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Yep, too many people make the mistake of buying on "imagined" or "wishful" income. OP don't go there, life is to short to be stressed like that.
This comment was directed at me since I was arguing the merits of this rule. I work in IT and my wife will be a RN next year. We wont be buying a house until a couple years after she finishes school and I will be near the end of my MBA. With the avg income of a RN and my current income we can afford a house around $287k. Once I finish my MBA all logical signs point towards a significant increase in my pay and also my wife plans on attaining a bachelors degree to bolster her career as well. With all of this we should easily be under the 2.5x you HHI rule.
It's worthwhile to also examine the opposite side of this debate. If you buy a house in an inexpensive area, chances are that decades from now, the house will remain inexpensive. You'll see minimal (if any) price appreciation. The house will lag inflation, and might even decline in price in raw numerical-dollar terms. But it will require the same maintenance costs and utilities costs as a more expensive house. Please explain to me: how is this a worthwhile investment?
Meanwhile, in the more expensive areas, a modest house is very pricy indeed - and will only become pricier. Every mowing of the lawn, every mending of the roof, adds to one's investment. What joy is there in working on a $90K house, that year after year only becomes cheaper? But there is a very real joy to conserving a $700K bungalow. Every brick, every beam is worth something.
The implication is that there actually are some benefits to living in places like San Francisco or Manhattan, and buying real estate there - unless we believe that real estate in those "glamor cities" will somehow depart from historical trends, and cease appreciating.
It's worthwhile to also examine the opposite side of this debate. If you buy a house in an inexpensive area, chances are that decades from now, the house will remain inexpensive. You'll see minimal (if any) price appreciation. The house will lag inflation, and might even decline in price in raw numerical-dollar terms. But it will require the same maintenance costs and utilities costs as a more expensive house. Please explain to me: how is this a worthwhile investment?
Because a lot of people don't consider the house an investment. It's a home.
As for buying a home in an inexpensive area ... a lot of retirees don't care if the house doesn't appreciate in price if it's their 'final resting place'.
Please note that I have said "a lot of", in both instances. I didn't say all.
It's worthwhile to also examine the opposite side of this debate. If you buy a house in an inexpensive area, chances are that decades from now, the house will remain inexpensive. You'll see minimal (if any) price appreciation. The house will lag inflation, and might even decline in price in raw numerical-dollar terms. But it will require the same maintenance costs and utilities costs as a more expensive house. Please explain to me: how is this a worthwhile investment?
Meanwhile, in the more expensive areas, a modest house is very pricy indeed - and will only become pricier. Every mowing of the lawn, every mending of the roof, adds to one's investment. What joy is there in working on a $90K house, that year after year only becomes cheaper? But there is a very real joy to conserving a $700K bungalow. Every brick, every beam is worth something.
The implication is that there actually are some benefits to living in places like San Francisco or Manhattan, and buying real estate there - unless we believe that real estate in those "glamor cities" will somehow depart from historical trends, and cease appreciating.
Not that long ago Detroit was one of the premier cities in the US, and the East Village was a ghetto that activist where trying to keep affordable and out of the hands of blight removal/urban renewal planners. Today the general advice is that cities are the future and far flung exurbs are just going to whither and die. Not so long ago the general advice was to get out of the failing cities as quickly as possible. Just about 30 years ago, NYC and even Manhattan, were in the middle of crime epidemics.
I'm not saying I'd bet against Manhattan or San Francisco, but I wouldn't just assume you'll see the 20% appreciation of the bubble years indefinitely. For the Bay Area, the expensive areas have been the most stable. The lowest third of the marked increased by 176% from 2000 to 2006; the highest third just 80% from 2000 to 2007. Lowest third fell by 62% from 2006 to 2009; highest third by only 25% from 2007 to 2009. Compared to 2000 prices, however, there's not much difference. The lowest third is 72% higher than 2000 prices in 2013; highest third is 78% higher.
I also wouldn't be betting on the demise of Marin County, Lamoraga, and other exurban communities. Point is that most people pretty much completely suck at predicting the future. The people buying up the dilapidated Park Slope brownstones in the '80s were the urban pioneers moving into bad neighborhoods for the price bargains. Today you have people buying in Oakland flats.
I don't look at A home as an investment either, unless you are paying cash. If you are using a mortgage and are not paying it off quicker, you will usually pay double or more for the house in interest by the time you are done paying the mortgage.
Because a lot of people don't consider the house an investment. It's a home.
This is indeed true for many people. Point taken.
But the premise of my assertion is that in many cases the resident doesn't really "need" a house, but is maneuvered into buying one, because of a mixture of societal pressure and the tantalizing prospect of investment. If you have 4 kids and plan on remaining rooted to one geographic area, it would be pretty dumb to be renting a 5-bedroom apartment, or the "equivalent" house. You'd buy. And hopefully be able to afford to buy. But what about singles or childless couples? What about busy people, who work 60-70 hours weeks, and party when they're not working (instead of, say, mowing the lawn)?
Our culture basically says that renter = loser, and sweetens the deal by promising financial advantages from house ownership. My opinion is that those financial advantages are indeed real in the more expensive parts of the country, where rent is exorbitant and where over long stretches of time, real estate appreciation is solid.
In the less expensive areas of the country, the affordability of housing (low house purchase price) is an illusion. Yes, the cost of entry is low. But the running expenses, as a proportion of house value, are also low. These can be cozy homes and offers great emotional satisfaction from house-ownership. I won't gainsay that. But we are discussing financial questions here... what's reasonable for a mortgage as ratio of house-cost to salary. People complain, with admittedly good reason, that the ratio of house price to median annual earnings is unpleasantly high in some areas. The flip side, in my view, is that this "unreasonableness" can actually be a benefit when viewed as long-term investment value.
Heh. This single person bought because she never wanted to be at the mercy of landlords ever again. Rent goes up. My house payment stayed the same. I see that as a financial advantage. (shrug) It worked for me.
I bought in 1999, *I think* it was 3 times my gross salary at the time. House paid off in 2011. (Yes, I made extra principle payments) Since I bought the house, property taxes have increased by $25 per month. If I had been renting all that time, my rent would have increased a lot more than that.
Last edited by Gandalara; 01-08-2014 at 05:43 PM..
I hear this rule of thumb all over. Use 2.5x your HH salary as a rule of thumb. If you are a single person in this economy, making $50,000 per year, then the maximum house you could afford is $125,000. That doesn't buy much. How do couples do it when one parent stays home?
How many couples do you know that have managed to survive on a single salary since the 80's?
I hear this rule of thumb all over. Use 2.5x your HH salary as a rule of thumb. If you are a single person in this economy, making $50,000 per year, then the maximum house you could afford is $125,000. That doesn't buy much. How do couples do it when one parent stays home? I really don't understand how we can have so many houses priced $250,000+ in the US? That would be an income of $100,000. That's doable for a couple in their mid to late 30's, but anything younger than that you're probably not going to break $100,000 take home pay as a couple unless you're either a lawyer, doctor, or engineer.
Pete, you are young. If you don't mind listening to an older gal. I suggest that whatever you do don't be married to a house. The stress will cause more fights and marital problems than it is worth. It's all about being able to spend time with your family and being able to do things and making memories you and your kids can look back on and laugh and smile. This is what my parents did and what me and my husband did and I am thankful.
Save to put 20% down. Start putting a little away for an emergency fund and retirement. You are young now but everything hurts when you get older. It will also teach you how to handle your money well which will lead to your making other good financial decisions.
Look and listen to the misery around you because people don't understand how to use money and bought more than they can afford.
Since I bought the house, property taxes have increased by $25 per month. If I had been renting all that time, my rent would have increased a lot more than that.
As the adage goes, everyone's mileage will vary. Since I bought my house (just over 12 years ago), my property tax has doubled. Meanwhile, local rents have risen maybe 20% in the nicer areas, and have been stagnant in the not-so-nice areas.
My house is relatively inexpensive. But the annual property tax alone would pay for around 6 months of rent in a 1-bedroom apartment (which is realistically all that I would need). Why? Because it costs money to send kids to school, to plow the streets and so forth. That money primarily comes from property taxes. In locales where housing is comparatively cheap, the tax rates have to be higher, because the cost of educating kids in public school varies much less from place to place, than does the local property value.
So where real estate is less expensive, prepare to pay more (certainly in percentage terms) for costs beyond the mortgage itself... like taxes, maintenance and insurance.
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