Salary vs House Cost

[Anonymous]

Anonymous wrote:

If the home cost should be no more than 3x the salary, then, doesn't the home prices seem out of whack with the current salaries?

Let me put that another way. Historically, a normal RE market reflects this ratio. Sometimes, it is well below that (depressed) and sometimes well above that (overheated). RE markets tend to find equilibrium at about the 3x income ratio. Remember, interest rates are being held down, deliberately, by a central bank (the Fed) that is buying massive amounts of bonds (most of them likely never to be repayed) with taxpayer (our) money. It is not sustainable and will not be sustained. Interest rates will rise, perhaps drastically, and we'll get back to 3x earnings eventually, probably below that, before the cycle starts again.

If you borrow five times income at 3.5% to for your house, the buyer who comes after you, with your income level, can only borrow half of what you did should rates go to 7% and still "afford" the payments. And 7% is still below the historical rate for 30 year fixed paper. So think about who you will eventually sell to before jumping in.

This is wrong:

1. Taxpayer money is not used to purchase bonds; it is done through money creation.
2. The bonds will be repaid. What makes you think that they will not? The only way they could not be repaid is if the US went into default, which is extremely unlikely. How do I know? If it were likely, you wouldn't have government bonds paying one percent or less - the Fed is not the only buyer.

[Anonymous]

Purchased this past summer for $550k. Put down 25% so mortgage is about $410k and payment is $2415. HHI is ~$165k. Could we have purchased more house, sure. But when you really put all the numbers down on paper, it doesn't look like a good idea.

[Anonymous]

Anonymous wrote:Purchased this past summer for $550k. Put down 25% so mortgage is about $410k and payment is $2415. HHI is ~$165k. Could we have purchased more house, sure. But when you really put all the numbers down on paper, it doesn't look like a good idea.

why is that? you would rather have a house worth $550K appreciate at 3% annually instead of a house worth $850K?

[Anonymous]

Anonymous wrote:The issue is that housing in the DC area in good school districts are expensive - period! the 3xs your salary rule goes out the window, unless you bought before 2004 and inside the beltway.

So all the smug folks on here who are proud of their high HHI and low mortgages are scewing (sp?) the responses and reality to be quite frank.

We have a HHI of $320K, and if we were in the market, our price range would be $800K-$1M max and even that buys you a shit box....

I'm a poster upthread who said we wouldn't be comfortable with a mortgage of more than 1.5 - 2 times gross. Here's the thing. When my salary was puny, we bought the house to go with it. When it went up, we upsized. That's been consistently true no matter where we lived and whether the home was our first home (purchased for $135,000) or our current one (purchased for $2 million). Some of us are not willing to spend more than that on a house, period. If you have that view, then you buy where and what you can based on what you earn. If you want to borrow more than that, go right ahead, but no matter what I made I wouldn't be in line behind you to do it, too.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Purchased this past summer for $550k. Put down 25% so mortgage is about $410k and payment is $2415. HHI is ~$165k. Could we have purchased more house, sure. But when you really put all the numbers down on paper, it doesn't look like a good idea.

why is that? you would rather have a house worth $550K appreciate at 3% annually instead of a house worth $850K?

Not PP, but if you have to go into debt because you overbought and can't cover your expenses, you'll be negating all that appreciation, and then some. You can also invest the money you're saving on your mortgage in other ways. It's called diversifying.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Purchased this past summer for $550k. Put down 25% so mortgage is about $410k and payment is $2415. HHI is ~$165k. Could we have purchased more house, sure. But when you really put all the numbers down on paper, it doesn't look like a good idea.

why is that? you would rather have a house worth $550K appreciate at 3% annually instead of a house worth $850K?

Where in the hell are you coming up with these numbers? How is it reasonable for a couple with a HHI of $165K to purchase a home with a mortgage that high? Sure, it would be nice to own a home that is valued at that, but if you are just buying and it hasn't appreciated...

Now, if they have a HUGE downpayment and feel comfortable with the monthly payments that would also allow them to save for retirement, college, etc, etc - sure, go ahead and buy the $850K home. But 20% down on that purchase price is $170K, which, which then takes you down to $680K for your 30-year mortgage. I don't even want to thing about that payment., and especially not on a salary of $165K.

I'm not even this PP - but I totally understood where she was going. You do NOT want to be house poor with everything else we are all asked to save money for by ourselves these days while the cost of everything else in life increases, too!

[Anonymous]

Anonymous wrote:

Anonymous wrote:The issue is that housing in the DC area in good school districts are expensive - period! the 3xs your salary rule goes out the window, unless you bought before 2004 and inside the beltway.

So all the smug folks on here who are proud of their high HHI and low mortgages are scewing (sp?) the responses and reality to be quite frank.

We have a HHI of $320K, and if we were in the market, our price range would be $800K-$1M max and even that buys you a shit box....

I'm a poster upthread who said we wouldn't be comfortable with a mortgage of more than 1.5 - 2 times gross. Here's the thing. When my salary was puny, we bought the house to go with it. When it went up, we upsized. That's been consistently true no matter where we lived and whether the home was our first home (purchased for $135,000) or our current one (purchased for $2 million). Some of us are not willing to spend more than that on a house, period. If you have that view, then you buy where and what you can based on what you earn. If you want to borrow more than that, go right ahead, but no matter what I made I wouldn't be in line behind you to do it, too.

I don't think this debate applies to those buying $2MM houses. i.e., if your income is $800K then duh, the ratios do not apply.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Purchased this past summer for $550k. Put down 25% so mortgage is about $410k and payment is $2415. HHI is ~$165k. Could we have purchased more house, sure. But when you really put all the numbers down on paper, it doesn't look like a good idea.

why is that? you would rather have a house worth $550K appreciate at 3% annually instead of a house worth $850K?

Not PP, but if you have to go into debt because you overbought and can't cover your expenses, you'll be negating all that appreciation, and then some. You can also invest the money you're saving on your mortgage in other ways. It's called diversifying.

what are all of these expenses? we are talking about people who qualify for these loans because they have little other debt, other than their mtg payment. not necessarily the poster above, but those making $250K but only buying $500K houses ....

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, do a mortgage calculator. they will tell you can afford a house of about $1.4MM

OP here. Holy crap that is a lot of money. That cannot be right!!!

We make over $300K and while we *technically* could afford a $1.4M house, we'd be really crunched. Instead, we put 20% down on an $850K house (well after 2003- and it's not large but certainly not a dump). We have some wiggle room with our expenses each month, but not a ton. If we were to increase our mortgage to near $1M, it would be really tight. I would never encourage someone with our income to buy that much house.

where does all of your money go?

-Private school tuition for 1 (thank God we can afford it as our child would have been miserable at our "top" public school-definitely wouldn't have been able to afford this if we had a $1M mortgage)
-$600 car payment for a nice, but not fancy, car that hopefully we'll have for a long time
-about $600/month for occupational therapy

Other than the above, our expenses are probably pretty typical (and our college and retirement savings are average or above-average) for a family with our income.

[Anonymous]

Anonymous wrote:I don't think this debate applies to those buying $2MM houses. i.e., if your income is $800K then duh, the ratios do not apply.

My point was I used the same ratio when I bought a house for $135,00 as I did when I bought a house for $2 million. The exact same one. So, tell, me, does the ratio apply only when you make substantially less than $200K or substantially more than $500K? And those of you between $200K and $500K need a different set of rules?

[Anonymous]

Anonymous wrote:

Anonymous wrote:I don't think this debate applies to those buying $2MM houses. i.e., if your income is $800K then duh, the ratios do not apply.

My point was I used the same ratio when I bought a house for $135,00 as I did when I bought a house for $2 million. The exact same one. So, tell, me, does the ratio apply only when you make substantially less than $200K or substantially more than $500K? And those of you between $200K and $500K need a different set of rules?

try to stay with me, ok? Bill Gates is not going to buy a $4B house.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, do a mortgage calculator. they will tell you can afford a house of about $1.4MM

OP here. Holy crap that is a lot of money. That cannot be right!!!

We make over $300K and while we *technically* could afford a $1.4M house, we'd be really crunched. Instead, we put 20% down on an $850K house (well after 2003- and it's not large but certainly not a dump). We have some wiggle room with our expenses each month, but not a ton. If we were to increase our mortgage to near $1M, it would be really tight. I would never encourage someone with our income to buy that much house.

where does all of your money go?

-Private school tuition for 1 (thank God we can afford it as our child would have been miserable at our "top" public school-definitely wouldn't have been able to afford this if we had a $1M mortgage)
-$600 car payment for a nice, but not fancy, car that hopefully we'll have for a long time
-about $600/month for occupational therapy

Other than the above, our expenses are probably pretty typical (and our college and retirement savings are average or above-average) for a family with our income.

FAIL, if you have an excellent public school you are throwing money away.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don't think this debate applies to those buying $2MM houses. i.e., if your income is $800K then duh, the ratios do not apply.

My point was I used the same ratio when I bought a house for $135,00 as I did when I bought a house for $2 million. The exact same one. So, tell, me, does the ratio apply only when you make substantially less than $200K or substantially more than $500K? And those of you between $200K and $500K need a different set of rules?

try to stay with me, ok? Bill Gates is not going to buy a $4B house.

I'm trying to picture a home even worth that much. How much are the historic castles in Great Britain worth? Is there any building in the world with that price tag?

That shit better be as big as the entire state of Rhode Island or something....

[Anonymous]

Anonymous wrote:

Anonymous wrote:

If the home cost should be no more than 3x the salary, then, doesn't the home prices seem out of whack with the current salaries?

Let me put that another way. Historically, a normal RE market reflects this ratio. Sometimes, it is well below that (depressed) and sometimes well above that (overheated). RE markets tend to find equilibrium at about the 3x income ratio. Remember, interest rates are being held down, deliberately, by a central bank (the Fed) that is buying massive amounts of bonds (most of them likely never to be repayed) with taxpayer (our) money. It is not sustainable and will not be sustained. Interest rates will rise, perhaps drastically, and we'll get back to 3x earnings eventually, probably below that, before the cycle starts again.

If you borrow five times income at 3.5% to for your house, the buyer who comes after you, with your income level, can only borrow half of what you did should rates go to 7% and still "afford" the payments. And 7% is still below the historical rate for 30 year fixed paper. So think about who you will eventually sell to before jumping in.

This is wrong:

1. Taxpayer money is not used to purchase bonds; it is done through money creation.
2. The bonds will be repaid. What makes you think that they will not? The only way they could not be repaid is if the US went into default, which is extremely unlikely. How do I know? If it were likely, you wouldn't have government bonds paying one percent or less - the Fed is not the only buyer.

PP here - 1. You are technically correct. But printing money is still money we don't have and taxpayers are on the hook because, 2. The Fed is buying Mortgage Backed Securities - bad mortgages in unkown quantitiy. The Fed's buying power works at the margins to keep rates low - it doesn't have to be the only buyer and of course it's not. Believe in 3% money forever if you wish.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

If the home cost should be no more than 3x the salary, then, doesn't the home prices seem out of whack with the current salaries?

Let me put that another way. Historically, a normal RE market reflects this ratio. Sometimes, it is well below that (depressed) and sometimes well above that (overheated). RE markets tend to find equilibrium at about the 3x income ratio. Remember, interest rates are being held down, deliberately, by a central bank (the Fed) that is buying massive amounts of bonds (most of them likely never to be repayed) with taxpayer (our) money. It is not sustainable and will not be sustained. Interest rates will rise, perhaps drastically, and we'll get back to 3x earnings eventually, probably below that, before the cycle starts again.

If you borrow five times income at 3.5% to for your house, the buyer who comes after you, with your income level, can only borrow half of what you did should rates go to 7% and still "afford" the payments. And 7% is still below the historical rate for 30 year fixed paper. So think about who you will eventually sell to before jumping in.

This is wrong:

1. Taxpayer money is not used to purchase bonds; it is done through money creation.
2. The bonds will be repaid. What makes you think that they will not? The only way they could not be repaid is if the US went into default, which is extremely unlikely. How do I know? If it were likely, you wouldn't have government bonds paying one percent or less - the Fed is not the only buyer.

Thanks PP. Well said. It's amazing the ignorance that abounds on these issues.