Real estate prices.
'09 | Income levels are considered
how much loan a family can handle
The two types of variables which affect residential real estate prices are macro forces and micro forces. Micro forces include state and municipal zoning, neighborhood features (like quality of schools, hospitals), local economic strength, and the condition of the property itself. Macro forces include economic strength (the business cycle), mortgage interest rates, federal taxes and demographics.Income levels are considered as the biggest factor which affects home pricese...
Dr. Tom Mayor
Income levels are considered as the biggest factor which affects home prices as the incomes of potential buyers limits the rise in home prices. More than 80 percent of the total number of homes sold are purchased with a loan so the ability to pay back the loan, borrow money and also the cost of getting a loan are the major factors which limit the rise in home prices. They start getting resistance when the prices reach the levels where potential buyers are not able to reach. On an average, in US the ratio is a home’s value is 2-4 times income levels.
A term known as ‘front-end’ ratio (income/mortgage payments) is used by responsible lenders to find out how much loan a family or an individual can safely handle and pay back. Generally, the front-end ratio is calculated as maximum of 28% of a borrower’s total monthly income which can be allocated to housing expenses including the payment of the mortgage or the loan, taxes like insurance and property etc. For example, if a borrower has a monthly income of $5000 then he can allocate 28% of $5000 that is, $1400 for housing expenses. After subtracting $200 for taxes, $1200 would be used for mortgage payments. According to lenders, $200,000 loan can be supported by $1200.