What house price given this situation? (funds, pay, rates, account)

[syracusa]

If you had the following scenario:

Family of 4 (two small children)
Dual earner family (husband making about 20,000-30,000 more than the wife)
Total family income: 165,000.
Area: Atlanta
Debt: zero
Educational level of spouses: both graduate degrees


1) What house price would you consider responsible, comfortable and perfectly affordable for such a family? What price range would you look for given this situation?
The family will have somewhere between 60,000-90,000 max to put down if they decide to buy a house. (Inheritance from family or other chunks of money fallen from the sky NOT assumed; all this money is hard-earned and saved cash).

2) Also, what house price do you think people in such a situation typically go for? The second is not a question about what would YOU do, but what you think MOST/A LOT of people in this situation go for?
(Please do not tell me "everybody's different"; yes, I know everybody's different - but I also know most people are not THAT different because if they were they wouldn't operate along trends; most neighborhoods seem to have a unique, distinct flavor, with a certain TYPE of individuals in it).
So I would also like to hear about perceived trends (trends perceived by you, personally).

Thank you so much for your insight.

[MrRational]

As to the purchase price:
No more than 50% of their cash reserves toward the down and closing...
call that $45,000 and at least 20% of the purchase price (= up to $225,000 sale price)

As to their mortgage:
$165,000 x 60% (40% margin) x 25% = $24,750 PITI
But no 30 year amortizations! Try to pay that $180,000 balance off in 10-15 years.

[syracusa]

Originally Posted by MrRational

As to the purchase price:
No more than 50% of their cash reserves toward the down and closing...
call that $45,000 and at least 20% of the purchase price (= up to $225,000 sale price)

As to their mortgage:
$165,000 x 60% (40% margin) x 25% = $24,750 PITI
But no 30 year amortizations! Try to pay that $180,000 balance off in 10-15 years.

I did not say that the 60,000-90,000 would be ALL of their cash reserves. It is what they are prepared to put down on a house. They will have other cash reserves left, beyond the 60,000-90,000 - but no, not twice as much.

So they will put down somewhere between 60,000 and 90,000 - not 45,000.

I would also appreciate an answer for the second question. It seems to me that the vast majority of home-buyers are far, very far - from operating at the level of responsibility you recommend. What do you think?

I should add that this family would NOT consider a less than top rated public school (I am not debating whether this is the right or the wrong thing to do; it is a given, part of the fixed parameters of the story and is not up for negotiation).
A 225,000 house in a top public school district of the Atlanta area would land this family in a miserable neighborhood, if such a neighborhood would even exist in such districts.

[md21722]

What you are asking "in what most people would do" is different from this hypothetical situation in which you are asking for responsible answers! I think what most people try to do is get as much house as they can afford very little cash and most have debt. The rules of 2.5x your income and 20% down are out the window in part because people are much more in debt these days and in part because interest rates are so low the interest portion of the loan is low enough that the 2.5x rule is not valid.

Even using the 2.5x rule w/ $165K you're looking at $412,500. That should buy a nice place in Atlanta.

Some people buy these really nice homes for 4x what they make ($660K in your case). Others buy modest homes and use their extra money for nice vacations, buying cars cash, and continuing to live debt free.

It really depends on what you want to do in the future. If you want to pay for your kids college eduction, and things like that, it is wise to buy a more modest home and continue to save your money. Others don't consider their children's college education their expense and they never budget for it. Other people take into account that they want to live only on one income for "necessities" and consider the 2nd income disposable for vacations, college, cars, etc.

[flyonpa]

Where are you going to be working? As you might know the commute in ATL hiway are bad. But 225K will get you a 3 or 4 bedroom in Forsyth/Cobb/Gwinnett/Cherokee on the north side .
In one of the best school system (Forsyth/Cherokee ) in the state & nationaly ranked.

DriveTime to/from work is a factor, You might pay more for a home, that will cut your commute costs. But the stress factor will be lower. Just don't over buy just because you can afford it.

[syracusa]

Originally Posted by md21722

What you are asking "in what most people would do" is different from this hypothetical situation in which you are asking for responsible answers!

Yes, I am aware of that. This is why I asked two separate, distinct questions. The first is about what people deem to be very responsible. The second was about what most people actually do.

Originally Posted by md21722

I think what most people try to do is get as much house as they can afford very little cash and most have debt.

Yes. This is what we have noticed too over the past few years living both in the NE and in the South. Most people seem to push themselves well over the limit which we consider financially responsible. This often places the financially responsible family in a neighborhood cultural disconnect.
It is the reality of it, no matter how PC and "background-blind" people may want to act.

Originally Posted by md21722

Even using the 2.5x rule w/ $165K you're looking at $412,500. That should buy a nice place in Atlanta.

Do I understand correctly that you would consider a 412,500 purchase price a responsible and perfectly affordable choice within the parameters given?

Originally Posted by md21722

Some people buy these really nice homes for 4x what they make ($660K in your case). Others buy modest homes and use their extra money for nice vacations, buying cars cash, and continuing to live debt free.
It really depends on what you want to do in the future

This scenario is obviously ours.
We have a philosophy that matches your second option: buy a relatively modest home and use the extra money for what we consider to be NECESSARY vacations (given my family is from Europe, I need to go visit people there and we want our children to stay in touch with their grandparents and the culture over there); also debt free life and college funds.

Here is where the trouble kicks in: we have discovered that this philosophy is easier said than done, given what most other people do - which is the first philosophy.
Over the past year we have been renting in a neighborhood where we believe we could easily afford to buy a house (purchase prices range from 250,000 to 300,000). Unfortunately, we feel a complete disconnect from our neighbors and it is clear that the neighbors feel the same disconnect from us. Some people have a (barely) college education, many don't, some are in "blue collar" type occupations, others barely "white-collar", many seem the type who do not necessarily feel cozy and comfortable around people from another country. They've been correct but largely reserved/distant from us since we moved in, even though we have acted very friendly, have been reaching out, all the jazz. They do seem to feel a whole lot cozier with each other than they are towards us. I get a feeling of "us" vs. "them" here and I am not at all convinced that we belong. I am not sure whether this issue comes from an "immigrant-native" disconnect (though my husband is born and raised Caucasian Southerner, but I am not), or it is education, overall background, mannerism, what have you.
The bottom line is we do not feel we belong and that our children would be better off in a different kind of neighborhood.

Without getting into too many unnecessary details that could easily be misunderstood and misjudged given people's general sensitivity when it comes to socio-economic background aspects, it is our gut feeling that culturally, we should be in a different kind of neighborhood and that it would not be wise for us to buy in this "affordable" neighborhood where we would always feel like "misfits".

I should add that, from a strictly material standpoint, I love the house we are in right now and I would never want things or amenities any nicer than what a 250,000-300,000 dollars can buy in this area.

[syracusa]

Originally Posted by flyonpa

Where are you going to be working? As you might know the commute in ATL hiway are bad. But 225K will get you a 3 or 4 bedroom in Forsyth/Cobb/Gwinnett/Cherokee on the north side .
In one of the best school system (Forsyth/Cherokee ) in the state & nationaly ranked.

DriveTime to/from work is a factor, You might pay more for a home, that will cut your commute costs. But the stress factor will be lower. Just don't over buy just because you can afford it.

Yes, I know. Commute is not much of an issue for us as one of us works from home, the other works partially from home (2-3 days a week in the office).

We need to be in the NW part of Atlanta as the workplace is in that area.

We do not plan to "over-buy" (we are in fact very afraid of over-buying) but we're trying to figure out what "over-buying" looks like, just in case we were stuck in our own little distorted world.

From what we see, most people stretch themselves way over what we are thinking of, given our parameters.

Initially we thought 250,000-300,000 top - but it is our feeling that in this larger area (with top rated schools) this money lands us in neighborhoods that make us feel like cultural outsiders.

I am also curious whether Mr. Rational took into account the monthly income stream too, in addition to the 20% down rule (which would have to be 50% of disposable cash reserves to be truly responsible, according to him).
Either way, he sounds very tight, conservative and financially cautious, which is a good thing in the large scheme of things. Unfortunately though, sometimes some things weigh more - including school quality.
It is hard for us to overlook such aspects just to stay at a very tight, financially conservative level.
After all, if we somehow could live in the middle of rural Georgia, we'd soon be rich. :-)

Or sorta.


Thank you so much everyone for your input, this is helpful.

[michgc]

One key piece of informaton that you did not include is what your monthly expenses are. You said you have no debt, but like others mentioned, different families have different expenses. Perhaps you put away $500 per month per kid for college or perhaps you save $600 per month for retirement. Maybe you have daycare expnses for a few more years. In other words, how much do you have left over after all of your expenses are paid (other than your housing cost)? That will help you figure what monthly payment you can afford. Taken together with your downpayment, you can better narrow down a reasonable purchase price.

[manderly6]

Originally Posted by michgc

One key piece of informaton that you did not include is what your monthly expenses are. You said you have no debt, but like others mentioned, different families have different expenses. Perhaps you put away $500 per month per kid for college or perhaps you save $600 per month for retirement. Maybe you have daycare expnses for a few more years. In other words, how much do you have left over after all of your expenses are paid (other than your housing cost)? That will help you figure what monthly payment you can afford. Taken together with your downpayment, you can better narrow down a reasonable purchase price.

Good post. I never like it when people say I make XX, how much house can I afford. I like to keep it simple. Subtract every single expense from your monthly take home pay including all savings you want plus house maintenance/upkeep and that is what is left over for a mortgage payment.

[syracusa]

Fair question.

Monthly take home pay: 8800
Overall monthly expenses (mortgage payment not included): approx 3500

Thanks again.