Down here in the real estate trenches, I think a home becomes affordable when a family can buy it for the same amount of money they are currently spending to rent a comparable house.

Let’s take an average house for sale in Nevada County, California, and see if it is “affordable: for an average Nevada County family.

The average Nevada County family, according to the last census (2000), makes $52,697 a year.  The average rent for a 3br/2bath house is $1300 a month.  The family is spending $15,600 a year in rent, or about 30% of their gross income. Yes, salaries have increased a bit over the decade, but so has unemployment.  On balance, the  income estimate is probably about the same as it was 10 years ago.

Here is a house I just listed in southern Nevada County in the community of Lake of the Pines. 

This house is about as “average” as you could find for the area.  It is 1600 square feet, 3br/2bath on .46 of an acre.  It’s well-maintained, but dated.  

It presents pretty well from the street with nice trees and has a back yard into which Mom and Pop have put a lot of work.

I listed it for $255,000 which translates into $159 per square foot.  The average price per square foot among comparable homes in the area is $152.  We are a bit high, but $255,000 is the asking price.  We know that homes in this community have been selling for about 95% of asking price, so we can anticipate a most likely sales price of $242,250, which translates into $151 per square foot, right on the mark.

Are you convinced that the home is reasonably priced for the area? 

How much will it cost for that average family to buy this average home?  Let’s assume that they have the “holy trinity” of home finance:

1.  steady job(s) 

2.  respectable credit

3. down payment of at least 10%

They will ante up closing costs of about $6,000 (most of which goes to the lender for various fees and loan costs) and 10% down payment of (let’s round it off) $24,000.  Total cash needed, $30,000.

They will borrow a 30 year amortized loan of $218,025 at 4.5%.  They will pay about $3630 per year in property taxes and about $1000 per year in insurance.  Because this home is located in a Planned Unit Development, they will also pay Homeowners Association dues of $1900 per year.

Put it all together.  Their monthly “nut” is about $1650, taxes, insurance, and HOA dues included.  They are about $350 above their current rent of $1300 per month. 

But we’ve forgotten something important, haven’t we?  The tax deduction for mortgage interest.  During the first full year of owning the home, they will have paid almost $10,000 in interest, fully deductible as an adjustment to gross income.  They will have reduced their taxable income from about $53,000 a year to about $43,000 a year.  All things being equal, they will save $3600 to $4600 in real tax dollars owed, or about $350 a month.

They pay $350 a month more to live in their own home, but they make $350 a month more in tax savings.  It’s a wash.

The bottom line is this:  An average home at Lake of the Pines, in southern Nevada County, California, purchased for $242,250 is exactly affordable for an average family paying the average rent for the area.

If that is good news, here’s the great news: when average homes become affordable for average families, the real estate market has returned to its senses.  True stability with reasonable appreciation is here at last.