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Can't anyone afford my home?

Prices have dropped. A lot. But it's still surprisingly hard to find buyers.

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By Money Magazine's Stephen Gandel and Amanda Gengler

What it takes to buy: Then and now
Even though houses have dropped by about 7% since 2005, stricter lending standards have thinned the herd of prospects by requiring more money down and higher incomes.
2005 Now
Sales price $425,000 $395,250
Down payment $21,250 $79,050
Mortgage amount $403,750 $316,200
Interest rate 5.64% 6.88%
Monthly payment (principal and interest) $2,328 $2,078
Taxes, insurance per month (home and mortgage) $667 $382
Total monthly cost $2,995 $2,460
Ratio of housing cost to income 45% 32%
Required monthly pretax income $6,656 $7,688
Notes: Borrowers have a credit score of 680. 2005 mortgage is a 5/1 ARM; current mortgage is a 30-year fixed.
How affordable is your house?
Check the following Web addresses
NAHB.ORG/HOI
This ranking of U.S. cities by affordability will tell you where your area stands and how much prices went up during the boom (and have fallen since).
REALTYTRAC.COM
This web site records foreclosures in your area. If many are near you, you'll be competing with them for buyers.
CNNMONEY.COM/REALESTATE
You can check on interest rates and use the calculator to figure what a prospective buyer's mortgage payment would be.
RENTOMETER.COM
Plug in the mortgage payment one would need to buy your home. If it's higher than local rents, you may have difficulty selling.
ESRI.COM/DATA
Click on Community Data and enter your zip code for your neighborhood's median income and the median price of a home.
Mortgage Rates
30 yr fixed 3.83%
15 yr fixed 3.16%
5/1 ARM 3.57%
30 yr refi 3.79%
15 yr refi 3.14%

Find personalized rates:
 

Rates provided by Bankrate.com.

(Money Magazine) -- Maybe you've started thinking that now you can finally find a buyer for your house. After all, this summer the National Association of Homebuilders asserted that houses were more affordable than at any time during the previous four years. Prices have slid so far that many homes are now within the reach of people who couldn't buy during the bubble.

Other faintly cheery facts have emerged too. Sales of existing homes were 3% brisker in July than June, and in several metropolitan areas - among them Boston and Denver - the market seems to be turning around.

When examined closely, however, those glimmers of better times ahead seem to fade. Sure, lower prices can help you sell, but you also have to know whether there are enough people who can afford to pay the price you want.

That, in turn, depends on a mix of factors including the financing that buyers can get, whether there are enough of them who want to live where you do, their other housing options and how they feel about investing so much in an asset whose future appreciation is iffy.

"Price is just one of many variables that go into a decision to buy a house," says real estate analyst Michael Larson of Weiss Research, a Jupiter, Fla. investment newsletter publisher. "Many other factors are overriding price right now. That's why the market remains challenged."

The long fall

Price, though, is still the primary measure of affordability for any buyer. And while the median price for an existing house has tumbled 8% from $230,100 to $212,400 since its peak in 2006, according to the National Association of Realtors, many potential buyers still see asking prices as expensive.

And they're not wrong. That $212,400 house, after all, costs 39% more than it did back in pre-boom 2001 when it sold for about $153,100. Prices in red-hot markets such as Miami became even more inflated during the boom and are still up about twice as high as they were in 2001.

So while homes are selling at a discount, they're not on clearance - not yet anyway. Peak to trough, the median-priced home nationwide is projected to fall as much as 20%, bottoming out around $185,000 by late 2009, according to a July report from Wachovia.

"Houses may be more affordable, but they will probably be even more affordable next year," says Nigel Gault, chief U.S. economist at Global Insight, an economic forecasting firm. "So why buy now?"

Crunched credit

The price may be right, but if buyers can't borrow enough, the house isn't affordable. Difficulty borrowing is keeping many Americans from buying. "The industry went from little or no credit standards to credit standards on steroids," says Marc Savitt, president of the National Association of Mortgage Brokers.

According to the Federal Reserve Board, about 85% of lenders, worried about falling prices and rising foreclosures, have stiffened requirements for borrowers in the past three months. Those with a credit score of 600 or lower cannot get loans at all, says Keith Gumbinger of HSH Associates, a mortgage information publisher.

The upshot: 21 million, or 13% of those who have credit records, many of whom would have qualified for mortgages during the bubble, can no longer do so.

Those whose credit scores are high enough to qualify for a mortgage will likely pay more. Fannie Mae and Freddie Mac, which set the lending criteria for most loans, in November will require a 740 score, up from 680 for buyers to escape a surcharge that ultimately increases their interest rate.

As a result, the 33 million Americans whose scores fall between 680 and 740 (roughly 20% of adults with credit histories) may have to pay half a percentage point more to borrow. On a $300,000, 30-year loan, that would add about $100 to a buyer's monthly payment.

Adios, easy money

Back in the go-go years, lenders fell all over themselves to make no-down-payment loans. Those are gone, and lenders want some skin in the game, at least 5%. But to avoid paying extra, most buyers need the full 20% demanded in days of yore. To buy a $400,000 house, a family would now have to amass $80,000 in cash, up from $20,000 or less a few years ago.

Buyers also face higher interest rates, which allow them to borrow less. In mid-2004 a borrower with good credit could have qualified for a rate of 5.87% on a 30-year fixed $300,000 loan. That translates to a monthly payment of $1,774. Now, with the rate for the same loan at 6.57%, the same monthly payment could support a loan of just $278,500.

Back in the day, option ARMs and other exotic mortgages with low teaser rates helped struggling purchasers stretch to buy houses that they could not otherwise afford. Those deals have largely disappeared.

And while banks once allowed a homeowner's monthly principal, interest, taxes and insurance (PITI) to make up as much as 45% of a family's before-tax income, now buyers are restricted to using only 32% for a house payment. If PITI rises beyond that limit, banks consider the loan unaffordable and the family cannot receive a mortgage.

That limit boosts the amount of income a homeowner needs to purchase. Say your house has dropped from $425,000 to about $395,000. A couple of years ago a family needed an income of only $80,000 to buy. Now, even though the house costs less, a prospective buyer must have an income of $92,000.

Less expensive options

Rental prices are looking good in many areas. Christopher Mayer, a Columbia University real estate professor, recently found that in 11 of 16 top cities, renting is a better deal compared to buying than it has been historically.

The extra expense of owning was offset by rising house values - at least a few years ago. Now that new buyers can no longer count on steep appreciation, they have less incentive to buy.

And it's not as if rents are standing still while your house's price falls. "Competition from vacant houses or condos that people can't sell is driving down rental rates," says Hessam Nadji, managing director of research at Marcus & Millichap Real Estate Investment Services in Encino, Calif.

The big pinch

A house is only affordable if a homeowner can meet its monthly payment and have enough left over to live on. Incomes rose by about 5% in the first half of the year, but few people feel as though they're better off.

Americans spent an extra $165 billion, or 26% more, on gasoline and oil in the first six months than over the same period last year, and food bills rose by 7%. Without a doubt, most Americans feel pinched.

If you live in an area dominated by financial companies or car makers, two sectors shedding jobs in the current downturn, you may encounter even less appetite to buy.

If the economic turmoil continues, vacation destinations like Las Vegas or Orlando could suffer a drop-off in business that would leave prospective buyers with less in their pockets.

"Not only is the amount of money people have to spend on housing in decline but because a house is a risky asset, the amount they want to spend on it is falling too," says Michael Englund, chief economist at Action Economics, a forecasting firm.

Buyers being wary

That fear may be the biggest obstacle keeping buyers from knocking on your door. During the boom, people were willing to spend as much as they did on housing because they thought that they were putting away money for retirement or college. And they could draw on their equity for renovations or other goodies.

If homes rose in value faster than stocks, as they did for a few years, homeowners could console themselves that forgoing 401(k) contributions for high mortgage payments was a sensible strategy.

Few these days think of real estate as a safe place to invest, however. According to Gallup, only 27% of the population believe a home is their best long-term investment, down from 50% in 2002.

"Nearly a quarter of potential buyers are on the sidelines waiting for some form of encouragement," says Walter Molony, spokesman for the National Association of Realtors. Maybe they're looking for some sign that houses have truly become more affordable. The price declines haven't done that yet.

How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith - the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family photo, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com. To top of page

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