You’re Gonna Need a Calculator for This One

November 27, 2010

Chicago real estate owners trying to sell in this market have it rough, but if you are a home buyer, you could have it made.

Home affordability is soaring across the Chicago region.

Father and Son in Front of Their New HomeAccording to a recent review, the affordability of a classic single-family home has improved by 66 percent over the last five years in the seven-county metro Chicago real estate market.

The review was put together by RE/MAX using the traditional measure of home affordability developed by the National Association of REALTORS (NAR).

Here’s how the NAR formula is calculated. Start with three numbers:

*Median family income

*Median home price

*Average mortgage interest rate on a 30-year fixed-rate loan

*Then you calculate the ability of a family earning the current median income to afford the current median-priced home after a 20 percent down payment.

*Principal and interest payments can be no more than 25 percent of the family’s annual income.

That’s a lot of numbers. Well, here’s what the answers mean:

*If 25 percent of the family income equals the required annual principal and interest payment, the affordability ratio is 100.

*A score of less than 100 means a family earning the current median income can’t afford the monthly payment on the median-priced home. The greater the deficit, the lower the number.

*A score of 100 or more means the family could afford the monthly payment. The higher the number the more affordable the home.

Got it? So, according to the recent review, the affordability ratio in the Chicago metro area for a median-priced four-bedroom, two-and-a-half bath home:

In the third quarter of 2005:

*Median price: $360,000

*Median family income for the Chicago metro area: $66,007

*Interest rate on a 30-year mortgage: 5.83 percent

*Monthly payment required after 20 percent down: $1,695.35

*Home affordability ratio in 2005: 81

In this year’s third quarter:

*Median price: $288,250

*Median family income: $75,100

*Interest rate on a 30-year mortgage: 4.46 percent

*Monthly payment after 20 percent down: $1,162.94

*Home affordability ratio for 2010: 134.5, which is a 66 percent increase in affordability and a savings of $533 a month.

“The difference between the monthly payment required in 2005 and that needed today to buy a similar home is absolutely striking and makes it clear why the current market is a remarkable buying opportunity,” said Jim Merrion, regional director of the RE/MAX Northern Illinois real estate network.

And now you know how they figured that out.

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