Shouldn't housing prices be brought down to a payment of 25% of wages a month?
for each community? The average pay should figure the average home price, making a payment of not more than 25% a month in that community? So if the average wage in a community is $30,000 a year, the average home there shouldn't cost more than $500 a month, after taxes from the pay?
- NDMALv 710 years agoFavorite Answer
That is pretty close to how housing prices have historically been figured. However it was not done on a monthly basis but figured based on a 30 year lifetime of a mortgage. The initial increase in housing prices happened in the Carter era. With ERA, womans rights etc more women started going back to work. The financial markets took advantage of this by adding the wife's income to the equation when figuring home values (Previously the home values were figured based upon the primary breadwinners income).
What has changed is not how home values are figured, what has changed is how mortgages are written. In bygone times the mortgage was a fixed rate agreement. The payment usually remained level for the 30 or 15 year life of the mortgage. Given that most peoples income goes up and time in at a company gives them greater financial security if anything it was easier to make the mortgage payments for the buyer over time. OF course as inflation went up the mortgage company was getting less value from the mortgage payments over time.
The FHA bringing pressure on banks to get more people into homes, the banks jumped at the opportunity to get creative with their lending practices. Balloon payments allowed initial low mortgage payments with a big payment towards the end of the loan. Variable rate mortgages starting with a low interest and low monthly payment where the payments grow with inflation as interest is adjusted. The Front end loaded mortgage where you pay only the interest in the beginning and principle on the back end (Basically you are renting your home for 5 to 7 years until your payments start to affect the principle - and you build equity - oh and did I mention if you sell in those 5 to 7 years you would often take a loss on the sale?)
These creative approaches did get people into homes, represented only a small amount of mortgages and during good economic times foreclosures were low. But banks noticed they were making more money on these types of loans and started just automatically putting home buyers into the these creative mortgages, to the point where one had to dig his heels in and insist on a fixed rate mortgage. Mortgage companies would begrudgingly do so -usually with the addition of a point or two on the down payment.
During less than good economic times, the mortgage rates went up with the economy and it was harder for home-buyers to keep up payments so you had more foreclosures. Then there came the home improvement companies that live of home equity financing etc. (Yes we can Remodel your kitchen and heres the good news, you have the money in the home itself, its called equity!. Blah Blah Blah) The result of these second mortgages was home buyers borrowing off the home equity. Then the banks came up with the bright idea of a home equity line of credit... Even giving out Credit ATM cars to make it real easy to tap that line of credit. Most folks don't have a clue how to use a credit card in the first play, giving home owners an equity backed credit card with thousands of dollars was a recipe for disaster. Sure enough as more women started staying home with the kids the average household income dropped and so did housing prices and some of these folks with maxed out equity lines started to get in over their head. Those who used their equity card like ATM's to supplement their income got into trouble first. Upon reaching their limit they could not make ends meet without the cash infusing from their equity card. A new source of foreclosures producing a increase in cheap houses to the market - and driving down real estate prices. Then the sub-prime variable interest mortgages started to hit home with monthly mortgage prices going up faster than income a new class started getting into trouble and things started to snowball.
Couple all this with the converting of mortgages into securities and you spread these bad mortgages throughout the financial markets. Banks write the mortgage, sell them for a percentage of the principle and interest, write more mortgages repeat the cycle. Banks realized hey we are making a bundle just writing these mortgages and foreclosure is not a problem because by they time the foreclose they will not be our problem. So banks relaxed their lending standards so they could write more mortgages. The problem was security rating companies who looked at these mortgages saw problems. So the banks started paying the security rating companies to not look so closely.
A minor bump in the economy and this whole mess exploded!
Housing prices was not the problem, creative financing, fraudulent lending practices, creating fraudulent securities, bribes, kickbacks etc. was the problem. The bankers greed created this problem, and so far they are the ones getting the bail outs and eluding prosecution. Which only sets them up to play this same game again after the smoke has cleared and people forget.
- Dr. Li WenliangLv 710 years ago
Wow what an idea. Now all we need is an absolute dictatorship that can set the price of everything to suit you.
Here's a simpler idea...don't buy a house that's so expensive that your mortgage will be more than 25% of your wages.
Now that requires no dictatorship, just a little personal responsibility,
- 10 years ago
It would be better, and more feasible, to have people live in communities free of charge; you work you get a house. These communities help grow food, take care of the buildings, etc.
- Ms. BeahavenLv 710 years ago
Supply and Demand will dictate prices.
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- Anonymous10 years ago
And a auto payment should be 15%.
How can any nation get these %'s fixed?