checkbook  © Corbis

Extra9/12/2007 12:51 PM ET

Why you can't afford a home

While house prices were soaring, fueled by low interest rates and risky borrowing practices, wages barely kept pace with inflation.

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By The Associated Press

An Associated Press analysis of new census data provides insight into the reasons for the slumping housing market: Since 1990, homeowners have faced a growing gap between their incomes and the price of their homes.

The widening gap in all but a handful of the nation's 500 largest cities helped make the recent boom in housing prices unsustainable, according to analysts. The rising prices were fueled largely by low interest rates and risky borrowing, rather than increasing incomes.

"We had an artificial economy," said Brad Geisen, founder of Foreclosure.com, a Web site that lists foreclosure properties. "There was all this wealth created in real estate, and it wasn't really created."

Nationally, the median household income grew by about 60% from 1990 to 2006, roughly matching inflation. At the same time, the median home value -- the point at which half were more and half were less -- more than doubled, to $185,200.

The gap between incomes and home values was even bigger in many cities.

For example, incomes in Miami roughly kept pace with inflation -- meaning they were effectively stagnant -- while the median home value quadrupled, to $315,900. In places such as Bend, Ore., and North Las Vegas, Nev., incomes about doubled, but home values increased fivefold.

Mark Zandi, chief economist at Moody's Economy.com, likened the current housing market to the dot-com boom and bust a few years ago, when stock prices for many high tech companies soared -- before some of them ever turned a profit -- and then crashed.

"The parallels are quite similar," Zandi said.

The Census Bureau today released 2006 housing data for every state, county, metro area and city with a population of at least 65,000. Income data were released last month.

Together, the figures provide a snapshot of the nation's economy just as housing prices were peaking in many areas. Since then, housing prices have decreased in many markets, fueled by a crisis in the subprime loan market and dwindling credit even for some wealthier borrowers.

Long-term trends converge

The AP compared the 2006 figures with data from the 1990 Census for the 499 cities that were included in both reports, providing an analysis of long-term trends that helped create today's housing slump.

The analysis showed that homeowners in nearly every city are spending significantly bigger shares of their incomes on housing costs. From 1990 to 2006, the share spent on housing costs increased in all but 13 of the cities examined. Nationally, the share increased from 21% to nearly 25% for homeowners with a mortgage.

Many of the cities with large increases in home values were fast-growing cities or places with thriving economies. However, there were also large disparities in incomes and home values in some distressed cities, mainly because incomes effectively dropped.

Home ownership rates are among historic highs, at 67.3% nationally. And booming home values have increased wealth for many families, allowing them to use the equity in their homes to take out second and third mortgages to finance home improvements, pay for college or buy automobiles.

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Home Financing low loan rates © Corbis
Slippery slope?
Home prices declined in 15 of the 20 cities in the S&P/Case-Shiller monthly survey for the 12-month period through June 30, reports CNBC's Diana Olick.

Dreams on hold

But many others who bought at the height of the market will have a harder time realizing their financial dreams.

Shawn Talbot and Gerry Woodruff bought a three-story condominium just outside San Diego in 2005, hoping to stay for about three years before trading up to a single-family home.

They were first-time homebuyers, paying $431,000 and financing it with two loans. They didn't have a down payment, but they hoped the value would increase enough to give them a sizable one for their next house.

That dream is now on hold, as the market value of their condo is in flux. The couple both have good-paying jobs -- Talbot works for a trade association and Woodruff is a financial analyst for an aerospace company. But the median home value in San Diego was $579,000 in 2006, among the most expensive in the country.

"Houses out here are almost like a 401(k)," Talbot said in a telephone interview. "It grows and grows until you get older and you need it.

"But a year or so ago all that changed," she said. "I'm not sure we will ever be able to afford a single-family home in San Diego."

Mortgage loans eating up incomes
StatePaying at least 30% on mortgageMedian cost per month

California

51.8%

$2,142

Hawaii

45.7%

$1,959

Nevada

45.4%

$1,617

Florida

44.9%

$1,425

New Jersey

44.7%

$2,130

Rhode Island

43.5%

$1,707

Massachusetts

41.8%

$1,925

New York

40.9%

$1,789

Washington

39.8%

$1,573

Connecticut

39.6%

$1,870

Oregon

39.1%

$1,412

New Hampshire

39.0%

$1,702

Illinois

38.7%

$1,566

Colorado

38.5%

$1,534

District of Columbia

37.8%

$1,949

Arizona

37.4%

$1,359

United States

36.9%

$1,402

Vermont

36.5%

$1,342

Michigan

35.2%

$1,302

Maryland

35.0%

$1,736

Montana

34.7%

$1,108

Alaska

34.2%

$1,611

Virginia

34.2%

$1,540

Idaho

33.9%

$1,099

Minnesota

33.9%

$1,436

Georgia

33.6%

$1,289

Maine

33.4%

$1,177

Wisconsin

33.4%

$1,338

Texas

33.3%

$1,309

Mississippi

33.1%

$940

Utah

33.1%

$1,294

Pennsylvania

32.6%

$1,271

Ohio

31.8%

$1,216

South Carolina

31.8%

$1,055

Tennessee

31.5%

$1,072

Delaware

31.3%

$1,371

North Carolina

31.3%

$1,144

New Mexico

31.0%

$1,076

Alabama

28.8%

$988

Louisiana

28.7%

$1,017

Missouri

28.7%

$1,097

Kentucky

27.7%

$989

Nebraska

27.5%

$1,163

Arkansas

26.9%

$908

Wyoming

26.9%

$1,059

Oklahoma

26.8%

$971

South Dakota

26.8%

$1,076

Indiana

26.7%

$1,089

Kansas

25.8%

$1,141

Iowa

25.1%

$1,063

West Virginia

24.5%

$853

North Dakota

23.0%

$1,043

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