Build Affordability in Your Spending Decision Process: Part 2 of 2
Part one looked at affordability to buy items other than a home. Part two will examine affordability to buy a private house. As well, we will discuss these two matters:
- Who decides affordability?
- What should happen to people living in homes they can’t afford?
Affordability [to buy a home] means…
The ability to buy your home, with or without a mortgage, so that the total estimated costs do not compromise current and projected household budgets, plans and commitments.
A Home is a Hefty Commitment
In Canada, in the 1960s through the early 1980s, except for a few brief periods, when you bought your home, you set the base for a major, predictable, tax-free capital gain. Normally, when you sold that home, the tax-free gain would be substantially larger than inflation. These days, depending on the timing and location, selling your home bought after mid 1980s might yield either a gain or loss. Still, if you didn’t buy to resell, this shouldn’t be an issue.
In the early 1980s, using credit, North Americans went on a spending spree. Greed was rampant, and like many areas in the economy, housing prices soured. For example, Canadian real estate markets in Vancouver and Toronto sizzled until the mid 1980s when prices fell. The slump lasted almost 10 years. So, in 2008, it should not have surprised us when following a similar path, housing prices in the US plummeted. Besides, we should expect housing prices there to remain low for a long time.
Though they would not admit it, governments encourage irresponsible spending. Just look at how the economy works! Consumers must spend to keep it growing, even if it means using high-cost debt financing. Still, governments seek continually to get us to spend.
In the 1970s, the US Congress passed the Community Reinvestment Act…
“…to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low-and-moderate-income neighborhoods, consistent with safe and sound banking operations.”
In hindsight, safe and sound banking operations, was meant to be read with a “wink, wink,” facial expression. Not to be outdone, the Canadian government’s Canada Mortgage and Housing Corporation say they “…work to enhance Canada’s housing finance options, to assist Canadians who cannot afford housing in the private market.”
They have this crazy, irresponsible, absurd statement on their website:
“One way to assist [low-to-moderate income] households is to provide them with an equity loan so they can qualify for a conventional mortgage. The loan…in effect lowers the qualifying income needed to obtain a mortgage.”
Before you buy a home, understand home ownership’s full effects. Beware of the lie that if you do not have enough funds today, property-value increases will help owning a home today. At best it is a potential trap to keep you in a refinancing cycle. That’s the government’s financing method that led to the sub-prime debacle in the USA.
Owning a home might involve most or all these yearly expenses (except noted to the contrary):
- Mortgage payment that can rise or fall
- Transfer taxes (one-off)
- Property insurance and taxes
- Repairs, upkeep, heating, lighting costs
- One-off legal fees, and several small items.
Renting a home, however, includes a monthly payment with responsibility to upkeep the grounds, and often, responsibility for heating and lighting. You have no other expenses.
Who Decides Affordability
Governments try to define affordability for us. They want households to use the same reckless Ponzi-style funding they use to waste taxpayers’ monies. Reject their approach. Each household should decide if he or she can afford to buy a home.
Each of these criteria should apply before you conclude you can afford to buy a home:
- You are debt free.
- Working with a monthly budget.
- Know your housing needs. For example, will the family size increase shortly?
- Have at least 20% down payment for a conventional mortgage.
- Understand and accept sacrifices needed to pay the full yearly housing costs. What might you have to give up to pay these costs regularly?
- Understand current and projected state of the economy and housing market, and feel reasonably comfortable you will be able to fund your total housing expenses for six months, even if you were laid off.
What Happens If You Must Give Up Your Unaffordable Home
To get a grip of this challenge, separate two decisions. First, can the home owner afford her present home? Second, if no, how can we work with her to provide affordable housing?
If the person or family can’t afford the home using my definition, move directly to question two. Don’t try to give so-called help by lowering or deferring a few months’ mortgage; that’s dishonoring and wasteful. Dishonoring because it gives the impression the family will be able to keep its home. Then, in a few months the family must give up the home. Next, the approach is wasteful, because time and money is spent knowing the family must leave the house.
In these situations, focus on lifestyle counseling and financial planning. Stress lifestyle issues such as affordability, budgeting, anatomy of a mortgage, and stewardship. Teach the virtues of renting when folks can’t afford to buy homes. Yes, it is a virtue. Some ownership arrangements give home owners significant risks with no equity. That’s why so many mortgages in the USA are higher than home values.
While they get counseling in temporary housing, folks should work with churches and charities to prepare them to live in rented homes. This could be a long journey; but if folks reject the victim path and learned from their errors, it could be rewarding.
Today, folks rush to own their homes and plunge deep in debt as their housing costs take up a large part of their monthly budgets. Be patient, rent until you can afford to buy. Then you will build a solid financial base and lower financial stress.
Copyright (c) 2011, Michel A. Bell