Salary vs House Cost

[Anonymous]

Anonymous wrote:

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.

You seem to not actually understand how "money" works. To even put the words "printing money is still money we don't have" reveals a depth of ignorance that's pretty shocking. It's like you got your entire knowledge of monetary issues from watching the Glenn Beck show or something.

[Anonymous]

Fed can print as much money as they want. and they can buy up all the bonds they want. it is all "off the books" so to speak.

that is completely separate from having to pay back bonds, which are backed by the full faith and credit of the US treasury.

[Anonymous]

Anonymous wrote:

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.

My child is thriving and doing better socially, emotionally and academically than he'd be doing in public. Worth every penny. I'd rather my child have a first rate education than live in a large house, however, the private vs. public debate isn't germane to this topic. The point that is germane is that if you take on the maximum mortgage that you can possibly afford, you lose the option of having other lifestyle choices. I'd rather have an affordable mortgage and not be absolutely stuck with the neighborhood school/ a job I hate, etc.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

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.

My child is thriving and doing better socially, emotionally and academically than he'd be doing in public. Worth every penny. I'd rather my child have a first rate education than live in a large house, however, the private vs. public debate isn't germane to this topic. The point that is germane is that if you take on the maximum mortgage that you can possibly afford, you lose the option of having other lifestyle choices. I'd rather have an affordable mortgage and not be absolutely stuck with the neighborhood school/ a job I hate, etc.

You can always sell a house

[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.

And try to stay with me. If you make $200K, you shouldn't be buying a house that requires you to take out a mortgage of more than $400K at the max. Talk about duh....

[Anonymous]

HHI 225. House 1.25m. Mort. 875.
Looks like we are outliers by DC standards.
Thing that makes this doable is 5/1 ARM at 2.5%.
Don't expect to be here more than 5 years. Buying seemed better value than renting.

[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?

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!

I'm the purchaser quoted above. You responded well. Before we purchased, we did a lot of thinking about a purchase price and budget planning. I created a very generous budget that included everything we might want to spend money on. Truthfully, we decided we prefer the experiences and comfort having a smaller mortgage allows us. If we cut out all the extras, we could have purchased up to $750k, but vacations would be limited, college savings would be limited, as would activities for the kids (both under 4, so we also had to think about daycare).

I guess it comes down to whether or not a person wants a huge, great house and no extras or a smaller, nice house and lots of extras.

[Anonymous]

HHI is $250 K and mortgage is $580 K. We bought 2 blocks from metro in an area of Arlington that has a lot of amenities but is continually getting more restaurants and shopping. We expect our home value to keep appreciating for a long time. Therefore, we made a choice to put our money into the house rather than investing in the stock market (which we feel has been rather unstable for the last 10 years).

[Anonymous]

Anonymous wrote:HHI 225. House 1.25m. Mort. 875.
Looks like we are outliers by DC standards.
Thing that makes this doable is 5/1 ARM at 2.5%.
Don't expect to be here more than 5 years. Buying seemed better value than renting.

Wowza! The thing you have to worry about is interest rates being higher in 5 years. When you move, you'll probably have the same mortgage payment for a house that's half the cost.

[Anonymous]

Anonymous wrote:

Anonymous wrote:HHI 225. House 1.25m. Mort. 875.
Looks like we are outliers by DC standards.
Thing that makes this doable is 5/1 ARM at 2.5%.
Don't expect to be here more than 5 years. Buying seemed better value than renting.

Wowza! The thing you have to worry about is interest rates being higher in 5 years. When you move, you'll probably have the same mortgage payment for a house that's half the cost.

Sure, but there isn't much we can do about that. Have the sort of job where you move every 5-7 years.

[Anonymous]

Anonymous wrote:We make 350k and we bought our house last year for 440k. We are planning on doing an addition in a few years - but we also have the flexiblity to live on one income if necessary (I thought I might have wanted to SAH after baby was born)

You're smart. Most people over leverage themselves with a mortgage, and don't have wiggle room if there's a change in lifestyle. We prefer to live simply, and bought our home for 500K, a fixer uppper with cash (made money on previous held real estate). If we both lost our jobs, we'd be ok for years. Our real estate was pushing us to buy in the 800-900K range, and we disappointed her and it showed!!!

Would a larger home make me happy? No, maybe short term. Would taking a couple of nice vacations every year - yes - my children are seeing the world. No one looks back to their childhood and says "I wish my parents would have had a larger home" but they will remember the great family time spent together, seeing new and exciting places!

[Anonymous]

... so the options were buying or renting and paying the same in rent as in PITI. In those circumstances, and in the current market we thought it makes sense to buy. Nobody knows, but we think prices are more likely to increase than decrease over the time we are. So far so good, prices in our section of the market up 10% y.o.y.

[Anonymous]

Note: PP was meant as a follow on from 10.27.

[Anonymous]

PP here. One thing to mention - we bought in a sought after neighborhood, close in, so that our renovations will pay off in the end. Over the 6 years we've lived in our home, we"ve put probably 75K in repairs/remodeling. We plan to add an addition in '14, when we can mostly pay for cash.

[Anonymous]

Hhi was 150k when we bought a 330k house on FHA (so little downpayment) in 2009.

Now make closer to 180 and feel ok. Now paying daycare and one small student loan.