The first part looked at affordability to purchase items other than a home. The second part examines the affordability of buying a private home. We will also discuss these two issues:
- Who decides affordability?
- What should happen to people who live in homes they can’t afford?
Affordability [to buy a home] means…
The ability to purchase your home, with or without a mortgage, so that the total estimated costs do not affect the current and projected budgets, plans, and commitments of the household.
Home is a big commitment
In Canada, in the 1960s through the early 1980s, with the exception of a few brief periods, when you buy your home, you are laying the foundation for large, predictable, tax-free capital gains. Normally, when you sell that home, the tax-free gain will be much greater than inflation. These days, depending on the timing and location, selling your home purchased after the mid-1980’s could result in a profit or a loss. However, if you’re not buying for resale, this shouldn’t be a problem.
In the early 1980s, with credit, North Americans went on a spending spree. Greed was rife, and like many areas in the economy, housing prices soured. For example, the Canadian real estate markets in Vancouver and Toronto sizzled until the mid-1980s when prices plummeted. The recession lasted nearly 10 years. So, in 2008, it shouldn’t have surprised us when we followed a similar path, as home prices fell in the United States. Besides, we should expect that housing prices there will remain low for a long time.
Although they won’t admit it, governments encourage irresponsible spending. Just see how the economy works! Consumers must spend to keep it growing, even if that means using high-cost debt financing. Yet governments are constantly seeking to get us to spend.
In the 1970s, the US 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 middle-income neighborhoods, consistent with safe and sound banking operations.”
in its occurrence, Safety and wellness Bank operations, were meant to be read with a “wink, wink,” facial expression. And not to be outdone, the Canadian government’s Canadian Mortgage and Housing Corporation says it is “… working to enhance housing financing options in Canada, to help Canadians who cannot afford housing in the private market.”
They have this crazy, irresponsible and absurd statement on their website:
One way to help [low-to-moderate income] Families have to offer them an equity loan in order for them to qualify for a conventional mortgage. The loan… actually lowers the qualifying income required to obtain a mortgage.”
Before you buy a home, understand the full implications of home ownership. Beware of the lie that if you don’t have enough money today, increasing property value will help own a home today. At best, this is a potential trap to keep you in the refinancing cycle. This is the government financing method that led to the subprime mortgage disaster in the United States.
Owning a home may involve most or all of these annual expenses (except where indicated otherwise):
- Mortgage payment that can go up or down
- Transfer taxes (one time)
- Property insurance and taxes
- Repair and maintenance costs, heating and lighting
- One-time legal fee, and many small items.
However, renting a house includes a monthly payment with responsibility for ground maintenance and, often, responsibility for heating and lighting. You have no other expenses.
Who decides affordability
Governments are trying to limit affordability for us. They want families to use the same reckless Ponzi-style financing they use to waste taxpayers’ money. I reject their approach. Every family must decide if they can afford to buy a house.
Each of these criteria must be applied before you can conclude that you can buy a home:
- You are debt free.
- Work on a monthly budget.
- Know your housing needs. For example, will the family increase in size soon?
- Get at least a 20% down payment for a conventional mortgage.
- Understand and accept the sacrifices required to pay the annual housing costs in full. What would you have to give up to pay these costs regularly?
- Understand the current and projected state of the economy and the housing market, and feel reasonably comfortable that you will be able to fund your total housing expenses for six months, even if you are laid off.
What happens if you must give away your expensive home
To master this challenge, separate two decisions. First, can the homeowner afford her current home? Second, if the answer is no, how can we work with it to provide affordable housing?
If the person or family can’t afford the house using my definition, go straight to the second question. Don’t try to allegedly help by lowering or deferring the mortgage for a few months; This is insulting and wasteful. Shame because it gives the impression that the family will be able to keep their home. Then, within a few months, the family must give up the house. After that, this approach is a waste of time, because time and money are spent knowing that the family should leave the house.
In these situations, focus on giving advice on lifestyle and financial planning. Stress lifestyle issues such as affordability, budget, mortgage anatomy, and stewardship. Teach the virtues of rent when people can’t afford to buy homes. Yes, it is a virtue. Some ownership arrangements give homeowners significant risk without equity. This is why many US mortgages have higher home values.
While they are receiving counseling in temporary housing, people should work with churches and charities to prepare them to live in rented homes. This may be a long journey. But if people reject the victim path and learn from their mistakes, it can be beneficial.
Today, people are rushing to own their homes and drowning in debt as their housing costs eat up a large portion of their monthly budgets. Be patient, rent until you can buy. Then you will build a solid financial base and reduce financial stress.
Copyright (c) 2011, Michel A. Bell