income on the mortgage. That alone would stretch most buyers beyond their limit, and banks would be hesitant to approve a loan based on those parameters.
Perhaps the most sobering aspect of those calculations is that they're based on a borrower buying a median-priced U.S. home, which was about $440,000 at the time of the study. The picture is exponentially more difficult in more expensive U.S. markets, especially their major population centers. According to the study, the most unforgiving markets are:
Los Angeles
San Francisco
San Diego
San Jose
New York
Boston
Trending: Accredited Investors: Grab Pre-IPO Shares of the AI Company Powering Hasbro, Sephora & MGM—
Although median incomes in all these cities exceed the national average, it's still not enough for most residents to qualify for mortgages under the 30% rule. For example, the study showed Los Angeles has a median income of $91,000, which exceeds the national average of $79,000. However, Realtor.com shows the median home price in Los Angeles is nearly $1.2 million. The estimated monthly payment with 20% down would be $7,958, or 104% of the average monthly income.
According to Realtor.com, an average Los Angeles buyer would need to put down 90%-95% to get an affordable mortgage. Buying in San Diego and San Jose would require down payments of 77% and 72%, respectively. 'Though San Jose boasts the highest median income among the 50 largest U.S. metros, the typical household will still face challenges in the housing market, as San Jose also has the highest median listing price,' said Realtor.com Chief Economist Danielle Hale.
New York and Boston buyers would need to pay roughly 80% down to qualify for a mortgage under the 30% rule. 'High-priced Northeast markets face high demand and low construction, which has resulted in a growing home supply gap,' said Hale. 'To remedy this challenge, and provide hope for prospective buyers in the country's most expensive markets, supply needs to increase to better match demand.'Therein lies the problem. It's a classic case of figuring out which comes first between the chicken and the egg. These cities need new affordable inventory, but land and financing prices are already prohibitively high. Plus, those cities have expanded so aggressively into suburbs and exurbs that there is precious little space remaining in their metropolitan areas for new construction. That leaves developers in a place where the only profitable lane is the luxury sector.
It's also leaving multiple generations of buyers locked out of home ownership in America's biggest cities. Buyers looking to purchase a home under the 30% rule may want to consider the Midwest. According to Realtor.com, Pittsburgh, Detroit, and St. Louis are the only U.S. metropolitan areas where buyers can pay a mortgage with 30% of their income.
Read Next: Warren Buffett once said, "If you don't find a way to make money while you sleep, you will work until you die." Here's , starting today.
Image: Shutterstock
This article Homes Are So Expensive In These Cities, You'd Need An 80% Down Payment Just To Afford The Mortgage originally appeared on Benzinga.com