How does income level translate to home value?

[xeemzor]

Originally posted by: senseamp
Wow, 2x or 3x annual income doesn't buy much in CA, even if I am making low 6 figs
Oh well, will just wait for bubble to finish bursting, or marry a sugar momma

Wait a few years the for the housing bust to start hitting CA hard. It's just not realistic to pay the prices these people are paying for homes. Personally, the Houston area is looking more and more attractive every day.

 

[xeemzor]

Originally posted by: Imdmn04

Originally posted by: xeemzor

Originally posted by: Imdmn04
The price of the house should not be used as a variable in comparison to income. Rather, it should be the amount to be financed

Let's say, a couple has a house that was bought 15 years ago, and now it's paid off and worth 400k. They want to upgrade to a 500k house and they only make a combined 100k.

By the rules posted above (2 or 3 times yearly income), they can't even afford a house that they currently live in. But in actuality, they can put down 400k sold from the old house, and take out a 100k mortgage, which every lender in the country will gladly approve on a 100k/yr annual income.

I believe the rule makes an assumption that you are paying a mortgage equal to the value of the house.

That is what's wrong with the real estate industry theses days, letting people buy houses with no down payment.

In my opinion, if you don't have at least 20% down, you can't afford it.

I'm certainly in agreement with you. Giving people houses when they can't afford them has only jacked up the prices for people who should be buying houses.

 

[Capt Caveman]

Originally posted by: Special K

Originally posted by: Capt Caveman

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

Wrong.

The ratios everyone is using for income has to do with the appropriate mortgage one should finance. No one is including the downpayment into the equation.

My house is over $500k and I make less than $250k yet I can comfortably cover my mortgage payments.

Shouldn't they also include property taxes, insurance, and maintenance costs?

Maybe someone that works in the mortgage industry can pipe in but I believe property taxes and insurance are factored in some equations but I believe that ratio they use would be a little higher.

Personally, I would factor in maintenance costs in my calculations but mortgage companies probably don't b/c of how subjective and the detailed analysis needed. Property tax and insurance can be taken from historical public records.

Originally posted by: mugs

Originally posted by: Capt CavemanNo one is including the downpayment into the equation.

I was assuming a 20% downpayment in my calculations.

Note, a number of folks that buy $500k+ homes are also putting down downpayments larger than 20% to avoid from having to finance with a jumbo mortgage, which is my case.

In today's mortgage crisis, it's currently almost impossible to get a jumbo mortgage without putting down a 20% downpayment and having a perfect credit rating.

Originally posted by: Naustica

Originally posted by: Frackal
Hey Naustica, those who make more than 250k, what do they do career-wise?

Varies. Some are doctors. Dentists. Construction. Contracting. Consulting. Dry cleaning. Restaurant. Technology company. Retail clothing. One thing is common though. Every single one owns their own business. Every single one. I don't know a single person who works for corporate america who makes more than low $100k.

Sales and Executive Management

 

[Capt Caveman]

Originally posted by: senseamp
Wow, 2x or 3x annual income doesn't buy much in CA, even if I am making low 6 figs
Oh well, will just wait for bubble to finish bursting, or marry a sugar momma

Use 3x annual income for mortgage. Now, you just need to save up for a big down payment.

 

[Special K]

Originally posted by: Naustica

Originally posted by: Frackal
Hey Naustica, those who make more than 250k, what do they do career-wise?

Varies. Some are doctors. Dentists. Construction. Contracting. Consulting. Dry cleaning. Restaurant. Technology company. Retail clothing. One thing is common though. Every single one owns their own business. Every single one. I don't know a single person who works for corporate america who makes more than low $100k.

I would imagine there are a number of people who work for a firm on Wall Street that make well over $100k. Likewise for certain lawyers, although I doubt you even have to restrict yourself to a certain city to find lawyers making well over $100k who work at a firm they did not own/start.

 

[SampSon]

Originally posted by: Imdmn04

Originally posted by: xeemzor

Originally posted by: Imdmn04
The price of the house should not be used as a variable in comparison to income. Rather, it should be the amount to be financed

Let's say, a couple has a house that was bought 15 years ago, and now it's paid off and worth 400k. They want to upgrade to a 500k house and they only make a combined 100k.

By the rules posted above (2 or 3 times yearly income), they can't even afford a house that they currently live in. But in actuality, they can put down 400k sold from the old house, and take out a 100k mortgage, which every lender in the country will gladly approve on a 100k/yr annual income.

I believe the rule makes an assumption that you are paying a mortgage equal to the value of the house.

That is what's wrong with the real estate industry theses days, letting people buy houses with no down payment.

In my opinion, if you don't have at least 20% down, you can't afford it.

Putting down less than 20% has nothing to do with the real estate industry, and everything to do with the banking industry.

The majority of America cannot afford to put 20% down on a house. Not being able to put 20% down has little to do with your ability to truely afford the mortgage. On top of that taking the time to save 20% in cash is not the best financial decision you can make. That cash can be utilized in much better ways than just sitting there earning minimal interest while it's just waiting to be pulled out and spent on a downpayment. If the 20% down rule was used in all types of lending, then no body would own anything and liquidity wouldn't exist.

The ability to save 20% also doesn't imply the ability to truely afford a mortgage nor does it get even close to a guarantee that person isn't buying beyond their means.

 

[statik213]

Originally posted by: waggy
depends on who and where i would guess.

my grandmother (well step-mothers mom). baught a house in the 60's for like 80k (in california). when she died a few years ago the estate sold the house for 1.5 million.

my grandmother never made very much money. weird part is her tax's were extremly low.

80k in the 60s is like 500k now... http://www.westegg.com/inflation/

 

[Gunslinger08]

I'm looking to buy my first house as a single guy who will be married within the next year or two. About the absolute cheapest house I could buy would be 3 to 3.5 times my gross salary (or about 2.5 to 3 times my gross income, with average bonuses). I'll probably buy a slightly more expensive house so that I can get some of the things I want other than a roof over my head (ex. newer construction, garage, decent size, etc.). This will probably put me in the range of 4 times my gross salary (or about 3.5 times my gross income). I feel like it'll be a stretch for me now, but once I'm married it should only be about 2.4 times our gross income.

 

[Yzzim]

My wife and I bought our house for 60k. We make almost double that. Guess we did the math wrong.

 

[FP]

It would be hard to afford a house in the Bay Area that is only 1x or 2x your gross annual income.

 

[ebaycj]

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

TRUE, unless you are buying your house with cash (or have a huge downpayment).

Basically the rule is: Making 250k a year means 500k should be the max amount you actually finance and pay interest on. So if you have 500k in cash (for a downpayment), you could get yourself a sweet $1m house and be OK.

I mean, if you make that much, live modestly, and save/invest any unspent cash, it'll only take a couple years to save up that much.

Also - most people with really big expensive houses have their really big expensive houses paid off, because they know that paying interest is a net loss, and they have the assets to avoid having to pay interest.

 

[Capt Caveman]

Originally posted by: ebaycj

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

TRUE, unless you are buying your house with cash (or have a huge downpayment).

Basically the rule is: Making 250k a year means 500k should be the max amount you actually finance and pay interest on. So if you have 500k in cash (for a downpayment), you could get yourself a sweet $1m house and be OK.

I mean, if you make that much, live modestly, and save/invest any unspent cash, it'll only take a couple years to save up that much.

Also - most people with really big expensive houses have their really big expensive houses paid off, because they know that paying interest is a net loss, and they have the assets to avoid having to pay interest.

You're saying that someone that makes $20,833 monthly gross can only afford a $3,377 monthly mortgage payment?

 

[spidey07]

Originally posted by: Capt Caveman

Originally posted by: ebaycj

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

TRUE, unless you are buying your house with cash (or have a huge downpayment).

Basically the rule is: Making 250k a year means 500k should be the max amount you actually finance and pay interest on. So if you have 500k in cash (for a downpayment), you could get yourself a sweet $1m house and be OK.

I mean, if you make that much, live modestly, and save/invest any unspent cash, it'll only take a couple years to save up that much.

Also - most people with really big expensive houses have their really big expensive houses paid off, because they know that paying interest is a net loss, and they have the assets to avoid having to pay interest.

You're saying that someone that makes $20,833 monthly gross can only afford a $3,377 monthly mortgage payment?

That's about it. It has nothing to do with what you can afford, it's what is a good decision financially. Taxes start really taking a chunk out your income so basing it on gross isn't really a good idea, but 2x gross is a good place to focus your money on building wealth instead of paying a mortgage.

ebaycj - I understand what you're saying and of course you're correct. I made the "assumption" that I was talking about the loan and not the actual house based on the audience.

 

[thomsbrain]

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

That's wishful thinking for people in high-density areas.

The reality is that in areas where the median household income is around $80K, run-of-the-mill 1960's tract homes are going for $700K-$800K. on a 20% down 30 year mortgage, that's roughly 60% of net income, and a lot of people are happily paying it. The thing is, percentage doesn't mean a whole lot if you still have plenty of actual cash left over to live. You're not going to be driving around in a BMW (at least, you won't if you're smart), but you're not going to starve, either. And yes, you can still afford furniture.

You can argue that they would have a higher quality of life if they allocated more income to non-household expenses. But that would mean moving their family to an apartment or moving to an area of the state or country where they feel it is not as nice to live. I'm sure there are many families who would rather live in a house in a pretty and culturally exciting area and be frugal than cram themselves into an apartment or live in Buttfuck, Kansas and get to spend more money at Dolce and Gabbana. A house represents a far greater impact on quality of life than consumer goods and dinner at Applebee's.

 

[spidey07]

Originally posted by: thomsbrain

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

That's wishful thinking for people in high-density areas.

The reality is that in areas where the median household income is around $80K, run-of-the-mill 1960's tract homes are going for $700K-$800K. on a 20% down 30 year mortgage, that's roughly 60% of net income, and a lot of people are happily paying it. The thing is, percentage doesn't mean a whole lot if you still have plenty of actual cash left over to live. You're not going to be driving around in a BMW (at least, you won't if you're smart), but you're not going to starve, either. And yes, you can still afford furniture.

You can argue that they would have a higher quality of life if they allocated more income to non-household expenses. But that would mean moving their family to an apartment or moving to an area of the state or country where they feel it is not as nice to live. I'm sure there are many families who would rather live in a house in a pretty and culturally exciting area and be frugal than cram themselves into an apartment or live in Buttfuck, Kansas and get to spend more money at Dolce and Gabbana. A house represents a far greater impact on quality of life than consumer goods and dinner at Applebee's.

That's utter nonsense. It's called living within your means, if your means require you to make poor financial decisions then so be it. But it doesn't make it less stupid.

 

[TinyDancer82]

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

Depends on your down payment. If I put 400k down on a 500k house, I could easily make the payments with 40k/year. There are more factors than AGI.

 

[Capt Caveman]

Originally posted by: spidey07

Originally posted by: Capt Caveman

Originally posted by: ebaycj

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

TRUE, unless you are buying your house with cash (or have a huge downpayment).

Basically the rule is: Making 250k a year means 500k should be the max amount you actually finance and pay interest on. So if you have 500k in cash (for a downpayment), you could get yourself a sweet $1m house and be OK.

I mean, if you make that much, live modestly, and save/invest any unspent cash, it'll only take a couple years to save up that much.

Also - most people with really big expensive houses have their really big expensive houses paid off, because they know that paying interest is a net loss, and they have the assets to avoid having to pay interest.

You're saying that someone that makes $20,833 monthly gross can only afford a $3,377 monthly mortgage payment?

That's about it. It has nothing to do with what you can afford, it's what is a good decision financially. Taxes start really taking a chunk out your income so basing it on gross isn't really a good idea, but 2x gross is a good place to focus your money on building wealth instead of paying a mortgage.

ebaycj - I understand what you're saying and of course you're correct. I made the "assumption" that I was talking about the loan and not the actual house based on the audience.

So, the average american household makes around $45k. Where are all of these less than $100k homes?

Please. It's nice to think that but it's not practical in the vast majority of metropolitan areas in the country. You mention taxes on one's income but doesn't consider the tax deductibility of mortgage interest.

I trying to figure out if you're trolling or really this naive.

 

[thomsbrain]

Originally posted by: xeemzor

Originally posted by: senseamp
Wow, 2x or 3x annual income doesn't buy much in CA, even if I am making low 6 figs
Oh well, will just wait for bubble to finish bursting, or marry a sugar momma

Wait a few years the for the housing bust to start hitting CA hard. It's just not realistic to pay the prices these people are paying for homes. Personally, the Houston area is looking more and more attractive every day.

CA was the source of the housing bust. Most of the top foreclosure cities are in CA. The rest of the country always plays catch-up to CA in terms of home markets. It's more like wait and see what happens to Houston when it catches up to CA.

In case you guys are wondering what these CA foreclosures look like, let me fill you in. These are not the $100K/year families who are losing their $800K homes. These are mostly working-class folks, first or second-gen immigrants, who are making very small wages. They went to see a broker who told them that if they moved out of the city into some farm town and took this "special" loan, he could help them buy a home. They bought a $300K home on $30K of income with no money down. Then five years down the line, their payment resets and they need come up with $2500 a month. That's their entire yearly salary. They can't sell because the market is falling and they owe more than their house is worth. They literally walk away from their house, find a ghetto apartment somewhere that doesn't ask too many questions, and try to start their life over.

People who buy a $1M home on a fixed 30-year but who have $20K or $30K left over for living expenses are not in trouble, and likely never will be as long as they have some basic emergency savings.

 

[Capt Caveman]

Originally posted by: spidey07

Originally posted by: thomsbrain

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

That's wishful thinking for people in high-density areas.

The reality is that in areas where the median household income is around $80K, run-of-the-mill 1960's tract homes are going for $700K-$800K. on a 20% down 30 year mortgage, that's roughly 60% of net income, and a lot of people are happily paying it. The thing is, percentage doesn't mean a whole lot if you still have plenty of actual cash left over to live. You're not going to be driving around in a BMW (at least, you won't if you're smart), but you're not going to starve, either. And yes, you can still afford furniture.

You can argue that they would have a higher quality of life if they allocated more income to non-household expenses. But that would mean moving their family to an apartment or moving to an area of the state or country where they feel it is not as nice to live. I'm sure there are many families who would rather live in a house in a pretty and culturally exciting area and be frugal than cram themselves into an apartment or live in Buttfuck, Kansas and get to spend more money at Dolce and Gabbana. A house represents a far greater impact on quality of life than consumer goods and dinner at Applebee's.

That's utter nonsense. It's called living within your means, if your means require you to make poor financial decisions then so be it. But it doesn't make it less stupid.

No, you're statement that 'Making 250K gross a year means you should buy a 500K house, MAX' is utter non-sense.

 

[FP]

Originally posted by: spidey07

Originally posted by: thomsbrain

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

That's wishful thinking for people in high-density areas.

The reality is that in areas where the median household income is around $80K, run-of-the-mill 1960's tract homes are going for $700K-$800K. on a 20% down 30 year mortgage, that's roughly 60% of net income, and a lot of people are happily paying it. The thing is, percentage doesn't mean a whole lot if you still have plenty of actual cash left over to live. You're not going to be driving around in a BMW (at least, you won't if you're smart), but you're not going to starve, either. And yes, you can still afford furniture.

You can argue that they would have a higher quality of life if they allocated more income to non-household expenses. But that would mean moving their family to an apartment or moving to an area of the state or country where they feel it is not as nice to live. I'm sure there are many families who would rather live in a house in a pretty and culturally exciting area and be frugal than cram themselves into an apartment or live in Buttfuck, Kansas and get to spend more money at Dolce and Gabbana. A house represents a far greater impact on quality of life than consumer goods and dinner at Applebee's.

That's utter nonsense. It's called living within your means, if your means require you to make poor financial decisions then so be it. But it doesn't make it less stupid.

Apparently you have never heard of leverage.

Living beyond your "means" and buying fancy cars and suits is stupid.

Living beyond your "means" and making money by doing so isn't stupid.

With respect the buying a house, thomsbrain is right. Where I live is more important to me than how big my house is. Could I afford a house 4x the size in Kentucky? Probably, but I have more job opportunities in the Bay Area and I like the area more. If one can comfortably afford a mortgage that is 3, 4 or even 5x their annual income why shouldn't they?

 

[Dirigible]

Originally posted by: binister
Could I afford a house 4x the size in Kentucky? Probably, but I have more job opportunities in the Bay Area and I like the area more. If one can comfortably afford a mortgage that is 3, 4 or even 5x their annual income why shouldn't they?

I gotta agree. I'm someone who bought a house with a loan of 4x my annual income. Yet I still managed to max out my 401k, save more than that in non-retirement accounts, go on the vacations I want, buy the toys I want, etc., etc. If I were laid off tomorrow I could go a couple years without income without changing my lifestyle. If I'm not laid off, my financial condition will continue to improve.

Don't see how this was a stupid financial decision.

Edit: I'll also agree that for some people, spending that much on their house could be a mistake. Everyone has a different situation.

 

[IHateMyJob2004]

Originally posted by: Safeway
I've heard that 3x annual income is absolute maximum. 2x is more reasonable.

That is about right.

 

[KillerCharlie]

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

That's what I used to believe in the midwest (which is still more expensive than cheapass Kentucky). It's unrealistic in Seattle though.

 

[Capt Caveman]

Originally posted by: Dirigible

Originally posted by: binister
Could I afford a house 4x the size in Kentucky? Probably, but I have more job opportunities in the Bay Area and I like the area more. If one can comfortably afford a mortgage that is 3, 4 or even 5x their annual income why shouldn't they?

I gotta agree. I'm someone who bought a house with a loan of 4x my annual income. Yet I still managed to max out my 401k, save more than that in non-retirement accounts, go on the vacations I want, buy the toys I want, etc., etc. If I were laid off tomorrow I could go a couple years without income without changing my lifestyle. If I'm not laid off, my financial condition will continue to improve.

Don't see how this was a stupid financial decision.

Correct. I'm at 5x my income compared to my house(much lower times factor if you just consider my mortgage). But I can walk to work and pretty much use my car only on weekends. I still manage to invest in my 401k, ESPP, other investments and still have play money.

 

[thomsbrain]

Originally posted by: spidey07

Originally posted by: thomsbrain

Originally posted by: spidey07
If you're smart 25% of your net goes to your house.

Making 250K gross a year means you should buy a 500K house, MAX.

That's wishful thinking for people in high-density areas.

The reality is that in areas where the median household income is around $80K, run-of-the-mill 1960's tract homes are going for $700K-$800K. on a 20% down 30 year mortgage, that's roughly 60% of net income, and a lot of people are happily paying it. The thing is, percentage doesn't mean a whole lot if you still have plenty of actual cash left over to live. You're not going to be driving around in a BMW (at least, you won't if you're smart), but you're not going to starve, either. And yes, you can still afford furniture.

You can argue that they would have a higher quality of life if they allocated more income to non-household expenses. But that would mean moving their family to an apartment or moving to an area of the state or country where they feel it is not as nice to live. I'm sure there are many families who would rather live in a house in a pretty and culturally exciting area and be frugal than cram themselves into an apartment or live in Buttfuck, Kansas and get to spend more money at Dolce and Gabbana. A house represents a far greater impact on quality of life than consumer goods and dinner at Applebee's.

That's utter nonsense. It's called living within your means, if your means require you to make poor financial decisions then so be it. But it doesn't make it less stupid.

You have to realize that quality of life is subjective and not everyone agrees with your particular subjective preferences.

As long as they are saving for a retirement in which they can comfortably continue or improve on their chosen standard of living, I think you would be very hard pressed to call any particular lifestyle choice to be a "poor financial decision." There comes a point at which the accumulation of wealth late in life no longer justifies further compromises in lifestyle earlier in life. Should I really raise my child in a small apartment where he can't play in the street so that I'll have $7M in assets when I retire instead of $5M? No amount of money can buy back that time that could have been spent better. I personally save so quick that my peers think I'm crazy, but a home is one of those things you should save all that money FOR. I'd consider myself a royal cheap bastard, but you're in a league of your own. And that's just my point: Lifestyle is subjective. Your's sounds just as stupid to someone else as their's sounds to you, as other posts in this thread clearly indicate.