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Home prices are rising faster than incomes, causing home buyers to hazard a financial stretch they can’t sustain, finds a report by The Joint Center for Housing Studies at Harvard University. Median home prices grew four times faster than the average income in Washington, D.C., and Baltimore between 2003 and 2004. In Los Angeles, increases in home prices outpaced increases in income by almost five times during the same period.
Skyrocketing prices haven’t shut out buyers, but rather caused them to take desperate measures to become homeowners, says Nicolas Retsinas, director of the Joint Center and author of The State of the Nation’s Housing 2005.
Borrowers are choosing riskier loans such as interest-only mortgages, adjustable prime loans that lower monthly payments for a limited time but doesn’t allow borrowers to pay down principal. For example, in September a monthly mortgage payment on a $200,000 30-year fixed rate loan at 5.8% would have been $1,173. On an interest-only adjustable rate mortgage at 4.48%, it would have been $746 during the first year, but the principal would still be owed in full after the interest-only period on your loan expires.
A strengthening economy typically triggers interest rate hikes, which would cause monthly mortgage payments on an ARM to increase. But a strong economy doesn’t necessarily guarantee increases in salaries. “You’ve stretched in order to afford this mortgage, and you’ve stretched as far as you can. Now your payment has increased,” Retsinas says. “That payment shock could in some ways undermine your homeownership.”
Just getting a job used to be enough to enable people to become homeowners, Retsinas adds, but today workers go out on a limb to purchase property. And low-income people are no longer the only ones affected. “Because home prices have so far exceeded income growth, it’s now climbing up the income scale,” he says.