Housing: the threshold of affordability

41.7 Million Spend Too Much on Housing


As of 2009, some 41.7 million U.S. households, or 36.7% of the total, faced housing costs that exceeded 30% of their pretax income — a level typically defined as the threshold of affordability. That’s an increase of 1.5 million from 2007, despite a sharp drop in house prices and policy makers’ extraordinary efforts to bring down mortgage payments.

At first glance, the numbers seem incongruous. By most measures economists and policy makers follow, U.S. households’ finances are getting better. Their debt burden, expressed as mortgage and consumer debt outstanding as a share of disposable income, has been falling ever since September 2007, from a peak of 130% to 119% in June 2010. Over the same period, payments on that debt have decreased from 18.9% to 17.0% of disposable income — the lowest level since 1998. To be sure, much of the improvement is coming as a result of defaults, but it still suggests consumers are getting in a better position to start spending again.

Such measures of household finances, though, are akin to the average temperature in a hospital — they don’t tell you how many people are really ailing. According to the American Community Survey for 2009, released earlier this week, the ranks of the financially ill are growing, at least in terms of the share of the population that is paying too much for housing. That’s particularly unfortunate given the fact that the housing bust, for all the pain it inflicted, should at least have made it cheaper to put a roof over one’s head.

Comment: Back when we bought our first house (1975), the rule of thumb was 25%

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