Why “Home Affordability” Calculators Are An Absolute Joke

Luxury HomeThis morning, I was browsing the web and saw a link to CNN’s “Home Affordability Calculator”, which they tout as a tool to allow you to see how much home you could comfortably afford based on your income. Their methodology for the numbers they provide you is advertised as the following:

“To arrive at an “affordable” home price, we followed the guidelines of most lenders. In general, that means your total debt payments should be no more than 36% of your gross income.

Once you enter your monthly debt (including credit cards, student loan and car payments), we come up with a maximum monthly home payment you could handle while staying under that threshold.

Why do lenders use this guideline? It’s been shown to be a level of debt that most borrowers can comfortably repay.”

Comfortably, huh?

“Okay” I thought. “Let’s put in some numbers and just see what we get”.

This is what the “affordability calculator” spit out:

homeafford

Now let’s stop and think about this for a second. Say, hypothetically, your family is doing reasonably well. You have saved up a 20% down payment, and you have a combined family income of about $120,000 before taxes. Between property, income, and a myriad of other taxes, the government is going to take about $30,000 of that easily. From the $90,000 you have left (approximately $7500 per month), this says that you are ok to leverage yourself into a home worth more than 5 times your annual income and eating up about half your take home pay. Supposedly, this should allow you to live “comfortably”, meaning have enough to pay off other debt, send your kids to school, drive a decent car, pay for health insurance for you and your family, save for retirement, keep food on the table, and go on a vacation now and then.

Let’s take a look at the budget spreadsheet I use (mentioned in this blog post here), and see what our typical month would look like for a hypothetical family of 3:

balance sheet

This is making a couple of assumptions:

1.) If you are stupid enough to spend that much on a house with that income, I am also assuming that some other bills will be higher. For example, your electric bill is going to be a bit higher to cool the home and keep all those crazy lights on.

2.) A lot of the other numbers I consider pretty reasonable. $50 a weekend eating out or going to a movie is actually pretty tame for the mindset of a person who would get themselves into this pickle. A single $2400 vacation every year seems reasonable for a family making 6 figures, right?

3.) This assumes they are smart enough to save in advance for any car repairs that might suddenly appear… keep in mind that these numbers are before we had any “emergencies” that popped up in our lives.

4.) The health insurance numbers are a close approximation for a family of 3 post affordable care act from healthcare.gov.

5.) This is assuming you were smart up to this point and were debt free. No credit cards, car payments, etc (this is a big leap, I know).

No wonder people are going broke. Considering that the average family income in Tampa is almost half of the example above at $67,108, you would think that using that number would be much more reasonable, right?

Let’s assume we saved up a $20,000 down payment for a home and take a look:

homeafford2

Let’s do the same numbers we did above, except let’s assume that after we pay our taxes (through paycheck withholding), we cut out all entertainment forever, never go on a vacation, get rid of cable, internet, Netflix, Hulu, and HBO, slash our food budget in half, cut down on our shopping expenses by 75% (who needs double ply toilet paper anyway), and never put a penny towards retirement or a rainy day fund.

Assuming things like PMI, HOA, CDD, and home insurance costs are already included in that house payment CNN gave us, and that we were debt free before we started, here’s what our “affordable” house looks like now:

balance sheet 2

Seriously CNN. What the hell?

This kind of stuff terrifies me, because I know I am one of the weird ones who does the math. CNN’s calculator for idiots wouldn’t exist if some people weren’t visiting it because they thought it was a useful tool. What it actually is is a quick trip to foreclosure and bankruptcy.

My philosophy on life is this: You keep the first things first. Huge houses are nice, but they are not more important that being able to sleep comfortably at night knowing you and your family aren’t going to be evicted onto the street. You should never have to worry about how you are going to feed your kids, or how stupid you would feel asking your family or in laws for money to make the bills, or the humiliation of going through a personal bankruptcy. You should never hit old age and have to rely on the charity of your kids and strangers and the government to get by. No house is worth that. Very few things in life are.

If there is any take away we can get from CNN’s “Home Affordability Calculator”, it’s that you are your own advocate. No one is going to look out for you but you. In fact, it’s very possible that someone out there has a vested interest in selling you as much house as they can get away with, regardless of what you can afford. Did you catch the line in the methodology CNN used above?

To arrive at an “affordable” home price, we followed the guidelines of most lenders.

Lender’s certainly have our best interests in mind, just like the home builders, right?

We need to wise up.

 

emusteveWhy “Home Affordability” Calculators Are An Absolute Joke