At the height of the housing boom in 2004, 42% of American families (both current owners and renters) were unable to afford to purchase a modestly priced home with standard underwriting, according to a May 2009 report published the U.S. Census Bureau. The study, which looked at the barriers to homeownership, concludes that few renters in 2004 would have been able to purchase a modestly priced home due in large part to their growing debt burden. The study also concludes that lower home prices and large upfront cash grants for downpayments, as opposed to lower interest rates, would have had the most significant impact on affordability. Given developments in mortgages and home prices in recent years, these findings are relevant to the current housing crisis.
Affordability was defined as the ability to qualify for a conventional 30-year-fixed mortgage with a downpayment of 5%. The report found four main conditions negatively affecting a family’s ability to buy a home: a lack of cash or assets necessary for a downpayment, poor credit history, insufficient income with which to make monthly mortgage payments, and any other types of debt that would reduce income availability.
The data show that these conditions mostly affect renters, only 8% of whom would have been able to afford a home purchase in both 2002 and 2004. Conventional mortgage underwriting allocates 28% of total income toward mortgage payments, and no more than 36% of total income for all debt payments. This total debt includes expected mortgage payments as well as debts such as student loans, car notes and credit cards. Thirty percent of the renters in the study had sufficient income to qualify them for a mortgage, but too high of a debt level.
The article simulated the effects on affordability of lowering interest rates or lowering downpayments. Interest rate simulations did not show a significant effect on affordability. Downpayment assistance was tested on the sample of respondents in incremental award amounts ranging from $2,500 to $10,000. The ability of renters to purchase upon the receipt of $2,500 in downpayment assistance showed an increase of 1%. However, had renters been given $10,000 in downpayment assistance, their ability to become homeowners increased by as much as 12%. That amounts to about 5.1 million renters who would have been able to purchase a home in 2004 had they received a significant amount of down payment assistance.
In general, the upfront cost of housing was the most important. The study considered a ‘modestly priced” home to be among the 25% least expensive owner-occupied homes in the area where a family lives. Buying a less expensive “low-priced” home drastically increased the percentage of families who were able to purchase, from 58% to 80%. A low priced home is considered to be one that is less expensive than 90% of the other homes in a neighborhood.
The study used data from the American Communities Survey and the Survey of Income and Program Participation. The report, Who Could Afford to Buy a Home in 2004? can be found at www.census.gov/prod/2009pubs/h121-09-01.pdf.