Today, in the City of Chicago, nearly 35% of all homeowners find their housing expenses too high versus their take-home income, according to 2007 U.S. Census Bureau Data.
For many years, 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.
The recent statistics from the Census Bureau Statistics, however, show that many homeowners here are exceeding this target percentage, leaving them little margin for emergency expenses, and little prepared for the loss of a job.
In 1999, an estimated 21% of homeowners in Chicago earmarked more than 35% of their income for housing expenses. Last year, the percentage increased to 35% - a nearly 67% increase in just eight years!
Across Suburban Cook County, the county in which the City of Chicago is located, homeowners spend 31% of their income on monthly house payments and directly-related expenses, versus 18% in 1999. Similar gains were reported in other counties surrounding Chicago.
Census data was compiled just as the housing crisis began to impact Chicago and other areas of the country. The alarming numbers reflect the the fact that easy mortgage money available to many prospective homebuyers until about this time last year, when the sub-prime mortgage market collapsed across the U.S., and lenders began drastically tightening their lending standards.
In 2008, many monthly housing payments have increased, as homeowners found their adjustable-rate mortgages reset to higher rates of interest. Escalating costs for gasoline (currently over $4.30/gallon in parts of the City of Chicago) and food, and stagnant personal income combined with thousands of job losses, have added fuel to the fire.
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, feels Hurst, this will not be due to a turnaround in the housing market. It will be due to the rising number of properties headed to foreclosure. "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," he said.
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."
We would imagine each and every one of us can cite examples of homeowners excited about their home purchase just a couple of years ago, and now finding themselves way over their heads financially. Their housing expenses now chew up a far larger share of what they earn than they initially expected.
Please - share your experiences!
Read our blog post via BlogChicagoHomes.com for more insight on this. We link to a story from yesterday's Chicago Tribune by Darnell Little, Jo Napolitano, and Kristen Kridel, who provide further detail and share the experience of several strapped Chicago area homeowners.
DEAN & DEAN'S TEAM CHICAGO
It is American to live beyond your means. Now, we are going to pay that ever lurking PRICE.