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Old 08-04-2008, 08:44 PM
 
119 posts, read 428,221 times
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This has been something that has been bothering me for a long time. I realize that things have come home to roost recently with foreclosures ramping up in recent months. But what surprises me is how more people aren't foreclosing...especially among those who bought in the last five or six years. It's very simple math.

The average household income in the US was about $48,000 in 2006, or the peak of the housing boom. Since many lower income people can't afford to buy, let's say the average home buyer grosses $55,000. Let's say for argument's sake that after taxes, benefits, and perhaps a nominal 401(k), one is left with $36,000, or roughly $3,000 a month post-tax. During the peak of the boom, the average existing single-family house was about $220,000. Let's say for argument's sakes that the average buyer put 10% down. So he/she would require a $198,000 mortgage. That means that at a low 5.25% rate on a fixed 30 year mortgage (I know a lot of people had interest only...those scare me even more, actualy), the mortgage payment would be roughly $1,100 a month. PMI would require another $100 a month. Taxes would be about $200 month give or take, depending on where the person lives. Insurance would be about $75 a month. Utilities...perhaps $150-250 a month. And if there is a homeowner's association fee, tack on another $200. So add this up, and you have $1,600-1,900 a month for housing alone. That means for everything else...car payments, gas, food, insurance, entertainment, etc., you have $1,100-1,500 a month. I just don't see how one can easily make it on that, especially if there is more than one mouth to feed.



Am I calculating this incorrectly? It boggles my mind...
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Old 08-04-2008, 09:42 PM
 
Location: over there --->
133 posts, read 430,740 times
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the number you are using for annual household income ($48k and $55k)...is that only one income or two (assuming a husband/wife or similar combination)? If it is accounting for two incomes, each person would be bringing home about $24k? If it is only counting one income, in most (or at least many) cases you could double it to $94k and $110k which would make those payments a lot easier...but I'm going to assume the $55k you end up using for the example is the total household income...according to what many financial advisers say, a person in the given situation should be able to afford a roughly $160k home. Still far below the cost of the average home.

Wow...average homes around here go anywhere between $55k and #175k (on the lake)...
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Old 08-04-2008, 10:41 PM
 
Location: Ohio
17,998 posts, read 13,233,625 times
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Quote:
Originally Posted by HurrMark View Post
Am I calculating this incorrectly?
Yes.

With two people working and a gross income of $48,000, that should leave at least $40,000 after taxes.

There's no excuse whatsoever why $15,000 to $20,000 per year shouldn't be in the bank.

After 4 to 5 years of apartment life, that's $60,000 to $100,000 saved up for a down-payment.

You then buy a starter home with a goal of financing $100,000. That'll make the mortgage about $580/month and more than affordable with all of the extras.

After about 7-10 years, the house should have increased at least 20%-25% in value, so if it was $160,000, it's now selling for about $200,000, and then you roll that over into a $350,000 McMansion and you're financing $150,000 which will put the mortgage at about $870/month and still affordable.

There's no shortcuts and the people who are putting less than 30%-40% down are idiots. You'll only put down 20% or less if the mortgage would be equal to or less than your monthly rent.
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Old 08-05-2008, 01:29 AM
 
2,639 posts, read 5,055,812 times
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Quote:
Originally Posted by Mircea View Post
Yes.

With two people working and a gross income of $48,000, that should leave at least $40,000 after taxes.

There's no excuse whatsoever why $15,000 to $20,000 per year shouldn't be in the bank.

After 4 to 5 years of apartment life, that's $60,000 to $100,000 saved up for a down-payment.

You then buy a starter home with a goal of financing $100,000. That'll make the mortgage about $580/month and more than affordable with all of the extras.

After about 7-10 years, the house should have increased at least 20%-25% in value, so if it was $160,000, it's now selling for about $200,000, and then you roll that over into a $350,000 McMansion and you're financing $150,000 which will put the mortgage at about $870/month and still affordable.

There's no shortcuts and the people who are putting less than 30%-40% down are idiots. You'll only put down 20% or less if the mortgage would be equal to or less than your monthly rent.
Flawed math.
  1. $48,000 is not $40 grand left over after taxes. Dunno where you got that figure. Try $32 grand. That's assuming Federal, State, SDI, SSA, and sales taxes.
  2. Once you've gotten that far, then there's consumable expenses: Food, gas, drinking water if you get it. In a large city suburb with a 30 minute commute to work one way and assuming two people, you can expect upwards of $6 grand minimum gone every year, with gas taking up the bulk of that. So now you're down to $26 grand.
  3. Living expenses. I'll even be reasonable. Assume a rent of $800/month. That leaves you ~$17 grand.
  4. Utilities. Assume a gas/electric bill of $100/month, water of $50/month, trash & sewer of $50/month, phone of $50/month. That leaves you ~$14 grand.
Now, you'd assume that $14 grand should go to savings every year, clean and neat, right? No. Why?
  • Annual rent increases. First it's $800/month...then $900...and so on.
  • Gas price increase.
  • Food price increase.
  • Change of job/job relocation (longer commute time = more gas to buy)
  • Car repair (not to be confused with...)
  • Car maintenance.
  • Babysitters.
  • Shopping needs (clothes, bedding, towels, etc)
  • Bathroom needs (soap, shaving stuff, shower stuff, cleaning stuff, etc)
  • Pet food
  • Medicinal needs
  • Other random needs
By the time you're all done, you're lucky to walk away with $2,000 each year, unless you live in the ghetto sticks, go to work dirty and unkempt, sit in darkness, and steal water from people's hoses, using a lighter to heat it up for bath water.
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Old 08-05-2008, 03:33 AM
 
Location: Los Angeles Area
3,306 posts, read 3,323,365 times
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Quote:
$48,000 is not $40 grand left over after taxes. Dunno where you got that figure. Try $32 grand.
A married couple even if they don't have kids will not pay that much tax. "Dunno where you got that figure". The math is simple, assume they have no extra deductions their taxable income will be around $30k for a total federal tax of about $3,700. Social security is around $3,480 and state tax in California would be around $1,000 for a total of $8,180. So the estimate given of $40k is accurate, $32k is out of the ball park. $32k is even too high if you are single with no kids, in that case it would be around $37,500.

Quote:
During the peak of the boom, the average existing single-family house was about $220,000.
There is little point in trying to make sense out of how people afforded prices during the peak of the boom, because the reality is that they didn't. Many people took out exotic loans that reduced the monthly payment the first few years by allowing them to pay only the interest (IO ARMS) or even only paying just part of the interest and letting the difference add to the loan (Pay option ARMS). But there are many areas of the country where houses stated reasonably priced, the bubble areas (CA, FL, NV etc) really pushed the national median up.
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Old 08-05-2008, 05:53 AM
 
Location: West Michigan
12,084 posts, read 33,129,150 times
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Quote:
Originally Posted by michimaize View Post
Wow...average homes around here go anywhere between $55k and #175k (on the lake)...
My thoughts as well! Glad to have a better income than average and cheaper housing than most other areas. Shhhh, don't let people know how nice it is here though, they will all flock here and try to form HOA's and crap like that we don't deal with now.
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Old 08-05-2008, 06:07 AM
 
5,463 posts, read 5,781,296 times
Reputation: 1803
Quote:
Originally Posted by Mircea View Post
Yes.

With two people working and a gross income of $48,000, that should leave at least $40,000 after taxes.

There's no excuse whatsoever why $15,000 to $20,000 per year shouldn't be in the bank.

After 4 to 5 years of apartment life, that's $60,000 to $100,000 saved up for a down-payment.

You then buy a starter home with a goal of financing $100,000. That'll make the mortgage about $580/month and more than affordable with all of the extras.
Remember that the median income includes everyone, not just people who haven't bought a house yet. It's no fair comparing median salaries or everyone to starter house costs. If you're going to compare the low end of house costs to salaries, you should compare them to the salaries of people who are buying their first house - this will reduce the median a good bit.
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Old 08-05-2008, 06:58 AM
 
Location: CNJ/NYC
1,240 posts, read 3,641,445 times
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Before you can ask how the family with the average household income can afford the average house price you have to establish that the average family actually owns the average house. Do they? I doubt that they do. The two don't necessarily go hand in hand.
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Old 08-05-2008, 07:07 AM
 
Location: Cookeville, TN
25 posts, read 68,338 times
Reputation: 22
While I appreciate the thought you put into it, the scenario may not be most reflective of society.

We made less than 50K for a long time, but have been homeowners for about 5 years now. Our first house was only 1200 sq. foot, but less than 10 years old, and only about 30% of your "average house" cost.

Our current home is about 70% of your average house cost, and we make just over 50K. We have no other bills, and our vehicles are paid for.

I find it quite easy to make it in these times... but we made some sacrifices and wise choices along the way...
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Old 08-05-2008, 07:13 AM
 
Location: Texas
42,203 posts, read 49,740,662 times
Reputation: 66975
Because first you live in an apartment until you can put a down payment on a house that is cheaper than the "national average." Then you build equity. And you may have to do all of this very slowly.

I have noticed that a lot of people have to rethink what they feel "necessities" are, too.
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