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The Basics

Average Joe still can't afford a home

Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn't work.

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By Bankrate.com

One of the worst things about today's real estate market is that there doesn't seem to be any silver lining in that big black cloud.

Normally, you'd think dramatically falling prices would make homeownership possible for more moderate-income families.

But even with homes more affordable, the median price in many markets is still out of reach for a median-income family, according to "Paycheck to Paycheck: Wages and the Cost of Housing in America," a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations -- registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

"Even with the housing downturn, the drop in prices still just isn't enough for many workers in traditional backbone occupations to afford houses," says Rebecca Cohen, a CHP research associate.

In many parts of the country, housing increases have outpaced wage growth for almost a decade. Census data released in 2006 revealed that between 2000 and 2005, the burden of housing costs grew sharply.

The Housing Affordability Index measures the cost of housing against median family income. The National Association of Realtors, or NAR, which calculates the index, considers that the typical family makes enough money to buy the typical used home, assuming a 20% down payment and a traditional 30-year mortgage.

In 2000, the NAR pegged the index at 129.2, meaning the typical family had 129% of the income necessary to pay for the typical used house. That figure dropped to 104.9 in June 2007, even though the 2000 median family income of $50,732 rose to $59,157 during the period.

That's because the median price of a home in 2000 was $139,000, but by June 2007 prices peaked at a whopping $229,200. In those seven years, the median price of homes increased 64.9%, while median incomes rose just 16.6%.

Recent NAR estimates indicate affordability may finally be moving in the right direction, but it still has a long way to go.

Cohen says there have been other consequences of the overinflation of housing. As the cost of buying a home went up, more families moved into rentals, which drove up rents. When that happens, many local economies have trouble filling lower to mid-range jobs.

The study also found that retail salespeople and food-preparation workers couldn't afford to rent a two-bedroom apartment in any of the markets. It based affordability on the metrics that a family or person should not spend more than 30% of household income on rent and utilities while homeowners should not spend more than 28% of their income on the mortgage, taxes and insurance.

The most recent NAR report projected a January median home price of $198,700 and median family income of $59,858. With a 20% down payment, a 30-year mortgage at 6.2% would mean $973.59 monthly for principal and interest. Assuming $3,600 per year for insurance and property taxes brings the total monthly payment to $1,273.59 -- within the $1,396 maximum threshold, but without factoring in closing costs.

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Home financing © Corbis
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The benefits of homeownership are obvious, but renting has its advantages, too. One is that renters typically have more disposable income to spend or put aside for the future.
Lenders have often used formulas such as this to gauge a person's borrowing capacity, but property taxes and insurance can vary widely by region. Cohen says these affordability metrics can also tell different stories based on the number of people in the household.

"A benchmark is just that and should be taken with a grain of salt. If a single person spends 27% of their income on housing, they might be doing great, but if you're a family with five kids, certainly the amount you're able to comfortably spend without cutting into your budget will vary," says Cohen.

Recent mortgage innovations and Americans' appetite for debt have created the illusion that homes are affordable and within reach of anyone, regardless of income. But just because a family purchases a house doesn't mean they can afford it, and those who borrow as much as they can may have to make other budget cuts that affect their financial futures.

Continued: What a lender doesn't know

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