Budgeting for your Mortgage

The rule of thumb for household budgeting is that housing should account for no more than 30% of income; spending more than that results in a cost-burdened household, while spending more than 50% results in a highly cost-burdened household. In their study The State of the Nation’s Housing, the Harvard Joint Center for Housing Studies estimates that 40.9 million households, or more than a third of all American families and individuals, were cost-burdened in 2012. Despite a 1.7 million decline between 2011 and 2012, these families had grown by 9 million in the previous ten years, with 5.8 million of these being highly cost burdened households.

The reduction in 2012 was almost entirely on the homeowner side, rather than the renter side. While more than a quarter of homeowners are deemed cost-burdened, with 10% being severely so, the number of cost-burdened renters increased marginally in 2012, to 20.6 million, for the sixth year in a row. Nearly half of all renters are considered financially strapped, with 17% falling into the severe category.
Four out of five households with incomes below $15,000, the equivalent of full-time minimum wage employment, spent more than 30% of their income on housing, and more than two-thirds spent more than 50%. In the severe group, there was minimal difference between tenants and owners.

Severe cost burdens are more common among minority households: 27% of black, 24% of Hispanic, and 21% of Asian households were severely burdened, compared to only 14% of white households.

For many causes, the number of cost-burdened households among renters and owners has increased. The ups and downs of housing costs, which surged by 15% between 2001 and 2007 and then began a fast decrease as interest rates and property prices fell, have been a source of frustration for homeowners. By 2012, expenditures had nearly returned to a decade earlier levels, but income levels had decreased.

Renters have been hurt by a drop in income. Between 2001 and 2007, median rental costs increased by 4%, but income plummeted by 8%, and then fell by another 8% by 2011. While there were advances in income in 2011-12, the net loss in income over 11 years was 13%, while median rent ($880) grew 4%.

This frequently compels low-income people to choose between paying more than they can afford and severely restricting their food, clothes, medical care, and other essential expenditures, or accepting home that is in bad shape or located in high-crime and/or blight areas.

According to a 2012 study, the most financially burdened households spent 39 percent less on food and 65 percent less on healthcare than those living in affordable housing; these decreases were much more pronounced among rural inhabitants. Rodents, allergies, poisons, and hazardous items may be present in homes that choose economical but poor housing.

Struggling to pay for housing has its own set of costs. Families have a tendency to relocate frequently, disrupting routines, schooling, and social networks. In 2011, the mobility rate among low-income families with children was 43 percent, but as income climbs to 80 percent of an area’s median, it drops to 19 percent.

The rising flood of cost constraints indicates the private sector’s inability to provide cheap housing, in addition to the expanding number of low-income households. In 2000, 8.2 million extremely low-income households competed for 2.9 million affordable and available rental apartments, resulting in a ratio of 37 units per 100 households, according to an Urban Institute report. By 2012, there were 11.5 million households and 3.3 million units, resulting in a 29:100 ratio. This takes us to the topic of housing subsidies.

Those earning less than half of the area’s median income are eligible for federal rental subsidies, but qualifying does not ensure assistance. Between 2007 and 2011, the number of eligible households increased by 21%, from 15.9 million to 19.3 million, while the number of people getting assistance increased by only 225,000, to 4.6 million in 2011. Renters with worst-case needs (high expense burdens or very inadequate accommodation) increased progressively from 50 to 58 percent throughout the same time period.

The growing insufficiency of housing assistance programs, particularly the voucher program, where the majority of the aid increase has occurred, is partly due to rising rent and falling incomes. In 2012, the average rent for a voucher-aided flat was $1,041, up 13% from 2007. During this time, federal spending per voucher-assisted unit (the difference between the rent and the tenant’s ability to pay) increased by 17%, from $600 to $705 per month. The capacity to serve eligible homes continues to dwindle as the cost of administering rental assistance rises.

2011 is the most recent year for which data is available. Since then, sequestration has slashed $3 billion from HUD’s budget, resulting in a 5% reduction in payments to voucher program landlords and a 4% reduction in program management. As a result, in 2013 roughly 42,000 fewer households received coupons than in 2012. If passed, the FY 2015 budget would restore 5% to the program, but this would do little to fill the gap between aid and rising need.

Over the next decade, more than 190,000 units of privately owned subsidized housing, or roughly half of the subsidized stock of 4.8 million, might be lost as contracts or affordability constraints expire. An estimated 596,000 have project-based rental assistance contracts, with owners having the option to convert the units to market-rate rates. Those who live in desirable neighborhoods with high rental demand are more inclined to do so. The anticipated $171 million cut to Section 8 support in the 2015 budget, as well as HUD’s attempt to offset the impact of sequestration by giving short-term extensions to expiring contracts in 2013, may have discouraged owners from staying in the program.

Since 1987, the Low Income Historical Tax Credit Program (LIHTC) has helped fund the construction of approximately 1.3 million units and the rehabilitation of another 783,000, and nearly 1.2 million of these units will approach the end of their compliance term between now and 2024. While most LIHTC owners have chosen to keep their properties cheap in the past, this now necessitates repeated contracts and subsidies. The units with for-profit owners in high-cost housing markets are the ones most at risk of being lost. Many of the units that are being renovated will require additional money for maintenance and rehabilitation.

The decrease in the homeless population from 633,782 in 2012 to 610,042 in 2013 is a positive spot in the housing landscape. Except for a slight spike in 2010, homelessness has decreased steadily for all risk groups since 2007: 11% among individuals with families, 12% among the chronically homeless, and 6% among veterans. The improvements are almost entirely among the unsheltered homeless (those living on the streets, in automobiles, and so on), while the sheltered population stays unchanged at slightly under 400,000 people.

The focus and money given to providing stable permanent housing is one cause for the decrease in homelessness. Between FY2007 and FY2013, funding for homeless services grew by 34%, resulting in the development of over 95,000 new permanent beds. Healthcare funding for persons with complicated medical, mental health, and substance misuse concerns has also been enhanced.

However, not everyone has benefited from these changes. Between 2007 and 2013, homelessness increased by more than 10% in fifteen states and the District of Columbia. The rise in homeless families in New York, which has increased by a third, and Massachusetts, which has increased by 80%, may be due to sequestration-related reduction in rental subsidies.

Another issue is the issue of neighborhood distress, which arose as a result of the housing meltdown and was particularly severe in low-income and minority communities. Housing prices in largely minority communities are predicted to have declined 26% between 2006 and 2013, more than three times the loss in white districts. High-poverty neighborhoods were similarly affected, with a drop of 20% compared to 14% in low-poverty areas.

These dramatic price drops reflect the increasing pre-crash prices in minority and, to a lesser extent, low-income communities. A correction was inevitable, but the loss of wealth for those who bought during the boom and those who refinanced at inflated prices has been catastrophic. Even after the recent surge in home prices, the ratio of negative equity in minority and high-poverty communities remained high in 2013, at about double that of white and low-poverty districts, putting these areas at greater danger of default and with limited prospect of refinancing or selling. Because of this inability, the inventory available for purchase by other low-income purchasers is limited. When considering halting loan modification and refinancing programs for underwater homeowners, authorities should examine the extent of misery in these neighborhoods, according to the Center.

Despite the doom and gloom of this and other housing topics covered in The State of the Nation’s Housing, the Joint Center predicts that the housing recovery and overall economic growth will continue at a moderate pace, despite the fact that numerous hurdles remain. The need for tens of millions of Americans to spend such a large portion of their income on housing while yet living in inadequate homes and surroundings is one of them. Nearly a quarter of all renter households make less than $15,000 per year, implying that a reasonable monthly rent is less than $400. Without subsidies, the private sector is simply unable to provide an adequate number of such homes, and this assistance is becoming increasingly limited as the number of eligible households grows, the cost of providing subsidies rises, and overall government spending is decreased.

Policymakers should continue to aid homeowners in places with significant concentrations of negative equity, in addition to rethinking support for disadvantaged households. Another issue is the mortgage market reform that has been postponed. The inability of younger Americans to buy a home is a crucial element in the sluggish rate of home buying; resolving their poor financial situation and providing them with opportunities to get financing supports the future growth of the own-occupied housing market.

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