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TROUBLING STATISTIC FOR CHICAGO HOMEOWNERS - More Are Spending Too Much of Their Income on Housing Costs!


In October, 2005, we acquired some first-time condo buyers, in search of a mid-priced, updated condo in the Albany Park Neighborhood on the North Side of Chicago.  Our clients, Alan and Melanie (not their real names), purchased with "piggy-back financing" - involving closing on a first and second mortgage simultaneously, for 103% of the price of the condo.  This high-risk financing option is no longer available.

The loan had a one-year adjustable rate option, interest-only for the first three years, expiring this fall.

Based on their incomes at the time of their purchase, their house payments comprised just over 25% of their combined take-home income.

After the one-year adjustment, however, their monthly house payment, with taxes, insurance, and condo assessments, increased to nearly 33% of their combined pay.  When Melanie had her first child and took some time off work afterward, their cash flow problem became immediately tighter.

Now, with the upcoming rate reset on the interest-only loan, their payments will again rise, by an additional $287 monthly.  Melanie and Alan, who recently had their second child, now find the percentage of their income devoted to housing expenses increasing to nearly 53% of what they earn each month, combined.

Further, the recent decline in the Real Estate Market here in Chicago has reduced the value of their condo by nearly 11% versus the original purchase price, and they owe far more than the house is worth.  Re-financing is no longer a viable option for them.

For many years now, mortgage lenders and other financial professionals have set a threshold of 35% as the percentage of your take-home pay that should be set aside for housing-related expenses.  This rule-of-thumb guideline includes principal & interest payments, real estate taxes, insurance, homeowners' association monthly assessments, and utilities.

Recent statistics from the U.S. Census Bureau show that many homeowners are exceeding this target percentage, leaving them little margin for emergency expenses, and little prepared for the loss of a job.

Back in 1999, roughly 21% of homeowners in Chicago had more than 35% of their income go to housing costs.  Last year, the percentage increased to 35% - a nearly 67% increase in just eight years! 

Those living in Suburban Cook County - the county that includes the City of Chicago - indicates that 31% of these suburban homeowners are currently beyond the 35% housing cost target, versus 18% in 1999.  Similar gains were reported in other counties surrounding Chicago - Lake, DuPage, Will, Kane, McHenry, Grundy, and Kendall.

The Census Bureau's numbers were taken at the beginning of the housing crisis impacting Chicago and other areas of the country today.  They reflect the easy mortgage money available to many prospective homebuyers until mid-2007, and the collapse of the sub-prime mortgage market nationally. 

Since that time, housing payments have typically increased, as many homeowners found their adjustable-rate mortgages resetting at far higher rates of interest.  Skyrocketing costs for gasoline (currently over $4.30/gallon in many parts of the City of Chicago) and food, and stagnation in personal income as well as thousands of job losses, have exasperated the problem.

According to Amy Terpstra, of the Heartland Alliance Mid-America Institute on Poverty, once people start spending more than 30% on their housing expenses, they often find themselves falling short on money for life's other necessities. 

"They have less money left over to pay for the other things they need to get by," Terpstra said. "It's an indicator that extends beyond folks who are officially poor, and we see the belt squeezing around people who are middle income as well."

Erik Hurst, a Professor of Economics at the University of Chicago Graduate School of Business, feels many over-extended homeowners may end up losing their homes.  He further predicted that the census estimate for 2008 will actually show a decline in the number of Chicago homeowners spend at least 35 percent of their income on housing costs. 

Unfortunately, this will not be due to a true market turnaround - it will be due to the rising number of foreclosed properties.  "They're not going to be able to maintain that 35 percent [for] housing expenditures, and it's going to lead to things like we're seeing this year: foreclosures," Hurst said.

The problem of over-extended homeowners is a factor all across the Chicago Metro Area, according to census data.  In the middle-income Western Chicago Suburb of Cicero, 48% of homeowners were spending more than a third of their income on housing, up from 25% in 1999.    Upscale neighborhoods in the Chicago Suburbs of Evanston, Naperville and Palatine also saw similar increases.

Housing Counselor Gloria Murtaugh finds that more homeowners are seeking her help to manage their finances in the face of soaring housing costs.  "People want to own a home, so they just do what they can to get in," Murtaugh said. "But sometimes it just isn't real manageable as they're going along. Some people just shouldn't own a home, at least not with the incomes they have now."

This is becoming increasingly apparent for families like our clients Alan and Melanie, and for hundreds of others across Chicago, and elsewhere.  Indeed, the cost of owning real estate, as well as other necessities, is escalating, while their family incomes to pay the increases are not.

Many homeowners exuberant two or three years ago about the idea of owning their homes, for little more than monthly rent, are finding themselves in financially unmanageable circumstances.

See yesterday's Chicago Tribune, and an article by Darnell Little, Jo Napolitano, and Kristen Kridel, for more info, and the shared experiences of others as their homeownership costs have increased rapidly as compared to their household income.


Posted: Thursday, September 25, 2008 11:28 AM by Dean's Team


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