Only 6% of Americans Can Afford a $300,000 Mortgage?
Only six percent of American's can afford a $300,000 Mortgage?
During the past few decades we have seen the world develop and grow at a rate which is unprecedented. Although we have seen the industrial revolution play a large role in this growth, more recently it has been the abundance of loans that has acted as a catalyst for economic growth.
In the past our financial future was planned with the expectation of loan assistance. We depended on these loans to support our purchases. Our current income did not justify our current expenses. However, since we had credit cards, lines of credits and loans we had the perception of affordability. A persons wealth and affordability was measured by the amount of credit available to him. One would perceive themselves as being wealthy because a bank gave him a $1 million mortgage to buy a house, or a $100,000 loan to buy a Mercedes. This perception of wealth was actually a reality of debt. Who is less wealthy? The person who now has no money or the person who owes others money? Debt became part of the formula of each of our personal net worth.
Because of this perception of affordability, people started buying property after property. The increasing demand lead to an increase of price. Properties in places like California, Arizona, Florida and many other places in the US doubled in price within only a couple years. Developers started developing new neighborhoods and condominiums as fast as they could. The real estate industry grew at an unprecedented rate. Prices of homes rose to unjustified prices. Although these homes seemed to be affordable, in reality the prices climbed so high that they became unaffordable. The perception of affordablility was actually the reality of financial distress.
It was only when the economy went into a recession that we realized how unaffordable our loans were and how dependent we really were on debt. Banks stopped lending, credit cards started raising interest rates, line of credit accounts started closing and loans became difficult to obtain. We live in a new time, in which loans are hard to come by. Banks are back to the conservative lending practices that our grandparents grew up with. Banks claim that they are still lending, however they are lending less. By less, I don't mean to fewer people. By less, I mean less money in comparison to what they use to lend in similar situations.
Larger banks such as Bank of America, are requiring borrowers to have around a 40% debt to income ratio in order to qualify for mortgages. Let's assume the average borrower has $1,000 a month in current expenses (such as car loans, student loans, credit cards, and etc). Now, this borrower decides to apply for a $300,000 loan. The monthly mortgage for a 30 year fixed loan would come out to around $2,250 per month (including property taxes and misc. fees). So now the total monthly expense of the borrower would be $3,250 a month ($1,000 + $2,250). At a 40% debt to income ratio, this borrower would need to be making $97,500 a year to qualify for this loan. Well, according to President Obama's pre-election statistics, "Only 6% of American's make $97,500 or more per year." According to this formula, only 6% of Americans can afford a $300,000 mortgage.
In all fairness, we do see a lot of dual income families in which their combined income can exceed $97,500 a year. However, it still is much tougher to obtain a loan in today's economy than it was just a couple years ago. If the banks continue to remain conservative, we will see prices of houses, goods and services come down. If it is hard to get a loan, then it will respectively be hard to spend money.
Over the last year we have seen the prices of houses, goods and services come down drastically. You can buy a house in some places for half the price it was sold 2 years ago. You can go into Subway and get a $5 foot long sandwich. You can higher a contractor to remodel you home for $20 an hour or even less. You can buy a steak at Outback for $9.95. You can get a $4 McDonald's Value Meal. I haven't been able to do this since Middle School. What we are seeing here is a period of rapid deflation. After periods of rapid deflation, historically we have seen a period of rapid inflation. When this occurs, expect to pay $2.50 for a bottle of water, $6 for a gallon of gasoline, $180 an hour for a plumber, $10 for a McDonald's Value Meal and etc. We all need to prepare for this period of rapid inflation because it will happen quickly and if we are not prepared we will not be able to efficiently benefit from this period of time. If you have the money, right now is the time to buy a house, remodel your existing house, buy a $5 foot long, eat a whole lot of steaks and invest in your business. If you don't take advantage of this time, you will not get ahead during the next period.
This is the best time for businesses to invest in themselves. If you want to replace a piece of equipment, you can probably find that equipment for a tenth of the price at a bankruptcy auction. If you want to open another location, you can probably get a lease that is half of the price it was a year ago. If you want to higher skilled employees, you can probably higher them for two-thirds of the wage that they use to get. If you want to invest into a ERP or Financial Management Software for your business, you can do it for much less than it would cost just a year ago. Invest, invest, invest. Gain a leverage over your competition, because when this period of rapid inflation occurs, you must be prepared. If you find yourself not prepared, then your competition will eat your piece of pie along with their own.
Reshad Kazimee
