The High Monthly Cost of Home Ownership

An Associated Press story out this week delves into the high percentage of Americans’ monthly income sucked away by the house payment. It starts with the story of a Davie, Florida, resident:

Al Ray is so strapped for cash, the only time he eats out is on Wednesday or Sunday, when the local McDonald’s sells hamburgers for 49 cents.

Ray lost his engineering job last November, and has been working as high school tutor, scratching out about $1,000 a month — if he’s lucky. He struggled to make his $1,400 monthly mortgage payment and $330 monthly homeowners’ association fee until May, when he stopped paying.

Ray is one of more than 7.5 million people — almost 15 percent of American homeowners with a mortgage — who are spending half of their income or more on housing costs, according to 2007 data released Tuesday by the U.S. Census Bureau. That is up from nearly 7.1 million the year before.

According to Bankrate.com, your monthly mortgage payment — including principal, interest, taxes, and insurance — should not exceed 28 percent of your gross monthly income. That means that if your household brings home $10,000 per month before taxes, your mortgage payment should be $2,800 per month. That equates to a mortgage amount of about $340,000 based on a 30-year loan at today’s interest rates.

The fact is that many household incomes in Los Angeles are under six figures, and a decent home in a decent neighborhood costs far more than $330,000. Clearly, something has to give. But Angelinos are not alone.

Traditionally, the government and most lenders consider a homeowner spending 30 percent or more of their income on housing costs to be financially burdened. But that definition now covers almost 38 percent of American homeowners with a mortgage — 19 million of them.

In San Francisco, more than one out of five homeowners with a mortgage spends half or more of their income on housing.

That’s also true in 13 more of the largest 100 metro areas analyzed by the Associated Press. Other places include California metro areas of Stockton, Los Angeles, Riverside, Oxnard-Thousand Oaks, San Francisco, and San Diego. Also in the top 10 are the Fort Myers, Sarasota and Orlando metro areas in Florida, and New York-Northern New Jersey-Long Island.

In the wake of the economic meltdown, it’s going to be vital for Americans to learn and practice fiscal conservatism. And stricter lending standards would be a nice safeguard against the temptation to overextend.

Downsizing expectations and/or living with roommates or other family members may be necessary to make a house payment manageable. Owning a house is great if it makes sense financially. With prices likely to remain flat for some time, buyers should look at a house as a place to live, not necessarily as an investment. After all, you have to live somewhere. Compare the cost of buying vs. renting and see what makes more sense.

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