Wednesday, January 1, 2014

Buying a Home After a Financial Crisis Doesn't Have to Cost $350,000


Sunday's edition of the Star Tribune had a heartwarming story of someone who had bought her first home after significant financial obstacles.  In today's housing market, there are more and more of these "ready again" buyers--people who are purchasing a new home after recovering from a bankruptcy, foreclosure, or short sale.  I should know; I was one of them.  After a divorce, my home went into foreclosure.  My ex-wife remained in that house, but was unable to get my name off of the loan or keep up with the payments.  We notified the mortgage company when she decided to move out.  I returned at one point to explore moving back in and seeking a loan modification that would be workable under one income, but found a skating rink in the basement due to burst pipes from a poor job of winterizing the place.

Since I had neither the credit nor the assets to make the home livable again, a foreclosure was the only option.  I spent several years rebuilding my credit and saving for a home, so I certainly could relate to this story.  What I couldn't relate to, however, was the purchase price of this house, ringing in at...

...$354,900.

If this person is comfortable with the payment and happy in her home, more power to her.  But a $350,000 purchase price is well beyond the means of many buyers, especially those in the "ready again" category.  So the story is in some ways misleading.  It makes buying a home seem more daunting than it really is.

Working backwards from the purchase price and down payment, one can assume that the buyer put about 3% or 3.5% down.  Even if she bought at the low point of 30-year interest rates near 3%, her principal and interest payment would be in the $1,450 range.  Tack on another $400 in property taxes and $175 in insurance per month, and you've got yourself a monthly payment over $2,000.  If she had a loan with mortgage insurance, the cost would be even higher.

Depending on what program or product she used, she would need an annual income of at least $54,000 (if the payment was 45% of her monthly income and there was no private mortgage insurance, an unlikely scenario) and possibly $86,000 or higher (if the payment was 28% of her income).  Most people on the low end of that range would be quite house-poor with a $2,000+ payment per month.  And many "ready-again" buyers aren't at that upper income level.

So the price range in this story could make buying a home seem well out of reach.  Contrast that with my neighborhood, Jordan in north Minneapolis.  Currently the median list price of a residential property in Jordan is a mere $80,000.  Granted, there are reasons people choose to live in Andover vs. the inner city.  But an $80,000 house in Jordan usually has 3-4 bedrooms and one or two bathrooms, plenty of space for a family.  And the monthly payment?  Likely in the $600-$750 range.  Instead of $13,000 down, try needing only two grand out of pocket.

In my situation, I bought my house when rates were lower than they are today, when prices were cheaper, and when more down payment assistance programs were available.  I happened upon a four-bedroom, two-bathroom house with a monthly payment of under $500, including taxes and insurance.  With homes this affordable, I keep telling anyone who will listen:  north Minneapolis is the best-kept secret in the metro.  And that's especially true for the "ready again" buyers.

4 comments:

  1. Unfortunately our own City is shortsighted to the fact that not all people need a $250,00 - $350,000 home as evidenced by the Green Homes North initiative and the lack of forethought regarding VBR and foreclosure properties.

    I can't tell you how many times I have heard our older homes referred to as "functionally obsolete" by members of CPED and the Planing department. I am confident that many of the thousands of homeowners who lost their homes (and credit) over the last 10 years would disagree. Had our City had a plan in place to combat the effects of the recession with the Millions of Federal Dollars they accepted from Washington and used to do demolitions; we would have a much healthier North Side economy.

    Instead we are financing non-profits to build large expensive homes for individuals (who don't live within their means) or can't afford market priced homes in other communities and our community has become host to a overwhelming flood of slumlord investors which keep property values low.

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  2. There's a lot of big banks and the fat ass banksters that work for them can't make the nut to feed their noses and fetishes on these cheap ass 80k homes average people can afford.

    350 large, there's some skim to float a few boats. If the SHTF again, 350 large is worth foreclosing on and jamming up the taxpayer's ass too!

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  3. Good blog Jeff! I saw this and thought the same thing - unless she is an extremely good money manager, or can consistently get overtime - this home could be a real burden to her.

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  4. And another thing with the Strib's "Homes" section: They consistently run a segment about what a certain dollar amount buys in different parts of the metro. But those prices are almost always in the $250-400,000 range. Now I know the Strib is trying to sell papers and make money, and featuring affordable $100,000 homes might not always accomplish that. But still, it furthers this notion that home ownership is out of reach.

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