The level of debt you feel comfortable with.

In Brent Hunsberger’s financial column on February 15 in the Oregonian, he discusses why we need to all step up and help people facing the foreclosure of their homes. He gives as an example, the Gott family who three years ago “bought a new, four-bedroom house in Albany for themselves and their two girls.” At the time, their annual income was $64,000/year; both parents worked, the father in building supply and the mother as a special ed. assistant. They had no car payment and no credit card debt and felt their $1,900 payment on their $260,000 home was reasonable.

Hunsberger describes what happened when they lost 23% of their income. He then goes on to explain how concerned he is by comments left on his blog when he posted their plea for help. “Several readers skewered them for getting into a house above their means and not shutting of cable or a cell phone.” The Gott husband argues that cutting those things off wouldn’t make a difference and Hunsberger goes on:

“Sure, it’s unfair when those who made a mistake get bailed out while the rest of us foot the future tax bill. But the carnage could affect everyone if we don’t step up and deal. As employers shed jobs and cut pay, millions of other US homeowners will find themselves in a similar fix.

“A foreclosure doesn’t just hurt them. The lender loses money. Surrounding property values drop. That makes selling homes more difficult, puts more homeowners underwater and leads to more foreclosures. The cycle feeds itself.”

I agree with Hunsberger’s closing argument, but let us return to the Gotts for a second. Was their home purchase reasonable. I’ve just Googled “How much home can I afford?” and found the following paragraph on the first hit.

Here’s the super-quick rule of thumb: Most people can afford a home that costs up to three times their annual household income, if they can make a 20% down payment and have only a moderate amount of other debt. If you have little to no debt and can put 20% down you can probably buy a house worth up to four times your annual income. (http://michaelbluejay.com/house/howmuchhome.html)

The article doesn’t mention how much down payment the couple was able to make, but let us run the numbers as if they did. $63,000 X 4 is $252,000.

So according to this quick look the Gotts, with no debt, have overbought a bit.

Then I plugged the numbers into the financial calculator at the bottom of the page. I entered their monthly income ($5333) and their debt payments ($0) and I gave them a down payment of $10,000, though it has been my experience that a lot of people in the last five years bought their first homes with little to no money down. According to the calculator, with a 6% interest rate, a 2% property tax/insurance rate (those were defaults I used) if the couple takes out a 30 year mortgage, the most house the couple could afford is one for $201,853 with a monthly payment of $1546. So according to this rough calculation, the Gotts have overbought a lot.

But here is my real point, (I’m quite good a burying the lead). When times were good, the Gott’s house payment was 35% of their expenses. When their income decreased, the payment suddenly took up 48.5% of their income. The smart spending money blog states that you shouldn’t spend more than a quarter to a third of your before-tax income on housing. In good times, the Gott’s only exceeded that by a bit. But currently they are in completely over their heads. Should they have committed so much to housing their first time around? I think this is where their initial mistake was. If they had limited themselves to a house payment of 25% of their current income ($1333 per month) when that income dropped to its current level, their house payment would only take up 34% of their budget, less than their original percentage.

Though I think the Gotts made an unfortunate choice, I can understand why they did so. I started looking at houses in 2004. I was hoping to get my first teaching job and become a home owner shortly afterward. At the time in Portland, there were still houses available for $130,000. They were old and some of them needed a lot of work and all of them were tiny, but they were available and I was looking forward to the challenge. I didn’t get my first teaching job and my financial situation was not good for a few years. When I began looking again in late 2006, it was difficult to find any home in Portland proper for less than $200,000. Home ownership seemed very, very far away. It was frustrating and depressing.

I, unlike a lot of people in the country in the early 2000s, did not believe that the good times would always roll. I’ve never felt that the income I earn from work will continue to be there, either at it’s current level or in an ever increasing amount. It probably has to do with messages I got growing up, (though my family’s income did grow in slow but steady amounts) and the many bad employment choices I made throughout my 20s.

I’m also very uncomfortable with debt. I currently have no credit card debt and I hate that I took out $30,000 in student loans for graduate school. When I was planning to buy my first home, there was no way I was going to commit 35% of my monthly income to mortgage, etc. It seemed too risky.

In 2007, with my income, a partner in graduate school and home prices at record highs in Portland, I faced the facts that there was no way I was going to be able to afford a home in the next 5-10 years. The story of how I bought my first home ends happily: I found the Portland Community Land Trust, we happened to income qualify, a house came available we could afford, family generously gave us money for more of a down payment and we bought it. We were incredibly lucky. My partner has subsequently graduated and now has a job. I just did a rough calculation and our house payment is 13% of our combined income.

Here’s where I have a problem with the Gotts. In “stretching” to buy their first home, they bought more home than they could afford. They are no different than many, many people across the country. I can’t tell you how many times I read the dubious advice to “stretch a little” to get into your first home. Who was giving that advice? People who gave loans. People who sold houses. People who stood to make money off of the “stretching“. All that stretching drove up home prices and left people who weren’t willing to stretch with the following options: keep saving and renting and hope for a downturn; give up and “stretch”; or find an alternative way to home ownership.

When I worked for Census 2000, one of the things we said a lot when kidding around and giving each other a hard time was “you are part of the problem.” As in, “Why aren’t the reports done? Because you didn’t finish proofing them. You are part of the problem.” I think of that phrase now and then, and lately a lot in context of the housing problem. Who is part of the problem? The lenders and real estate agents. The crappy oversight, sure. But people like the Gotts? They are part of the problem too.