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Can't Afford To Buy A House? Buy It Anyway Housing "Experts" Advise

“In metros with high-income growth, unaffordable mortgage payments can become affordable within a few years,” writes Trulia Housing Economist Ralph McLaughlin in a blog post titled “For Millennials, Buying an Unaffordable Home Isn’t Always a Bad Idea”. 

Now first, buying an unaffordable home is always a bad idea, just like buying an unaffordable anything. 

Sure, it might one day become affordable, but saying it’s a good idea to buy something that you can’t afford because circumstances could eventually conspire to make you richer is like saying it’s a good idea to quit your day job and become a traveling magician because there’s a chance people will love your act. After all, on this logic, one could buy a Ferrari because there's a chance you could win the lottery next week (well, unless you're playing in Illinois where they'll pay you in IOUs).

In other words, you can justify anything you want by saying it might turn out ok, but the flaw in that logic seems to have escaped McLaughlin (who has a Ph.D. in Planning, Policy, and Design from the University of California at Irvine) because as you’ll read below, he thinks millennials should consider buying houses where mortgage costs are too high as a percentage of their income on the assumption that based on local trends, their incomes will eventually rise. Here’s more:

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. 

 

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. 

It gets still better. Here's a look an infographic which shows you how many it would take in select areas of the country for your mortgage payment to become "affordable":

And here's a chart from Bloomberg which shows New Haven and Providence (mentioned above by McLaughlin as places millennials may want to consider if they want to buy above their means):

So just to be clear, Trulia is saying that it would be a good idea for millennials to buy a house they can't afford in New Haven and Providence because in 3 years it will be "affordable." Here's how Trulia came up with these figures:

Second, we’ve estimated projected 30-year income growth of millennial households. To do so, we looked at the percentage difference in median household income between households aged 25-34 and households aged 55-64 in each metro using 2014 American Community Survey Data. We annualized this percentage over 30 years to get an idea of how much income growth a 25-34 year old can expect over their career, and then, assuming an inflation rate of 2%, use it project future monthly income for the median 25-34 year old household. 

That's it? You just took a look at what older people make versus younger people and annualized it? What happens if that changes? What happens if there's another deep recession? You're looking at a 30-year time frame here. Anything could happen to income trends in these areas over three decades. Not to mention the fact that while losing one's job is always a bad thing when it comes to making mortgage payments, it's made that much worse if you've bought a house you can't afford.

Trulia does go on to show that there are plently of places where buying a home is easily affordable now - like pristine Detroit - and based on the same income analysis, you'd have plenty of cushion the event circumstances change. We recommend millennials choose wisely when it comes to overreaching based on simplistic analysis lest you should end up not being able to make the payments, because then you might find yourself in the market for a rental and with current asking prices in that market going parabolic, you might soon find yourself back in your parents' basement.