I edited this entry to correct for new information I just read about in the other blog.
I just read a posting by someone here in Boston lamenting the high cost of housing. I found some problems with his argument.
First, he states that, "I can’t even come close to affording anything short of a ripped tent in Dorchester for $350k". I disagree. You can get a really nice, totally renovated 1,000 square foot, two-bedroom, two-bathroom condo in Dorchester, for $350,000 (there are 105 two-bedroom condos for sale in Dorchester for under $350,000).
He then states that his monthly housing cost, currently, is $1,400.00, yet buying a condo will set him back $2,447.00 per month. That much is true, I can’t argue with those numbers. (I originally said $900 rent because I misread the part about the condo fee of $500 tacked on to his monthly expense.)
(Actually, his real monthly housing cost, by renting, is even less, due to the deduction you get on your state tax return for rental payments. But, the cost of owning will be less, as well, as shown below, – approximately $1,961. I could also throw in the fact that the amount you pay in principal, $2,400 over the first year, should be included as a benefit to owning, as it’s a way of forced savings, and therefore lowering the cost to $1,761, but I won’t.)
Homeownership in our country is at an all-time high, over 70%. Of the remaining 30%, the majority are probably those under the age of 30 (just starting their first or second job), those in nursing homes, and those people who prefer, for one reason or another, to rent instead of own.
However, I agree, it’s a simple fact of life is that there will always be those who simply can’t afford to buy. Those people are called "renters".
A single person is going to have trouble buying a decent home, in Massachusetts, but that’s probably been true, forever. The majority of people buying homes are a part of a couple. That means they have more income to put towards a home. Unfortunately, single people don’t have it so easy.
A couple will have a much-easier time of it, buying a home.
Hypothetically, let’s say we have a couple looking to buy their first home, a condo, in Boston. Let’s say the first person makes the average income of $48,000 (in Massachusetts), and the second person works part-time, or in a lower-paying job, and makes half of that, or $24,000 (how lucky for them). Or, say each person makes $36,000. Therefore, their combined income is $72,000.
Based on my calculations & data, they may have to pay as much as 40% of their income on their housing costs, or $28,800, per year, or around $2,400. Which seems a tough situation (they’ll end up paying less, after taxes, as you’ll see, below). Still, that still leaves them with $3,600 per month leftover (taxes will take a big chunk of this, however).
And, in fact, that’s how much a two-bedroom condo will cost them, in the city of Boston.
Here is a breakdown of the costs associated with owning a condo in Boston. These are estimates.
Purchase price: $350,000
Down payment: $17,500 (5%)
First mortgage loan: $280,000
Second (soft) mortgage loan: $52,500
Currently, a 30-year fixed rate mortgage loan will run you about 5.21%, according to Bankrate.com. Let’s assume, however, that you get a higher rate, of 6%. Therefore, your first mortgage loan will be about $1,680.00 per month.
Most people, these days, get a adjustable rate mortgage for their second mortgage loan, since they can’t come up with the 20% necessary for a down payment, and don’t want to have to pay PMI. The second mortgage loan will be interest-only. In our example, let’s assume you get a $52,500 home equity line of credit. This loan will vary, monthly, based on interest rates. You can assume this amount will go up, over the coming months. Right now, you can get a loan for 5.00%, but figure it will go up at most 1% over the coming year. At 6%, this comes out to $263 per month.
Therefore, your monthly payment would be $1,943.00 per month. Your condo fees would add perhaps $200 per month. Your taxes, based on the city’s rate of $10.73 per $1,000 of assessed value, would be approximately $284 per month (using 90% of purchase price as assessed value). Therefore, your monthly cost would be $2,427.00.
Now, your first year, you will be paying approximately (gulp) $16,700 in interest on your first mortgage loan, and $3,156 in interest on your second mortgage loan. This is all deductible on your federal income taxes (although that won’t help you when you need to make your mortgage payment…). This means you will might get a refund of about $5,600 (28% tax bracket). That comes out to about $466 per month.
Therfore, your monthly cost is actually $1,961.00 ($2,427.00 – $466.00). This is equal to 32% of your gross monthly income of $72,000.
There aren’t any holes in my argument, much as people wish there were.
In fact, I can’t see how housing will ever be any cheaper than it is, today.
Revision: The numbers as I reported them as to what it costs to buy a condo are accurate. However, if the other writer is happy with his 1,000 square foot apartment in Brookline, for which he pays only $1,400, then, I agree, there would be no reason to buy. I didn’t mean to suggest otherwise. My point is that I don’t see the high cost of real estate being a barrier to buying a home. I mean, everyone is doing it! Condo sales have gone up every year, for each of the past five years, as have the sales of single family homes. You can’t argue with that fact, either.