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It's actually pretty easy to explain. It's what happens when supply doesn't meet demand. Take LA County for example.
10,000,000 people
3,500,000 housing units
At any given time time, only 20-30,000 of those homes are for sale.
You're not competing against the median income to buy a home. You're only competing against the top 20-30,000 people looking to buy a house in LA County at any given time. That's probably about 10% of the people that want to buy a home, so really you're competing against top 10% incomes in the metro. The other people have no chance to own a house, unless they inherit a family home, live in a really rough neighborhood, or commute from the parts of LA county that are on the edge of the Mojave desert 2 hrs away. They are stuck living crammed in to smaller apartments or houses with a third to half their income going to rent.
A similar picture exists in all major West Coast Metros, as with geographic constraints and robust economies, there isn't really anywhere to build new housing near job centers. Also, if you make >$180/yr, you should be able to afford a $600K house if you have reasonable credit.
Thank you for answering a very common question people frequently ask and scratch their heads over. It’s really simple but not the answer most people want to hear. That is, most people are priced out of the market and can’t afford a home in the priciest markets.
Nope. Not able to put anything down. Really lucky just to have a positive net worth, most of my friends are deep in educational debt.
I could afford $4,200, heck if we are being honest I could afford nearly double that and still would have a better standard of living than the median American family.
But...
Most couldn’t.
Apparently the country is full of areas where the median family living in an area can’t afford a median home in that area.
That’s crazy to me.
It’s crazy that I technically can’t afford own a home in an area where my family is pulling down 3x the median in the area.
I’m ok with renting, there’s a bit more variety in the rental market where I have to live (I kinda feel like people older buying up properties and renting them out because the rental market is way below the mortgage market, even on new construction).
I assume you have done a mortgage calculation, but your payment seems high for a $600k mortgage. If you have very high property taxes, that would explain the calculation, but a 600k mortgage financed at just under 4% would be at $2800 principal and interest. Add $100/month for insurance and $550 for and you ring in at $3450.
If you gross $180k/year that’s $15k/ month before taxes and other deductions. I am not sure how you bring home $11,500 per month take home. If that isn’t right, I would guess it’s more like $8-9k depending on the state, then that would explain why a $4,100/ month mortgage seems high.
Define "really bad schools." Some areas they are just that, really bad. Some areas it simply means, "there are fewer kids raised by Dr's and CPA's and Engineers and the tests are correspondingly lower." All I'm saying is that you should dig into that a bit and not go exclusively by what greatschools says. If the place is a war zone then you've got problems. If the school serves more kids from disadvantaged backgrounds but is otherwise a stable place where kids can get an education, it bears some thinking about. Or, look into what private schools would cost.
Had a couple of friends recently tell me their adult children did not like the local school because they had observed that too few of the fathers dropping off the kids were wearing suits. Some were, shock horror, tradies (who happen to make a fortune here, especially if they are plumbers) Was pointed out to the anxious parents that at drop off time all of the fathers who needed to wear suits to work would have long been departed for their offices in the city law and finance companies.
I assume you have done a mortgage calculation, but your payment seems high for a $600k mortgage. If you have very high property taxes, that would explain the calculation, but a 600k mortgage financed at just under 4% would be at $2800 principal and interest. Add $100/month for insurance and $550 for and you ring in at $3450.
If you gross $180k/year that’s $15k/ month before taxes and other deductions. I am not sure how you bring home $11,500 per month take home. If that isn’t right, I would guess it’s more like $8-9k depending on the state, then that would explain why a $4,100/ month mortgage seems high.
I had to do estimates, not living in that state yet, not making the “big bucks yet” and I had to trust Zillow’s calculator for the tax rate in the area (plus HOA ).
Between FICA, Federal, and State I’m down from 15k/m to a bit more than 11.
Maybe I’ll be able to itemize and save a bit more, but I feel like the tax bill isn’t going to be kind for my specific situation(not complaining, it is what it is, but it is rough thinking about paying almost as much in taxes as I netted last year).
I’m not buying anything though. I’ll hang out there for a few years, then it’s off to somewhere better for my family in more ways than just housing costs.
This affordability problem seems to quite acute in all the English speaking countries, as well, I am sure, as in many others. Last year when we were in China they were saying that the prices were really skyrocketing there.
Maybe it is caused by simply too many people on the planet. But then a developed country like New Zealand, with a tiny population of 4 million, has if anything an even worse problem than we have in parts of Australia.
I think the issue of foreign investment in housing is prominent in many countries, possibly caused by the massive growth in the wealthy and middle classes in Asia and their wish to invest in what they see as more stable areas.
Or could it be caused by increasing regulations and taxes on housing? Or by increased life expectancy meaning that elderly people are staying in their homes longer? Or by baby boomers refusing to move to retirement areas, unlike their parents generation.
So many potential reasons and it is very difficult for young people.
This affordability problem seems to quite acute in all the English speaking countries, as well, I am sure, as in many others. Last year when we were in China they were saying that the prices were really skyrocketing there.
Maybe it is caused by simply too many people on the planet. But then a developed country like New Zealand, with a tiny population of 4 million, has if anything an even worse problem than we have in parts of Australia.
The biggest problem is overly strict land use regulations that make it difficult and / or expensive to build new housing.
I had to do estimates...
Between FICA, Federal, and State I’m down from 15k/m to a bit more than 11.
And what of the pretax contributions (401K, IRA, etc) ?
These are both MORE important than buying or where you live
but also affect how much tax is applied to the reduced amount.
MAX out these contributions when young.
I’m looking at moving to an area where the median household income is only $60k/yr, but the median three bedroom home is $600k.
How does that even work?
My household income will finally be more than sustenance level, but even grossing more than 3x the median I can’t afford a freaking $600,000 home (well not without a down payment and sticking to the rule of 28).
This is a crazy world we live in.
It shouldn’t work in my financial playbook.
Just checking out Zillow in the Minneapolis and St. Paul area where foreclosure outnumber for sale homes 8 to 1 in all areas of income.
Right now the wife and I are looking at homes in the 200,000 to 215,000 range. Those House go fast on the market. The bank is willing to lend us more, but there is no way we are going to spend 45% of income on housing.
Nope. Not able to put anything down. Really lucky just to have a positive net worth, most of my friends are deep in educational debt.
I could afford $4,200, heck if we are being honest I could afford nearly double that and still would have a better standard of living than the median American family.
But...
Most couldn’t.
Apparently the country is full of areas where the median family living in an area can’t afford a median home in that area.
That’s crazy to me.
It’s crazy that I technically can’t afford own a home in an area where my family is pulling down 3x the median in the area.
I’m ok with renting, there’s a bit more variety in the rental market where I have to live (I kinda feel like people older buying up properties and renting them out because the rental market is way below the mortgage market, even on new construction).
At $180k a year if you can't save for a down payment than you need to look at your spending habits and re-evaluate! Many can get a home loan without putting 20% down. You also don't need to buy a $600k home. Home values are high now.I honestly think they will start falling soon. If you start saving now for a down payment than you might have a down payment for that $600k house, because in a year it might be $500k instead! Nothing wrong with renting, but at your income level it would most likely be advantages to have a home so you can deduct the mortgage interest and property taxes! Plus rents increase every year, where a mortgage payment is more stable and also builds equity.
If it was me I'd....
Re-evaluate spending, make a budget and start saving for a down payment. Even if it's only 3.5% down. There are also many first time homebuyer incentives!
Look at homes that cost less than $600k if you're not comfortable with that level of a mortgage payment! If they are fixer uppers than buy them and fix/update them when you can.
Maybe think about moving to a lower COL area.
Speak to a loan officer, financial planner and a realtor! These people can help you with a monthly budget and finding a home that fits in your budget.
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