How to Create Affordable Housing

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This may take a while.

Before I start, we must define affordable. All housing, regardless of cost, is affordable to someone. The CEO making $1.5 million a year has many choices. We’ll not worry about the CEO.

Likewise, the two-income, families with a combined $100,000 to $150,000 income per year will find something they can afford.

But let’s focus on those families earning the median household income in Indiana. Most recent data says that figure is about $56,500. And that means half the families in Indiana earned that amount or less.

HUD says to be affordable; a family should not spend more that 30% of their income on housing. (Frankly, this percentage is too high. In the past, HUD put the figure at 20%. And with low to moderate incomes, spending the full 30% on housing costs leaves little for food, clothing, healthcare, etc. But for now, we will stick with 30%.) To use this formula, several costs must be included. Those costs are mortgage or rent, insurance, utilities, and property tax. Of course, if one is renting, insurance and taxes are included in the rent.

But for the moment, I will focus on the ability of folks in this this income level to afford to purchase a house. 

Here’s he math:

30% of $56,500 is $16,950 per year…total housing allowance to be affordable.

$16,950 divided by 12 months is $1412.50…total monthly allowance.

Assume $100 per month for insurance.

Assume $150 per month for property tax.

Assume $250 per month for water, gas, and electricity.

$1,412.50 minus ($100 +$150+$250) = $912.50 …total available for mortgage payment.

At 5% interest, for 30 years, that payment will allow the borrower to borrow $170,000.

There are problems with this. First, you might say “Hey Paul, interest rates are lower than that!” My response is, they are going up.

Next, there is the problem of a down payment. Unless you are a veteran or qualify for some other special deal, most folks must put down 20% of the purchase price. Putting all this in my head and working the calculator, our hypothetical buyer COULD purchase a house costing $213,000, put down $42,600 (20% of $213,000) and then borrow $170,400 and move in.

So now we have determined what is affordable ($213,000) for a family earning $56,500 per year, IF they have $42,600 for the down payment and IF interest rates don’t go higher than 5%.

But remember, half of the population earn LESS than that median income, some much less. 

I am going to be arbitrary here and declare – for purposes of continuing this theoretical discussion – that we need housing costing $150,000 to $175,000 to begin to fill the needs of the currently unserved market. 

I will stop here. Next, we will examine the components of housing costs: land, materials, labor, and regulatory fees.

Stay tuned.

Paul Schreiner

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