What’s your take on the current troubles in the housing market?

Housing has been in the news a lot lately. We’ve seen an unusual run-up in prices over the last several years that has been widely attributed to a flood of “easy money” being available for borrowers. Much of this “easy money” has been the result of creative financing programs.

One of the companies I worked for several years ago was a large homebuilder. The marketing folks fully understood that one of the keys to increasing sales was to make it as easy as possible for potential buyers to say Yes to a purchase.

When it comes to buying a home, what are the two primary financial obstacles that get in the way? The down payment and the ongoing monthly payment. So it should come as no surprise that homebuilders and lenders have worked hard to develop programs that minimize these obstacles. As a result, we have seen a proliferation of loans where no down payment is required, and where the initial series of monthly payments is as low as possible — typically accomplished through an interest-only payback feature during the early years of the loan.

It’s interesting that, in 2001, less than 2% of all home loans originated were interest-only, yet in 2004 — just three short years later — the number had skyrocketed to 31%. In the San Diego area where I live, more than 50% of all loans originated in 2005 were interest-only. Now we are seeing the fallout of this “feeding frenzy” with the bursting of the housing bubble.

Does this mean that housing is no longer a solid investment? Not at all. It just means that it’s going to take time for supply and demand to come back into equilibrium, and that prices will remain under pressure until this equilibrium is established. So buying and selling today is a riskier proposition than it has been over the past few years.

What does that mean for the young married couple interested in buying their first home, or for the growing family needing more space? From a financial perspective, the best advice I can give is to make sure you can afford the home you are considering. When I speak with personal finance professionals, the common refrain I hear is that clients consistently buy more home than they need or can afford.

A guideline I use is that all housing-related expenses (including payment, taxes, insurance, utilities, gardening, improvements and so on) should amount to between 30% and 35% of your gross income. And this should be measured based on old-fashioned type loans (30-year or less and fully amortizing).

It’s not unusual for people to spend between 40% and 50% of gross income. At that rate, it becomes impossible to have a spending plan that meets your family’s needs in a balanced manner. Something has to give.

The result is often inadequate resources being used for education, savings, insurance and the Christian call to generous stewardship. God love you.

Phil Lenahan is president of Veritas Financial Ministries

(VeritasFinancialMinistries.com).