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We bought a house four years ago that was five times my husband's (sole earner) salary.
We were able to do it because:
a) Fairly large down payment. It was our second home. When we sold our first home, we had a lot of equity in it, because for that first "starter" home, we were both working full time and we bought less house than we qualified for. While we were both working, we paid down the mortgage fairly aggressively. Then, we got lucky and values appreciated, so we had an additional $60K on top of that, when we sold it. Our down payment on this second home was significant. I'm fairly certain our household income is probably one of the lowest in the neighborhood, but we have the largest, nicest home.
b) We moved from a high cost of living area to a lower one. Our new lower COLA had MUCH lower property taxes, enabling us to purchase a lot more house.
c) Our interest rate on the 30-year loan is only 3.625. We couldn't even itemize the interest last year because it wasn't enough to make it worthwhile, even with 3 kids. But that keeps our mortgage payments low too.
I'm convinced that you have to live in less popular areas of the country. For example, you might make $100k in the NYC metro area, but it takes $500k to buy a decent house. Whereas you can live in Buffalo, make $60k doing the same job, and buy a decent house for $180k easily. So, its 5x salary in NYC PLUS higher taxes, or 3x salary in Buffalo and lower taxes.
I'm convinced that you have to live in less popular areas of the country. For example, you might make $100k in the NYC metro area, but it takes $500k to buy a decent house. Whereas you can live in Buffalo, make $60k doing the same job, and buy a decent house for $180k easily. So, its 5x salary in NYC PLUS higher taxes, or 3x salary in Buffalo and lower taxes.
This is very true. Not all places with a high COL pay that great and not all places with cheaper houses pay that badly. Think Miami vs. Toledo, just as an example. You have an exceptionally high housing cost combined with rather low pay compared to other large metros for the same jobs. Toledo has significantly lower housing costs combined with a pay rate that is on a par with other metros (according to the dept. of labor stats).
I do think $ 125K can buy a decent home in some cities.
I hear this rule of thumb all over. Use 2.5x your HH salary as a rule of thumb.
That's a fairly conservative rule and nearly impossible in California. Most people couldn't purchase an empty lot for 2.5x your HH salary. Plus they are usually talking about the mortgage balance, and not the home price. Traditional financing involved 20% down payments.
The other rule used to be for a conforming loan 28% of your salary should go to principal, interest, taxes and insurance:
$125,000 @ 7% interest for 30 years is $831.63/month (-$9,979.54 per year) for principal and interest
add $4020.46/year for taxes and insurance and you get $14,000 per year, which is 28% of $50,000.
So in that example it is the same as the 2.5 rule.
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 subscribed to a site that sends me weekly updates of homes on the market in my county.
I routinely see 2bdrm homes asking somewhere in the $40k area, between $35k and $45k.
I live in a state that is also big on tourism. Mostly along the coast [we have over 3,000 miles of coastline] there are houses that routinely market for $300k to $500k. But those houses sell as vacation houses for wealthy tourists.
Nobody living in this area earns enough to buy a house like that.
So they don't buy a house until their mid-to-late 30's then. Not sure why people think they have to buy a house so quickly these days.
When I bought my house in 1998, it was 1.9 times my salary.
Yup.
By the time my parents bought a house to live in (1980s), my dad was in his 40s. And he had a high level engineering job turned management. He bought a small house in his 30s for rental income, but that was never lived in. The equity from the house he bought in his 40s bought another nice house to live in when he moved states and then left over some to put down payments on 2 more rental properties.
I don't get this whole thing with people in their 20s or early 30s who are not remotely established demanding to know why they can't get a nice house.
You don't even have to go back 30 years to see people renting or living with relatives till they could really afford a home.
Whether Cali or Texas, none of my neighbors growing up were young families.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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It's amazing how much home prices have gone up since this thread started in 2013. Our home, for example was worth about $500k then, now $850k. When we bought our first house in 1978 it was $50k, and our income was about $25k, so just 50%. We bought this one in 1993 for $190k. To buy our current home now
at the "rule of thumb" would require an income of $350k, more than double the median income here. Yet still, people are buying them and also new homes for over $1 million. Most are bringing equity from selling homes in even more expensive areas. Putting $500k down brings the $800k home down to a mere $300k loan. The younger families buying in our area have high incomes from tech jobs at Amazon or Microsoft and are just starting to have kids, so looking for good schools and low crime.
people these days will do anything to get into a house including leveraging themselves to the hilt... i'm expecting a repeat of 2008 in due time.
Let's take an example - Los Angeles:
Year 2000:
- Median Home price = $227,000
- Median Household income = $42,000
- Ratio = 5.4x
Year 2018:
- Median Home price = $631,000
- Median Household income = $64,900
- Ratio = 9.72x
It does not take a rocket scientist to see that we are almost 100% overvalued which would necessitate a 50% correction in these markets.
Part of this is speculation, part of it is artificially low interest rates causing temporary escalation in prices.
Eventually, cheap capital dries up, interest rates rise and the whole thing comes crashing down. In my view 2008 would've been way way worse if the government had not stepped in with QE infinity. However, this time there isn't that option as the balance sheets are already loaded and the Fed is trying to desperately unload them. it's going to be interesting.
We've always emphasized being relatively house agnostic, so we wouldn't be susceptible to its ups or downs. We bought our current house, in Florida, 2 1/2 years ago at about 1.5 times household income. Our agent was surprised, but it's an approach that works for us.
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