Author Topic: How much house to buy  (Read 6109 times)

affordablehousing

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How much house to buy
« on: November 28, 2017, 12:59:33 PM »
Forum members, I'm wondering if any can offer some guidance as to how much house ends up feeling comfortable as a multiple of gross income. Besides the obvious answer- as low as possible, I'm wondering if any could offer experiences of whether 2.5x as some internet sites suggest is really reasonable, if the 4x the broker suggested is warranted ever. We are looking at a move to a HCOL area. Not entertaining discussions for us to stay where we are....unfortunately.

Askel

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Re: How much house to buy
« Reply #1 on: November 28, 2017, 01:09:54 PM »
I'd say it's a big "depends". 

I live in a LCOL, with a seriously depressed housing market.  1x annual salary can buy a lot of house here. 2x and I can afford 90% of the houses available. 

On the flip side, jobs of similar salary are scarce so the likelihood of having to move away from a house I can't sell or rent is significantly greater than zero. 

So I stick with 1x, and work to pay down my mortgage as fast as I can and sleep pretty well at night. 


marty998

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Re: How much house to buy
« Reply #2 on: November 28, 2017, 01:13:48 PM »
Forum members, I'm wondering if any can offer some guidance as to how much house ends up feeling comfortable as a multiple of gross income. Besides the obvious answer- as low as possible, I'm wondering if any could offer experiences of whether 2.5x as some internet sites suggest is really reasonable, if the 4x the broker suggested is warranted ever. We are looking at a move to a HCOL area. Not entertaining discussions for us to stay where we are....unfortunately.

You need to tell us where you are so people local to you can answer this....

I am living in a place that is 6x my income, and its a small apartment. Most houses here go for 11-12x

It's hard to compare.

Finallyunderstand

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Re: How much house to buy
« Reply #3 on: November 28, 2017, 01:17:15 PM »
2x is my opinion of threshold regardless of HCOL or LCOL.  What mortgage brokers approve people for is ridiculous. 

My wife and I started in (and still are in) a home that at the time was 2x our combined income.  Now she quit work to be a SAHM and my income went up drastically and our home is worth less than 1 year of my income.  We briefly entertained the idea of lifestyle inflation and buying a bigger house but stayed grounded and changed our mindset.  There is an immeasurable value in having zero financial concerns that we felt is greater than a bigger/better/newer home that would impress people we didn't need to impress while taking out another mortgage.

ketchup

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Re: How much house to buy
« Reply #4 on: November 28, 2017, 01:17:48 PM »
First house was about 1.5x then-salary, second house about 2x then-salary (still in this house, more like 1.5x salary now).  Mortgage lender wanted us to buy at about 4x too.  That would have been madness.

But it depends on your location, of course.  It really is meaningless out of context.  4x might be low for your area.  Also play with rent vs buy numbers of course (buying is not always better, especially in higher cost of living areas).

frugaliknowit

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Re: How much house to buy
« Reply #5 on: November 28, 2017, 01:18:26 PM »
1.  Pay NO attention to what a broker says, NONE!

2.  in the abscense of specifics, I like the Dave Ramsey payment of no more than 25% of net income on a 15 year fixed rate mortgage.
« Last Edit: November 28, 2017, 01:21:51 PM by frugaliknowit »

affordablehousing

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Re: How much house to buy
« Reply #6 on: November 28, 2017, 01:27:46 PM »
To make it more specific, this is a move to the bay area. We will be keeping our current place that we bought at .75x our salary, and it has been nice to have a cheap place, but life dictates this move and we're forced to consider a higher multiple. Thanks for all the responses so far.

Laura33

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Re: How much house to buy
« Reply #7 on: November 28, 2017, 01:53:08 PM »
1.  Ignore whatever your broker says you can "afford" -- I swear, those guys must be required to get specialized training in alternative math or something.  Their advice is fundamentally incompatible with FIRE.

2.  Personally, I have always been most comfortable when we were at @1.5x or less, because then we wouldn't lose the house if one of us lost our job, and I am much happier now at well under 1x.  But my personal experience (of the "oh shit" variety with unexpected job losses) probably means that my personal comfort level does not reflect the norm.*

3.  Ratios are meaningless in general, and even moreso for someone looking to FIRE.  Your desired FIRE date and the 'stache you need are so completely personal that what works for someone else likely has no bearing on your life and could even be misleading.

4.  The only way to get a good number is to do sample budgets.  Start with your new income, including any adjustments to account for differences in gross income, taxes, benefits, etc.  Then subtract out savings -- #1 is the savings necessary to reach your target FIRE date, but don't forget other things like a vehicle replacement fund, saving for college, etc.  Then look at your current non-housing living expenses, including things like hobbies and vacations and such, and try to adapt them for your new surroundings (e.g., difference in grocery costs, commute costs to your target area, local restaurants and events and such you might want to go to, and the like); subtract all of that out.  What you can afford is what is left. 

If that number is too small to afford reasonable housing in your new area -- and, yeah, it will be -- then you need to go back through the budget and figure out what gives.  How you answer that question doesn't matter as much as asking it in the first place.  Where people go wrong is in buying a house without doing the math (or worse, relying on self-justifying math, a/k/a "well, I love the house SO much that I'll be happy never going out"); that approach inevitably results in locking themselves into an expensive house (which also comes with more expensive carrying costs that they also failed to consider), not actually changing their lifestyle past the first couple of months (because why live in such an awesome place if you can't take advantage of it! -- a/k/a more rationalization to do what they want), and now it's two years down the road and they wonder why they can't seem to save anything.  In the real world, the money has to come from somewhere.  Do the math first, and then at least you are making an informed decision and can knowingly accept whatever the tradeoffs are that come with that choice.

*Think Scarlett O'Hara, except with "by God, I will never have to sell up and leave my entire life behind and move across the country again."

frugaliknowit

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Re: How much house to buy
« Reply #8 on: November 28, 2017, 02:01:08 PM »
To make it more specific, this is a move to the bay area. We will be keeping our current place that we bought at .75x our salary, and it has been nice to have a cheap place, but life dictates this move and we're forced to consider a higher multiple. Thanks for all the responses so far.

If you are going to be "jumping multiples", without knowing the specifics, it does not seem wise (by way of risk) to hold a rental property (out of state?).  It sounds like you should do ''cheap rent" instead, at least for a while.

zinnie

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Re: How much house to buy
« Reply #9 on: November 28, 2017, 02:06:35 PM »
Buy the smallest place you can afford (20% down payment) and live comfortably in with your minimalist/mustachian lifestyle.

Making a calculation relative to your income is ridiculous, IMO. ESPECIALLY on a site like this where you're planning to save the vast majority of your income, right? This sounds like a sales tactic. Don't fall for it.


SavinMaven

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Re: How much house to buy
« Reply #10 on: November 28, 2017, 02:22:22 PM »
Would you consider renting?

I know it's "throwing money away" and all, but really, that's not any more true than thinking you've thrown away all the time you've spent eating in your life. It's kept you going, it's not "lost".

A move into THE highest of the HCOL areas on the country can be a crapshoot. Buyers' agents can smell desperation. There's no shame in renting for a year, getting to know the neighborhoods, etc. and buying when you feel comfortable, where you feel comfortable, on YOUR schedule and not because you have to find a place by x date.

ketchup

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Re: How much house to buy
« Reply #11 on: November 28, 2017, 02:32:11 PM »
Would you consider renting?

I know it's "throwing money away" and all, but really, that's not any more true than thinking you've thrown away all the time you've spent eating in your life. It's kept you going, it's not "lost".

A move into THE highest of the HCOL areas on the country can be a crapshoot. Buyers' agents can smell desperation. There's no shame in renting for a year, getting to know the neighborhoods, etc. and buying when you feel comfortable, where you feel comfortable, on YOUR schedule and not because you have to find a place by x date.
I'd go further: renting is not just "throwing money away."  Very often it can be the financially prudent move.

APBioSpartan

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Re: How much house to buy
« Reply #12 on: November 28, 2017, 03:35:56 PM »
I'm interested in this topic as well.  My wife and I just recently paid off all of our student loans and are now saving up for a down payment on our first home (Age 25/26).  We live in a very weird area now (Asheville) where the income is super low and the housing costs are high.... but aside from that, I have convinced myself that 2-2.5x our combined annual salary would be acceptable.  However, we are actively considering moving to another city that would allow us to stay closer to the 2x side of the range. 

nwhiker

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Re: How much house to buy
« Reply #13 on: November 28, 2017, 03:47:54 PM »
The real question isn't how much house to buy but rather how much house you actually need. Think about size and location requirements and go from there. You might find out that you will need to spend 4x to get what you want, then so be it. A dust your financial plans accordingly.

Cranky

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Re: How much house to buy
« Reply #14 on: November 28, 2017, 03:48:58 PM »
It also depends on what the income is - 3x $400,000 is a heck of a lot different than 3x $20,000.

You also have to figure in your long term plans. Are you expecting to stay in this house and grow into it, income wise?

nereo

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Re: How much house to buy
« Reply #15 on: November 28, 2017, 03:54:54 PM »
Forum members, I'm wondering if any can offer some guidance as to how much house ends up feeling comfortable as a multiple of gross income. Besides the obvious answer- as low as possible, I'm wondering if any could offer experiences of whether 2.5x as some internet sites suggest is really reasonable, if the 4x the broker suggested is warranted ever. We are looking at a move to a HCOL area. Not entertaining discussions for us to stay where we are....unfortunately.

I really don't understand why you are ignoring what you've self-identified as the obvious answer.
Financialyl speaking you want your housing costs to be as low as possible.  Find where that threshold for you to be content and there you go.
... If you are looking for an upper cut-off where you definitely won't buy, well ultimately you still have to live somehwere to more realistically the only decision you have is whether it makes more sense to rent vs buy.  For that, try this calculator.


2Birds1Stone

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Re: How much house to buy
« Reply #16 on: November 28, 2017, 04:47:54 PM »
If you're a billionaire, what does gross income matter?

If you're $100k's in debt, what does gross income matter?

ChpBstrd

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Re: How much house to buy
« Reply #17 on: November 28, 2017, 09:19:39 PM »
If you're moving to the SF Bay Area, I already know renting is more economical than buying.

That area of the world is for only two types of people:

1) those looking to earn $1M in two to three years and GTFO. These people should rent.
2) those looking to rent houses to others at a negative cash flow while the houses appreciate $74k/year. These people will buy, but I'm not sure they should.

fubarcamry

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Re: How much house to buy
« Reply #18 on: December 16, 2017, 04:39:08 PM »
We live in a $41,000 house and gross about $130,000 per year, so maybe 1/3 your income is the magic number. Just kidding, but in actuality, using a multiplier of income is just a sales pitch or general rule of thumb for non-mustachians. Housing needs don't vary with income. Inflating your housing with salary is lifestyle inflation (dangerous).

the_fixer

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Re: How much house to buy
« Reply #19 on: December 16, 2017, 04:56:48 PM »
I have never used a multiple I have always stuck to buying a house we can afford if one of us lose our job.

That means being able to pay all necessary bills with the lowest of the two incomes.

We have decent dual incomes and I can see where this would not work as well if you had one person making 120k and the other making 30k.

It has worked well for us, either of us are free to switch jobs at any time and it has been pretty stress free even during 2008 when we had a house for sale sitting vacant while renting an apartment in another area due to relocation.

Granted we have always lived in smaller houses than our peers but we will retire before them and never worry about layoffs or things like that :)

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ysette9

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Re: How much house to buy
« Reply #20 on: December 16, 2017, 08:08:52 PM »
We live in the Bay Area and just bought. We rented for a number of years before making the decision that buying was good for us because we plan on staying here a long time/forever. That is a scenario where it makes financial sense to buy. My advice is to not buy unless you are committed to staying long term, and even then, don’t buy right away. The Bay Area is a hugely diverse place with micro climates and micro neighborhoods and commutes that can be good of horrific depending on where you are and where you are going. It takes time to learn it all and figure out what will fit best for your family. I say this as someone who has spent basically my whole life here. I am constantly discovering new areas.

We decided that 3x annual salary was comfortable for us. Thankfully as a dual-income professional household that meant we could actually buy a house, unlike many other people who are priced out. Real estate here is different than in most other areas of the country so it really behooves you to take your time with this decision.

joonifloofeefloo

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Re: How much house to buy
« Reply #21 on: December 16, 2017, 10:14:19 PM »
Has this been posted yet?
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Not just for rent vs buy, but for additional housing costs to consider, how duration of ownership factors in at any given price point, etc.

COEE

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Re: How much house to buy
« Reply #22 on: December 17, 2017, 01:14:35 AM »
House #1 - 2.2x.  It was tight but manageable.
House #2 - 3.3x.  This was dumb for us.  High tax area with relatively expensive HOA.  Somehow we made it work but there wasnt much margin for error.  We did okay when we sold though.  Kind of made it worth it.  If i hadn't got some good raises in there i think the outcome would have been different.
House #3 -1.4x. Best financial decion weve made so far.  I even lost my job for a while and we had no problems really.

As others have pointed out.  This is extremely personal and depends on a very many number of variables including commute, taxes, hoa, savings, home size, risk tollerance, job stability, reny vs buy, etc.

Good luck!

Imma

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Re: How much house to buy
« Reply #23 on: December 17, 2017, 07:18:34 AM »
It's very hard to say without seeing the exact numbers.

We took a big risk when we bought this house: our mortgage was nearly 4 x our annual gross income (income 20.000, mortgage 77.900, purchase price 79.500 - down payments are uncommon in this country) . We decided this was worth the risk as we were expecting a rise in income and because rents are extremely high in this place. Our monthly mortgage payment is a bit less than 300 EUR, while we used to pay 800 EUR in rent for a crappy place. In the new house we also rented out one bedroom to generate some extra income.

We took this big risk and it paid off  - 2 years later our income has doubled and our mortgage payment is about 12% of our income - but I wouldn't have done this is we'd had other options, like affordable places to rent or cheaper places for sale. This was the absolute cheapest house we could find (it's very small too, 800 square ft) . I wouldn't have taken this risk just to buy an extra large or luxurious property or to be able to buy in the middle of a housing boom.

jac941

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Re: How much house to buy
« Reply #24 on: December 17, 2017, 07:34:21 AM »
My advice is to not buy unless you are committed to staying long term, and even then, donít buy right away. The Bay Area is a hugely diverse place with micro climates and micro neighborhoods and commutes that can be good of horrific depending on where you are and where you are going. It takes time to learn it all and figure out what will fit best for your family.

+1000

We are also in the Bay Area and would definitely advise renting for some time before buying. The real estate market is insane and the rent vs buy highly favors rent. And the commutes ... can be horrific - 10 miles can easily take an hour.

We do own our place. Paid about 1.5x our income when we bought and that amount is about equal to our income now. To buy the same place today would cost 3-4x our income.

dreams_and_discoveries

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Re: How much house to buy
« Reply #25 on: December 17, 2017, 10:03:46 AM »
I bought a house at 4.5x income....and all worked out ok. I knew it was high, but I had plenty of money left to enjoy life and live as I wanted. Now my income has increased massively, the mortgage seems very reasonable. Not to mention I was very lucky timing wise, as property has appreciated massively.

MJseast

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Re: How much house to buy
« Reply #26 on: December 17, 2017, 12:22:50 PM »
I'm also in a HCOL area and bought my house 8 years ago for ~3.7xs my annual salary. I'm so happy that I did because rents have skyrocketed here and I pay much less in mortgage+ins+tax than I would in rent now and have a much nicer place than I would otherwise.

Another great thing to consider in a HCOL area is that your area might be very desirable for AirBnB or even just renting out if you want to leave for awhile. My salary has dropped quite a bit since I bought the place, but now I Airbnb a spare room out and it is almost always booked, which helps with my income. And in the summer, I AirBnB the entire house and will just take off an go camping for long weekend when someone wants to book it.

So, like other posters have mentioned, it may make sense to have a higher income:house ratio if you plan to stay in the house for a long time, and get a low fixed mortgage rate. My additional $.02 is to consider possible future rental opportunities.

Carrie

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Re: How much house to buy
« Reply #27 on: December 17, 2017, 01:48:14 PM »
Our first house was about 1.2x, second house was almost 3x, but with a hefty down payment, so the loan was only 2x, but that quickly dropped due to income increases. We paid off the mortgage in January so now we have 100% equity on a house that is worth about 2.5x income. Next house, if we move or build, should be a lateral cash move.
I'm a fan of the cheapest house that makes you happy & meets your needs. Less payment means more freedom & faster to fire. Look for short commute, good neighbors, good floor plan, solid construction. 

former player

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Re: How much house to buy
« Reply #28 on: December 18, 2017, 02:10:27 AM »
A long time ago I bought in London at 3.3 multiple of my salary.  It was a small place in a good area with an easy commute.  It was a struggle at first (I lived like a student until my salary starting leaping upwards) but paid off big time over the next 25 years.

So to answer your question: do your research, which means being on the spot not buying from afar.  Work out
  • your minimum space requirements,
  • your maximum commute requirements (remembering that "maximum commute" is a combination of time, expense and convenience),
  • the maximum amount you have for repayments, and
  • the degree of risk you are comfortable with (risk depends on amount and security of earnings, possible trends in house prices, condition and location of the property and, for SF, the consequences of earthquakes).
And after all that, consider that you are still probably better off renting until you move out of commuting distance and away from the insane prices.

Also, are you ever planning to move back into your current house?  If not, you are probably better off selling it, as long-distance landlording is not easy.

joonifloofeefloo

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Re: How much house to buy
« Reply #29 on: December 18, 2017, 06:01:08 AM »

Dicey

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Re: How much house to buy
« Reply #30 on: December 18, 2017, 11:56:57 AM »
Another long-time Bay Area resident here. Do what ysette9 says. Every word.

--------------------------

Eh, I'm back with this to add: bragging about how little you paid for your LCOLA house does ZERO to help the OP.  The Bay Area is unfuckingly, unbelievably, insanely expensive. Unless your salary approaches MMM's rumored blog income, you can forget about paying <three times your salary. It just doesn't exist at current market prices, especially if one wants to live within walking or biking distance to work. You should, because traffic here sucks.

Okay, where was I... oh yeah, listening to  ysette9's great advice.
« Last Edit: December 18, 2017, 03:37:30 PM by Dicey »

RetirementDreaming

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Re: How much house to buy
« Reply #31 on: December 18, 2017, 11:59:33 AM »
It depends especially on how long you plan to stay in the home.   

House #1-   2.8   My 1st house purchased at 27 individually
House #2 -2.9   Bought with spouse
House #2 -4.7   Moved to HCOL area; bought too much house. Sold for 205k profit 16 months after purchase.
House #3 -3.3   Our income has increased a lot since we purchased and we put a lot down. 1.3 of gross now

ysette9

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Re: How much house to buy
« Reply #32 on: December 18, 2017, 08:05:48 PM »
@Dicey: :)

jamesbond007

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Re: How much house to buy
« Reply #33 on: December 19, 2017, 04:29:52 PM »
Forum members, I'm wondering if any can offer some guidance as to how much house ends up feeling comfortable as a multiple of gross income. Besides the obvious answer- as low as possible, I'm wondering if any could offer experiences of whether 2.5x as some internet sites suggest is really reasonable, if the 4x the broker suggested is warranted ever. We are looking at a move to a HCOL area. Not entertaining discussions for us to stay where we are....unfortunately.

This is how I bought my house. I looked at the rent that I was paying then. Added a little bit more to it after considering mortgage interest deduction and considered that as my monthly payment that I would comfortable with. Then worked backwards to figure out how much should I put down and total cost f the house that I could afford given my constraints above. I came to a number. I stuck to it. No wavering irrespective of what my real estate agent or the mortgage broker says.  Did not give in. It took my 3 years to find the house in my budget. But I sure as hell found it.

While touring open houses, I asked myself one question. "If I were to rent this house would I rent it?" If the answer was yes, then that is the right size house for me. If the answer was no, then not. The reason for this question, I think, is that you bring out the need instead of the want.

Forget about 1.5X, 25X, 1000X. 0.5X. You know your priorities. Work backwards. The last thing you want in life is regret.

badassprof

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Re: How much house to buy
« Reply #34 on: December 19, 2017, 07:45:06 PM »
In the Bay area here too. We have owned our home since 2006 and  although we  have a healthy combined income, I don't think we'd try to buy right now. As noted, there are a lot of communities and options to consider and explore, many of which you can't get a feel of until you're here and get a chance to explore. In addition, right now the situation is insane. Our former tenants had tons of cash to put down and kept getting out bid by 75,000 to 100,000 (on houses with asking prices of 750). It took our  friends almost a year to find a place. Not a market where one can get a deal where one feels good.  The house behind us went for over 200,000 over asking, and sold within in two weeks (and that asking price was 1,450,000. . So called Tax "reform" may be bringing some of the prices down or at least will flatten them in a way that, I hope, will mean people don't have to buy in a panic, so I'd wait.


ysette9

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Re: How much house to buy
« Reply #35 on: December 19, 2017, 07:58:12 PM »
When house hunting and looking at numbers I put together a spreadsheet of different housing costs versus how many years to FIRE. We found it helpful to frame our wants in this way because it made the trade offs much clearer than an additional x$/month as a mortgage affordability calculator online would do. Then we could ask ourselves “I like this location/extra bedroom/lot size, but am I willing to work X number of extra years for it?”.

Goldielocks

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Re: How much house to buy
« Reply #36 on: December 19, 2017, 08:22:02 PM »
After living, renting and buying in LCOL and HCOL (including the bay area), I found that the calculation used is very different.

LCOL -- base the home purchase amount off of your salary multiple, because the plan is to eventually own the home outright (or an equivalent account that could completely pay off a mortgage).    With this home, the cost and time for maintenance is a large factor in your analysis.   You can't ignore rental prices, but chances are the home you buy for the same monthly dollar is a lot nicer than than the home you can rent.  Often, an acceptable rental to you is VERY hard to find.

HCOL -- owning a home is really just a form of "renting" a home.  Base the cost off the monthly payment vs your income and area rentals. You will have that $700k mortgage for a very, very long time, because most people just re-up the mortgage, and it will be a high mortgage in terms of $'s per month, that puts a lot of pressure on keeping your job or else be forced to move out of the area.  This decision analysis falls to Rent versus Buy more strongly...  AND you need to evaluate the likelihood of losing one of your jobs into the analysis.

Dicey

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Re: How much house to buy
« Reply #37 on: December 19, 2017, 09:44:48 PM »
I like the way you think, Mr. Bond.^^^

Acastus

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Re: How much house to buy
« Reply #38 on: December 20, 2017, 10:39:29 AM »
Monthly cost as a % is more meaningful than multiples of income. Our 1st house cost 25% of gross income to start. We were pretty broke the next couple years. Luckily, I got 5-10% raises every year that decade, so there was breathing space in the budget after a while. I miss the '90s. I think I felt comfortable when the mortgage + taxes was under 20% of gross income. When it went below 15%, it became easy.

Goldielocks

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Re: How much house to buy
« Reply #39 on: December 20, 2017, 11:30:58 AM »
Even %'s don't tell the whole story .  We are nearing 48% of net pay as housing (mortgage + tax) and yes, it is tight-ish.  But we still have 2-3x our  monthly food budget to spend on utilities and all other expenses, so very possible.   BUT we don't have childcare costs, the one teen is no longer in costly after school activities, and we no longer have to travel to see family, could start using just one car plus transit, etc.

affordablehousing

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Re: How much house to buy
« Reply #40 on: December 27, 2017, 02:21:40 PM »
Thank you all for the responses, and especially those that relate to the special case of the bay area. Spouse and I are both natives, and have family reasons to return to the bay area. We are fortunate to have reasonable job security and average incomes for the bay area ~$350K, though consider ourselves even more lucky to really enjoy our jobs. It seems like our horizon for this next house is around 35 years, so we may just have to take the long view and pay a premium for a house now to insulate ourselves from the worries of housing costs in the future and endure a tighter budget as we pay down our mortgage. Inspirational to hear from those that have already done this, hung on, and just focused on enjoying life. We find the concept of FIRE interesting, but I think more of a curious theoretical case study rather than a goal. Thanks all!