Is Buying an Unaffordable Home A Bad Idea? See What Trulia Has to Say

In metros with high-income growth, unaffordable mortgage payments can become affordable within a few years.

Financial experts say buying an unaffordable home, where monthly mortgage payments exceed 31% of a household’s income, is usually a bad idea. And for the most part, we agree. Homes are expensive to acquire and maintain, and mortgage payments are almost always a household’s biggest single expense. Outsized mortgage payments can lead to household financial stress down the road.

But in many housing markets where most workers see strong wage and income growth – New Haven, Conn., Providence, R.I., and Newark, N.J., among them – mortgage payments actually shrink as part of the monthly budget and can become affordable within just a few years and, in some places, in just a few months.

On the flipside, we found that in some metros – San Francisco, Los Angeles and New York to name a few – home prices are so high and wage growth so sluggish that for the life of loan, chances are buyers will always be shelling out 31% or more of their income for mortgage costs.

We’ve crunched the numbers to identify where, and when, buying an unaffordable home might not be such a terrible idea. To do this, we’ve identified metros:

• Where the median home is feasibly unaffordable to millennial households (25-34 year olds), that is, where initial mortgage payments exceed 31% the federal government’s definition of unaffordable –
• And those payments don’t exceed 43% of income, the limit a vast majority of lenders place on new mortgages
• And finally, we projected lifecycle income growth of millennial households to calculate the number of years it would take for mortgage payments to drop below 31% of a household’s income.

Where Buying an Unaffordable Home Isn’t a Terrible Idea
First, the good news. Of the 100 largest housing markets in the U.S., initial mortgage payments are affordable in 73. In the most affordable of these 73 markets, initial payments constitute 20% or less of median household income. What’s more, households in the top 10 most affordable markets end up paying 7% or less of their income towards their mortgage payments by the end of the loan. For example, in Columbia, S. C., where home prices are low but income growth is strong, mortgage payments drop from 17.0% of monthly income at the beginning of the loan to 6.6% at the end.

– See the full article at: http://www.trulia.com/blog/trends/buy-unaffordable-home/#sthash.ea3crBRk.dpuf