On May 13, 2020 the Texarkana Gazette published an article entitled “Housing division going up on Arkansas side”. The article is about a new Arkansas housing subdivision at 2201 Arkansas Blvd that will contain about 20 homes whose price range is expected to be 160K-200K. The contractor is TDC General Contractors. An official with TDG General Contractors said his firm is constructing them and will also be selling them. The project started in February 2020 and is estimated to be completed around August 2020 even after being delayed by weather according to the official. I am familiar with this property as it use to be owned by Mount Grove Baptist church who used it as a youth/community center to include renting it out for community banquets.
The price range for the above housing raises a question as to affordability. Of course, housing at different levels are appropriate in a capitalistic society provided sufficient quality affordable housing are available for all to own not just rent especially starting at or about age 25-30. So this article is not meant to be critical of TDC General Contractors for building such housing; perhaps they do also build lower cost housing.
Housing at varies degrees of luxury according to the population capability is reasonable. Government financing of construction through grants for salaries and similar costs supporting reasonable cost home ownership is worthy of consideration while at the same time requiring home owners to pay a reasonable amount for the entire home ownership industry/process.
The standard formula for estimating how the cost of a house one can afford is 2.5 times one’s annual salary. For a 160K house that would be a household income of about $65000/per year. That means a household would need to make $5500/month to afford the home.
According to the 28%/36% standard rule one should spend no more than 28% of one’s monthly income on housing cost and 38% on total debt where total debt includes mortgage, car expenses, credit cards, and student loans.
Things like credit score and debt-to-income ratio (DTI) are important factors considered by potential lenders to include interest rate offered. One can get one’s credit score free of charge annually at annualcreditreport.com.
To compute DTI add up ones’ expenses listed above then divide by gross monthly income. The higher the DTI the harder it is to get a lender. A DTI above 43% normally disqualifies.
According to the below city data link no more than 26.5% of the households made at least 60K as of 2017. That means no more than Texarkana, AR households could afford a 160K house. But 26.5% is probably high since that includes those making 60-64K.
Let’s take a couple with a household income of $3360/month or $40, 320 annually. What home would be affordable? At 2.5 times 40,320 that would give an affordable home of $100,800. But let’ say the couple has a new car payment and a used car payment for a total of $800/month and a monthly credit card debt of $100 for a total debt of $900. Then the affordable home price is 32K.
According to the Zillow mortgage calculator (see reference section) one would have to pay 1109/per month for a 160K house. That is 3950/month x .28 to get about 1109/month or 47400/year.
It is also worth noting that it is the banks and similar financial institutions that make out. For one usually ends up paying about 2 to 2.5 times the current cost of the home over a 30 year period. A home certainly does not appreciate that much. The average appreciation rate is between 3% to 5% annually. Moreover, the lending institution makes money from construction company loans in addition to the home buyer loan.
Not only that but lending institutions make money off the lumber company and other businesses in the home building/buying industry as many do not have cash on hand to cover salaries/benefits and their office building(s) and other business expenses.
Our economy sure does need a reset because it is out of whack for the common people.