Yesterday I asked why people don’t think their financial lives will get better in 2019, even as macroeconomic stats start the year strong.
Data just out from ATTOM gives additional context for this sentiment: renting a three-bedroom home is cheaper than buying in the vast majority of the U.S.’s crowded metro areas. Name a major city in the U.S. and ATTOM says buying a house there is expensive, from L.A. to Chicago to Houston to the usual suspects like NYC and San Francisco.
This number in particular smacked me in the face:
The report shows that renting a three-bedroom property requires an average of 38.0 percent of weekly wages across the 755 counties analyzed for the report.
Renting a three-bedroom house will on average cost you almost 40 percent of your income? Come on. No wonder Very Smart People are ringing the affordable housing alarm.
Two important things to consider here:
1. On the negative side:
This is for three-bedroom houses, meaning these aren’t necessarily starter homes for young people like me. But lots of you who’d be first-time homebuyers are financially strapped due to student loans and a lack of affordable housing, you might’ve committed to renting for a bit, started a family already, and are now ready for a homebuying hunt.
When I think that I either need to be a total workaholic or pray for a housing crash to ever be able to afford a home for my future family, I get pretty pessimistic like the Gen X-ers ahead of me. And I’m not alone. New Trulia data suggests young people are increasingly unsure they’ll ever own a home.
2. On the positive side:
This ATTOM data, like all other macro data, doesn’t fully account for individual profiles and hyper-local property markets. For example, ATTOM says it’s cheaper to buy homes in my home turf of the Detroit metro area. But I know the quality (or lack thereof) you get for certain prices in this area. That’s when it hits home that macro data and headlines have less to do with local decision making.
Macro stats don’t matter in homebuying & mortgage approvals:
Everything about buying or renting a home comes down to monthly costs, not macro stats. It’s all contained in something called a debt-to-income ratio or DTI as the pros call it.
You calculate DTI by dividing your total monthly bills by your total monthly income. This gives you a percentage. So when I first choked on that ATTOM percentage above like Ders chokes on his bong in Workaholics, I didn’t realize how all this worked.
So I went to the boss and he laid it out: if you’re buying a home, lenders will allow your total resulting monthly debts (including housing and non-housing bills) to go as high as 50% of your income, but they try to cap it at 43% for reasons I’ll explain another time.
The point is, it’s fairly normal for a debt-to-income ratio to be in this 40% range—the rest is exactly how you’re calculating the income and the debts (take home pay vs. gross salary, etc.). That said, it doesn’t mean you’re not stretching at 40% DTI. A debt-to-income ratio that’s considered not to have a big lifestyle impact is closer to 30% or less.
So it seems I’m not doomed to workaholism or defeatism. Next week as my go-beyond-the-headlines training continues, I’m going to dive deeper into what this all means for me so you can start to see what it means for you too.
For now, I can say I’m relieved having gotten a higher view, and no longer feel the walls closing in.