Is mortgage debt going to rule me? If I buy a house and the market tanks, will I be house poor? Is home ownership a poor way to build capital?

After the housing bubble of 2007, these have been consistent concerns of home buyers and sellers. Many are waiting for the bottom to fall out again. For those of us paying attention to the financial markets or who were home owners at the time, the events from that year were a major wake up call. One thing that is important to note is that one of the reasons the housing market experienced a downturn in 2007 was due to unscrupulous lending practices. As a result, there were numerous programs available at that time that have either been modified or are no longer in existence today.

Some homeowners have recently done a “cash out” refinance and have taken a portion of their increased equity from their house. Others have sold their homes and purchased more expensive homes with larger mortgages. At the same time, first-time buyers have become homeowners and now have mortgage payments for the first time.

These developments have caused renewed concern that families might be reaching unsustainable levels of mortgage debt. Some are worried that we may be repeating a behavior that helped precipitate the housing crash ten years ago.

Here is a graph created from data released by the Federal Reserve Boardwhich shows the Household Debt Service Ratio for mortgages as a percentage of disposable personal income. The ratio is the total quarterly required mortgage payments divided by total quarterly disposable personal income. In other words, the percentage of spendable income people are using to pay their mortgage.

Today’s ratio of 4.44% is nowhere near the ratio of 7.21% during the peak of the housing bubble and is instead at the lowest rate since 1980 (4.38%).

Bill McBride of Calculated Risk recently commented on the ratio:

“The Debt Service Ratio for mortgages is near the low for the last 38 years. This ratio increased rapidly during the housing bubble and continued to increase until 2007. With falling interest rates, and less mortgage debt, the mortgage ratio has declined significantly.”

Bottom Line

Many families paid a heavy price because of questionable practices that led to last decade’s housing crash. It seems the American people have learned a lesson and are not repeating that same behavior regarding their mortgage debt. Make sure you shop around, find a reputable lender, and understand your loan program. Remember:

• Expect unexpected expenses to arise
• Take closing costs into account (check with your lender to understand how that impacts home affordability)
• Your mortgage payment is not just principal and interest…it can also include:
  • Home Insurance
  • Property Taxes
  • Mortgage Insurance

Understand your finances, know what you can afford up front, and stick with that amount!