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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Ricky on April 20, 2015, 09:30:50 PM

Title: How much is too much for a house?
Post by: Ricky on April 20, 2015, 09:30:50 PM
I think one thing that neither MMM or anyone here can come to a consensus on is housing.

I've seen several threads where people throw out the fact that they're either considering or buying houses in the $500k-$1m range or even more and everyone on this forum seems to shudder at the thought.

My thoughts are there are plenty of places where paying that much wouldn't be necessarily un-Mustachian or wasteful, unless the goal for everyone is to work in a HCOL area and then retire to a LCOL. What about when you still want to keep the amenities of a HCOL in retirement?

Even for a mid-COL area like Austin, TX, which I'm currently visiting, housing can be surprisingly affordable or not depending on where you want to be. If you want to be in the more Mustachian, bikeable parts of town, it's going to cost you. Houses are generally $300-500k or MORE. And this is what is considered by most to be a very affordable housing city. Austin is more dense than some cities, but I wouldn't want to live anywhere outside the core since it's just too sprawling for me. The obvious problem with buying an expensive home is the taxes. It doesn't matter if you're maintaining ~1200 sqft if you're still paying ~2.5% on a $400k house.

So I'm wondering what a general rule of thumb would be? Say within 10-20% of the median sales price for any given area?

I know the general principle is to live below your means, it just seems like that is sometimes unavoidable with housing? Are more people here choosing to rent if they live in the city? If they buy, are the choosing to live well outside the core?
Title: Re: How much is too much for a house?
Post by: okits on April 20, 2015, 09:36:58 PM
Lots of factors to consider. 2-3x annual income, ideally.  Comparisons to the cost of rent for similar.  It depends on what income you can generate in your HCOL area, so dollar figures aren't a good yardstick (e.g. $5MM is fine if you can earn $2.5MM/year).
Title: Re: How much is too much for a house?
Post by: HenryDavid on April 21, 2015, 07:02:58 AM
3x the annual income of one of us--we didn't include my spouse's unpredictable income--with 30% down, has worked amazingly well for us.
Minimum payments on this amount are laughably low, but you could make those and bank the surplus if you prefer.  We chose to double up payments and the mortgage has melted away quickly and painlessly. Less than 15 years of low housing costs, and done. Doing this meant buying a house with some upgrades needed, but those could be done at times of opportunity: one year our Canuck government offered a home reno tax credit, so we jumped on that.
Preserve your flexibility and don't overload your life with any more house cost than you truly need. There's so much more to life than your house. It's what you do in it, and away from it, that makes your life.
Title: Re: How much is too much for a house?
Post by: Gone Fishing on April 21, 2015, 07:08:19 AM
If you can rent one of those $500k houses for $3k per month or abouts, it is probably too much house.
Title: Re: How much is too much for a house?
Post by: nereo on April 21, 2015, 07:19:24 AM
I think one thing that neither MMM or anyone here can come to a consensus on is housing.
That's because the decision on whether or not to buy a house requires so many parameters, and how you 'weight' these parameters changes the outcome.  Some are quantifiable (price, rent-to-buy metrics, distance to work/shopping), others are more subjective (pride in ownership, the 'i-love-this-house') and yet more are unknowable or hard to quantify (e.g. duration in an area, job prospects, appreciation).  Not all of those are equal, but depending on whether you place a higher emphasis on,say, future mobility than 'i-love-this-house' it can change the outcome of the "should I buy this" question.

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I've seen several threads where people throw out the fact that they're either considering or buying houses in the $500k-$1m range or even more and everyone on this forum seems to shudder at the thought.
Personally, I don't think the sticker price of the house matters nearly as much as how buying compares to renting in that area.  For example, if I lived in Palo Alto, California again a $750k house within biking distance of work might seem attractive compared with a >$3000/month rental that's requires a car and a commute.

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So I'm wondering what a general rule of thumb would be? Say within 10-20% of the median sales price for any given area?

I think you're asking the wrong question.  It shouldn't be "how much can I pay for a house in this area" - a better question to ask is "what combination of price, location and features will maximize my happiness and freedom".  It might be within 10-20% of the median sales price, or it might be double the median price if it allows me to live car-free in an efficient home with a great floor-plan.
Title: Re: How much is too much for a house?
Post by: velocistar237 on April 21, 2015, 07:32:43 AM
There's a lot of flexibility, but there's some consensus. Don't buy more house than you reasonably need, be willing to move to another city, and if transportation savings offset the increased housing cost, then it could be worth it.

But more often than not, people who want to spend more than 3x their income end up buying more house than they need. If you live in NYC, for example, then you need a studio, or maybe 2 bedrooms if you have kids. If you can do it in one place, then you can do it in another. People might want 3+ bedrooms and a backyard in a top school district, and the pull can be really strong, but they certainly don't need those things. I wouldn't be surprised if someone who bought a house like that would be willing to make the decision to delay their financial independence at the time of purchase, but when they actually start working the extra years, would start to chafe at the loss of freedom.

Who on their deathbed regrets their housing choice? Life isn't about having a nice house. Buy something that gives you freedom of choice, and if you still want a nice house later, figure out how to get it then, when you aren't pushing the cost of the decision onto your future self.
Title: Re: How much is too much for a house?
Post by: merula on April 21, 2015, 07:40:22 AM
My metric is "don't have a room in your house that you don't use at least weekly". Any house price can be frugal if the circumstances are right: earning potential in a high COL area; close to family, friends and amenities to reduce travel time/cost; and finding a place you're happy to call home.

IMO, what's really wasteful is too much space, not the sticker price on the building. More space has to be heated and/or cooled, furnished, cleaned, maintained, etc. The sticker price can often be made up in the resale, the upkeep costs cannot.
Title: Re: How much is too much for a house?
Post by: James on April 21, 2015, 08:06:20 AM
MMM himself lived in a high value house himself until last year, it is an area he conciously decided to spend more on, while also feeling like it was too much house as he progressed in mustachianism. So I don't think a high value house is necessarily un mustachian. What is considered "high value" or "too much" just depends on a lot of things including the local market, individual preference, individual finances, and position on the progress to FI. The environmental impact is also a key factor, often overlooked if the focus is entirely financial.
Title: Re: How much is too much for a house?
Post by: SnackDog on April 21, 2015, 08:53:25 AM
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.  Looking back, we were tempted by homes (which we didn't purchase) in much, much less desirable locations which have turned out to be much less valuable in the long run.

Just remember, in many circumstances purchasing a home may not be your smartest financial move, particularly if there is any chance you will not live there a very long time.
Title: Re: How much is too much for a house?
Post by: cynthia1848 on April 21, 2015, 09:34:09 AM
Agree with SnackDog.  We stretched to buy a house in a good school district and with a shortish commute in a HCOL area.  The house itself was a wreck.  With the work we have put into it and the appreciation of the area, now it is probably worth about 50% more than we paid (7 yrs later).  Our previous condo made us about 20% profit in 2 yrs of ownership.
Title: Re: How much is too much for a house?
Post by: Kris on April 21, 2015, 09:41:03 AM
To me, the most important factor by far has always been the percentage of my income.  The fact that the "rule of thumb" is to spend 3-4x your annual income on a home is mind-boggling to me. (And of course, there are people who spend much more than that.)  When I got divorced and bought my own condo for the first time, I had to come close to 3x my income, and it freaked me out completely, although I could easily afford it, looking back.  When I met my now-husband, he had a condo that was 4x his income.  He sold it and moved in with me, and now what we pay is about 10% of our annual income.   
Title: Re: How much is too much for a house?
Post by: Friar on April 21, 2015, 09:41:16 AM
My metric is "don't have a room in your house that you don't use at least weekly" (...)
what's really wasteful is too much space, not the sticker price on the building. More space has to be heated and/or cooled, furnished, cleaned, maintained, etc.

I think this is quite a good mantra to have.

It's all well and good having a spare room for when people come to visit, but if that's only happening for three weekends a year then the room otherwise goes to waste.

I'd be happy offering my guests a comfortable blow-up double mattress on the floor of my living room if they're staying for a few days. For those who can't handle it, and VIPs (read: the parents/in-laws), they can take the master bedroom and my partner and I can use the inflatable.
Title: Re: How much is too much for a house?
Post by: Ricky on April 21, 2015, 09:50:55 AM
There's a lot of flexibility, but there's some consensus. Don't buy more house than you reasonably need, be willing to move to another city, and if transportation savings offset the increased housing cost, then it could be worth it.
This is what is confusing I think. "More house than you need" is a bit ambiguous. Some 500 sqft homes cost upwards of $500k in some areas. Technically, you're not buying more space than you need, but are you in general paying too much to live in a HCOL area, effectively having access to more things than you really need?

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.

So I guess the answer is that there isn't a true definitive answer for everyone. I was only curious because there are a lot of people on these forums with sub $250k homes and are high earners in fairly HCOL areas so I just wonder where they are finding these deals or if they choose to live far outside the core to save money on housing.
Title: Re: How much is too much for a house?
Post by: nereo on April 21, 2015, 09:56:06 AM
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period. 
Title: Re: How much is too much for a house?
Post by: MLKnits on April 21, 2015, 09:59:00 AM
My metric is "don't have a room in your house that you don't use at least weekly". Any house price can be frugal if the circumstances are right: earning potential in a high COL area; close to family, friends and amenities to reduce travel time/cost; and finding a place you're happy to call home.

IMO, what's really wasteful is too much space, not the sticker price on the building. More space has to be heated and/or cooled, furnished, cleaned, maintained, etc. The sticker price can often be made up in the resale, the upkeep costs cannot.

I like this rule a lot. I rent very affordably in a HCOL area (condos comparable to my apartment are atrociously priced, and don't get me started on houses), but even if the cost differences weren't so stark, I just don't need all that extra. My electricity cost (only utility I pay directly) is $30/month, it's easy to keep tidy, it restricts how much random crap I can accidentally purchase--if anything, I sometimes think my one-bedroom is bigger than I need.

Obviously, families with kids will have different needs--but then, there are lots and lots of those in my building, so do they really?

That said, I have a balcony that I don't use all winter, so I may be breaking the rule myself--but I'm on it every single day in the warm months, let me tell you!
Title: Re: How much is too much for a house?
Post by: nereo on April 21, 2015, 10:02:55 AM

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.
That would make sense to me - if you have investments of $1M and no other income and wish to live off of a 4% WR, you will have an annual budget of $40k.  It's analogous to someone earning a $40k salary.  So yes, I think a $120k house is approximately how much you could 'afford' under those circumstances.

Of course the early retiree with $1MM in investments could simply get a part time job paying $12k/year and afford something almost 3x as fancy, but that's another scenario.
Title: Re: How much is too much for a house?
Post by: Ricky on April 21, 2015, 10:17:40 AM

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.
That would make sense to me - if you have investments of $1M and no other income and wish to live off of a 4% WR, you will have an annual budget of $40k.  It's analogous to someone earning a $40k salary.  So yes, I think a $120k house is approximately how much you could 'afford' under those circumstances.

Of course the early retiree with $1MM in investments could simply get a part time job paying $12k/year and afford something almost 3x as fancy, but that's another scenario.
If said person bought a $300k house instead (7.5x his annual income) he would still have $700k in investments, yielding $28k per year.

Add in 1.25% in taxes, 1% in maintenance, $800 in insurance yearly, you have $7.5k in yearly expenses on that house.

This (single) person still has $20.5k a year to live off of, and that's not the definition of being able to afford much more than 3x your monthly income? I think Mustachians can afford much more house since they are frugal in so many other areas.
Title: Re: How much is too much for a house?
Post by: nereo on April 21, 2015, 10:30:50 AM

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.
That would make sense to me - if you have investments of $1M and no other income and wish to live off of a 4% WR, you will have an annual budget of $40k.  It's analogous to someone earning a $40k salary.  So yes, I think a $120k house is approximately how much you could 'afford' under those circumstances.

Of course the early retiree with $1MM in investments could simply get a part time job paying $12k/year and afford something almost 3x as fancy, but that's another scenario.
If said person bought a $300k house instead (7.5x his annual income) he would still have $700k in investments, yielding $28k per year.

Add in 1.25% in taxes, 1% in maintenance, $800 in insurance yearly, you have $7.5k in yearly expenses on that house.

This (single) person still has $20.5k a year to live off of, and that's not the definition of being able to afford much more than 3x your monthly income? I think Mustachians can afford much more house since they are frugal in so many other areas.
I agree with your math but disagree with your conclusions.  If this person bought a $300k house outright they'd have a much smaller stash to live off - $20.5k vs $40k if they bought no house. 

Could this work?  Sure.  Is does it make financial sense?  Nope.  Here's why:  If this person decided to perpetually rent, he/she would be able to afford up to $1,625/month in rent, and adjust as necessary for inflation.* In just about any market this will allow you to live in a place worth substantially more than $300k.  Alternatively, he/she could spend less to live in an equivalent $300k home and either have a lower WR or have more money for other things, like traveling.

*$1,625/mo based on the 'lost' $19.5k/year when comparing investments worth $1MM and $700k and a WR of 4%
Title: Re: How much is too much for a house?
Post by: thd7t on April 21, 2015, 10:59:20 AM
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.
50% over the last 7 years is almost exactly what the S&P500 has returned (much better over 6 years, because that excludes the crash).  However, I agree that buying a house and hoping to turn a primary residence into a return sounds like speculation.
Title: Re: How much is too much for a house?
Post by: nereo on April 21, 2015, 11:09:43 AM

50% over the last 7 years is almost exactly what the S&P500 has returned (much better over 6 years, because that excludes the crash).  However, I agree that buying a house and hoping to turn a primary residence into a return sounds like speculation.
From April 2008 to today I calculate 60.3% adjusted for inflation, and 75.8% not adjusted for inflation (all including dividends).  Earlier post didn't specify whether increase in housing price was in real-adjusted dollars, but I suspect not.

That's a pretty big difference.  I'm not saying 50% over 7 years isn't a good return - it is.  But it's always good to compare it with how the market has done over the same time period.  Too many people think the appreciation of their home over several decades made it a fantastic investment, which sometimes it really wasn't that great.
Title: Re: How much is too much for a house?
Post by: mm1970 on April 21, 2015, 11:14:49 AM
There's a lot of flexibility, but there's some consensus. Don't buy more house than you reasonably need, be willing to move to another city, and if transportation savings offset the increased housing cost, then it could be worth it.

But more often than not, people who want to spend more than 3x their income end up buying more house than they need. If you live in NYC, for example, then you need a studio, or maybe 2 bedrooms if you have kids. If you can do it in one place, then you can do it in another. People might want 3+ bedrooms and a backyard in a top school district, and the pull can be really strong, but they certainly don't need those things. I wouldn't be surprised if someone who bought a house like that would be willing to make the decision to delay their financial independence at the time of purchase, but when they actually start working the extra years, would start to chafe at the loss of freedom.

Who on their deathbed regrets their housing choice? Life isn't about having a nice house. Buy something that gives you freedom of choice, and if you still want a nice house later, figure out how to get it then, when you aren't pushing the cost of the decision onto your future self.
Not necessarily (the bolded part).  I know there are some places that are super expensive.  And yes, if we worked really hard we could probably find jobs somewhere else.  But finding two jobs (we both like working) in our two fields isn't easy.

I'd say when we bought our house, it was probably 4.5x our gross income.  It was literally the bottom of the single family market in our town.  2BR, 1BA, no garage, small lot, a driveway that goes to a house in the back.  The house was between our two jobs.  The next town over (about 10 miles away) had 3/2's for that amount (the size of the houses really depended on when they were built.  In our town, 20's to 40's, in the town over, 60's and 70's).

Of course now we both work in the next town over, so hindsight I'd have bought the 3/2 for the same amount of money.

The house isn't too big or "too much" for us with 2 kids.  We could have gotten a condo, but didn't want a condo.  It's just a really expensive area, where only about 5% of the people who live here can afford to own.  Of course, our timing sucked, but whatever.

The other thing to consider is demographics.  Yes, we live in <1200 sf now.  So we could do that *anywhere*.  But some towns are newer than that, and don't have 1200 sf houses.  Some towns only have condos and townhouses that size, and if you want a single family home, they are all bigger.  And some towns only have those size houses in crappy school districts.  Which, I live in a bad school district now, and transfer our son to a slightly better, but still not great, school.  But I've learned my lesson there.  I won't do that again.
Title: Re: How much is too much for a house?
Post by: thd7t on April 21, 2015, 11:19:21 AM

50% over the last 7 years is almost exactly what the S&P500 has returned (much better over 6 years, because that excludes the crash).  However, I agree that buying a house and hoping to turn a primary residence into a return sounds like speculation.
From April 2008 to today I calculate 60.3% adjusted for inflation, and 75.8% not adjusted for inflation (all including dividends).  Earlier post didn't specify whether increase in housing price was in real-adjusted dollars, but I suspect not.

That's a pretty big difference.  I'm not saying 50% over 7 years isn't a good return - it is.  But it's always good to compare it with how the market has done over the same time period.  Too many people think the appreciation of their home over several decades made it a fantastic investment, which sometimes it really wasn't that great.
I was looking at non-adjusted numbers and getting a 58% return.  I might not be factoring dividends in.  However, again, I agree with you that a primary residence shouldn't be counted on as an investment (for a return).  It can be a great investment in a way to reduce expenses, in the right market, though.
Title: Re: How much is too much for a house?
Post by: Rein1987 on April 21, 2015, 12:23:27 PM
I paid a lot on my house, because I spent a lot of time in the house. I think this is very important to the life quality. I feel, if you can still keep up with a 50%-60% saving rate, it's OK to buy a good house. Because the marginal between 50% saving rate to 70% saving rate does not reduce too much of your years till FIRE, but you can definitely enjoy the life more before your FIRE.

And I also consider house as an investment because I'll move to a relative LCOL area after FIRE. People consider 1M house expensive but do not consider 1M mutual fund expensive, which sounds not right to me. I cannot live in the total market fund but I can live in a good house on my journey to FIRE. No one can predict which one increase more...maybe my house price increase much more than the stock. Or maybe not.
Title: Re: How much is too much for a house?
Post by: nereo on April 21, 2015, 01:02:55 PM
I paid a lot on my house, because I spent a lot of time in the house. I think this is very important to the life quality. I feel, if you can still keep up with a 50%-60% saving rate, it's OK to buy a good house.
I think this is a good point - if having an expensive home increases your happiness, and you can do it while spending less than you earn, then by all means spend a lot on a home.  To me that's part of what being mustachian is all about - making financial decisions that still allow you to live below your means.

Quote
And I also consider house as an investment because I'll move to a relative LCOL area after FIRE. People consider 1M house expensive but do not consider 1M mutual fund expensive, which sounds not right to me. I cannot live in the total market fund but I can live in a good house on my journey to FIRE. No one can predict which one increase more...maybe my house price increase much more than the stock. Or maybe not.
Sure, no one can be certain whether a specific house will increase more than a specific stock over several decades, but we can use history as a guide.  And overall, homes have appreciated more-or-less at the same rate as inflation.  The market has returned 7-8%/year after inflation.

Moving to a LCOL area after FIRE has nothing to do with it.  If you spend an insane amount on a home (and by insane I mean far more than you otherwise could have in a similar area) then you will have less money when you move than you would had you lived in a more sensible home and either paid off the mortgage faster or invested the difference.  There is no scenario where choosing a home that costs 2x as much as one nearby nets you more money when you retire, regardless of whether you buy or rent.  Telling yourself any differently is just trying to make yourself feel better about unnecessary consumption.  I'm not saying you shouldn't buy a nice house if it gives you happiness - like MMM I also choose to live in a very fancypants home - but I don't try to convince myself every month when i make my mortgage payment that the extra $200 I pay vs something slightly less fancy is somehow making me wealthier.  It isn't.  It's just making me happier now.

Title: Re: How much is too much for a house?
Post by: velocistar237 on April 21, 2015, 01:45:42 PM
I paid a lot on my house, because I spent a lot of time in the house. I think this is very important to the life quality. I feel, if you can still keep up with a 50%-60% saving rate, it's OK to buy a good house. Because the marginal between 50% saving rate to 70% saving rate does not reduce too much of your years till FIRE, but you can definitely enjoy the life more before your FIRE.

I like this line of thinking, though the difference between 50% and 70% is going from 17 years to 8.5 years. That's pretty big. Maybe more along the lines of if it's just a small difference in time, then it could be worth it to some people.

Another thing to consider is that OMY buys a lot more if you wait to get the nice house later and don't have the loan interest working against your investments in the meantime.

And I also consider house as an investment because I'll move to a relative LCOL area after FIRE. People consider 1M house expensive but do not consider 1M mutual fund expensive, which sounds not right to me. I cannot live in the total market fund but I can live in a good house on my journey to FIRE. No one can predict which one increase more...maybe my house price increase much more than the stock. Or maybe not.

Moving from a HCOL area to a LCOL area is smart, but not necessarily if you spend a lot on housing in the meantime.

People do consider the time it takes to get a 1M mutual fund as expensive. The trade-off between working for money and doing something more worthwhile is what MMM is all about.

You can't live in a total market fund, but you can pay rent from the earnings.

No one can predict whether a house will increase in value more than the market, but we do have historical data that says the market is a surer bet, and that "investing" in housing isn't investing at all but speculating on an expense.
Title: Re: How much is too much for a house?
Post by: ysette9 on April 21, 2015, 01:56:05 PM
I am following this thread with interest because we are considering purchasing and I got (politely) smacked upside the head on another topic for saying we were planning on purchasing a place that costs up to $800k. I know that will buy a tremendous amount in many parts of the country, but where we are, our list of needs/wants is relatively modest: 2/2 minimum (we'd really like 3/2), 1000ft^2 minimum (1200ft^2 would be really nice), good light, located between our two jobs in a place with good public schools. At our price we are only able to consider condos, no SFH. That is just the way it works out sometimes. Then again, we are reaping the many benefits of living where we do which includes a high household income, so that purchase price is not outrageous for us (so we think). :)
Title: Re: How much is too much for a house?
Post by: MrsPete on April 21, 2015, 04:01:22 PM
As someone else said, this is a question with many variables -- so many moving pieces!

To give an example of why it's hard to give hard and fast rules, I have two rooms in my house that we don't use every week -- in fact, I can't think of when we last used them -- BUT this house is BY FAR the cheapest place we can live right now, and it has increased significantly in value in the time we've been here.  We'll do well when we sell.

I personally would not be comfortable spending more than 2Xs my yearly salary on a house. 
Title: Re: How much is too much for a house?
Post by: Rein1987 on April 21, 2015, 04:36:51 PM
Moving from a HCOL area to a LCOL area is smart, but not necessarily if you spend a lot on housing in the meantime.

People do consider the time it takes to get a 1M mutual fund as expensive. The trade-off between working for money and doing something more worthwhile is what MMM is all about.

You can't live in a total market fund, but you can pay rent from the earnings.

No one can predict whether a house will increase in value more than the market, but we do have historical data that says the market is a surer bet, and that "investing" in housing isn't investing at all but speculating on an expense.

My past experience of house investment beats the stock market. It gave us 500% tax free return in 4 years (total mortgage payment in 4 years + down payment vs money got back after selling). It's true that not always this case, like history data suggests. But still, house can be an investment. It's more like picking an individual stock, not a total market though.
Title: Re: How much is too much for a house?
Post by: badger1988 on April 21, 2015, 05:35:23 PM
I find the whole topic very fascinating. I'm so used to living in the midwest that its hard for me to calibrate to HCOL areas. We bought our house three years ago, and at the time it cost 56% of our gross income. It's way bigger than we need, great location, great neighbors, and I have no desire to move or upgrade as long as we live in the area (Peoria). Really, the reason it was so inexpensive is simply because most people are scared to send their kids to Peoria public schools, so they all buy "expensive" houses in the suburbs with no character and no trees.
Title: Re: How much is too much for a house?
Post by: kindviking on April 21, 2015, 08:15:04 PM
Simple answer: 3x the main income earner max, with 20% down. We're in a HCOLA as well, did this and went with a 15-yr mortgage. Now, just a few years and a few raises later, we owe about 1.5x our main income earner's salary. We *could* have purchased a much more expensive place, but concluded it was definitely more house than we need, more real estate exposure than wise in the event of a downturn and would tie up cash such that we'd lose out on other investing opportunities.
Title: Re: How much is too much for a house?
Post by: alsoknownasDean on April 21, 2015, 08:33:39 PM
Where I live, 3x the average income might buy a 1 bedroom apartment.

I'm looking at buying in a couple years, and not looking at spending any more than 5x. That'll get a two bedroom unit about 15km from the city, a 1 bedroom apartment about 5-10km out, or a house in the outer suburbs (>30km out).

The average house price in this city is about 7-8x the median income.

Regional areas are cheaper, but that means far fewer employment opportunities or long commutes to the city.
Title: Re: How much is too much for a house?
Post by: louloulou on April 21, 2015, 09:56:17 PM
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income
Title: Re: How much is too much for a house?
Post by: Kris on April 22, 2015, 06:07:57 AM
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.
Title: Re: How much is too much for a house?
Post by: nereo on April 22, 2015, 06:28:31 AM

My past experience of house investment beats the stock market. It gave us 500% tax free return in 4 years (total mortgage payment in 4 years + down payment vs money got back after selling). It's true that not always this case, like history data suggests. But still, house can be an investment. It's more like picking an individual stock, not a total market though.

No, it didn't. At least, I am 99% certain this was not the case. I was shocked when I read that you got a "500% tax free return in 4 years" because that's in the realm of house-flippers' best dream scenario.  But then I realized how you were calculating returns (total money spent vs. money back after sale).
What are you measuring here is total return on money spent.  And that's fine - you did very well, congratulations!  pat yourself on the back.
However these 'returns' that you quoted were highly leveraged.  You were on the hook for the total value of the home, and while you didn't state the specifics after 4 years I'm guessing you owned somewhere around 20-30% of the total home (i.e. you had paid off 20-30% of the original sale price of the home).  Let's assume 25% - that means your returns were leveraged 4-1 when you sold (and had been going down each mortgage payment).  To make a fair comparison to the stock market, you would need to compare returns with the same degree of leverage.

But wait, it gets more complicated.  For a fair comparison you need to include buying and selling costs, insurance and associated taxes.  Also, any money you spent on home maintenance needs to be included, as well as any upgrades or repairs that you made over 4 years.  Then all prices need to be real-adjusted for inflation (appoximately -8% of the sale price in your case). Finally, for a truly fair comparison the total number of hours spent on home maintenance needs to be factored in.

I'm not trying to pooh-pooh your gains here.  I do think it's great that you made such a tidy profit on your home over a relatively short time period.  But I see this fallacy of fantastic home-ownership gains perpetuated over and over.  Someone purchases a home for $300k with a small down payment and sell it a few years later at $400k and conclude that they've had gains which have far exceeded anything the stock market has ever returned.  It's just incorrect and can become dangerous when gullible individuals start thinking home ownership is their ticket to riches.

If I'm grossly wrong about some of my assumptions I apologize.  If you bought a home with cash for $100k and sold it 4 years later for $500k without every doing any maintenance  - well done!   I'm just trying to educate a bit here...
Title: Re: How much is too much for a house?
Post by: GetItRight on April 22, 2015, 07:23:26 AM
In absolute terms even in a HCOL area I'd say 150k-200k, with the upper end pushing past my comfort level. To accommodate for higher cost of living areas 2x income would be my max and even that is pretty extravagant. If you are working in an area where 2x income doesn't cut it then the presumably higher income in that area does not justify the higher cost as there are plenty of places where 2x income will get you a very nice house.

If it's your last house after FIRE and you've budgeted for it then I could see spending more for a desirable location that accommodates your lifestyle and retirement goals (i.e. proximity to beach, waterfront, etc) but even those types of places can be had for much less than the average consumer type pays if you don't demand all the luxury features unrelated to your goals. For a basic house serving the purpose of being in reasonable proximity to work while you're still building the stash... 2x income at most. Live like you're poor now so you can live like you're rich later.
Title: Re: How much is too much for a house?
Post by: madmax on April 22, 2015, 08:49:57 AM
 
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.

What is the alternative then? Rents in the Bay have been going up somewhere in the 6-10% range every year. The salary multiple, absolute cost is irrelevant IMO. If the alternative is renting, punch your numbers in the NYTimes buy vs rent calculator and see what you get.
Title: Re: How much is too much for a house?
Post by: Bob W on April 22, 2015, 08:53:28 AM
My rule on houses is the same for anything else  "If you can't pay cash for it you can't afford it."    That said I'm not opposed to you having the cash (or tax deferred accounts)   that are greater than the value of the house but take out a 3.25% loan while keeping your investments working.

Houses are the ultimate consumer marketed item.   Realtors are taught to say things like "Buy the biggest house you can afford and it will be a great investment!,"   and "Your mortgage should be about 1/3rd of your income."   Using that logic a couple earning 150K should have a 50K annual housing cost and buy a $750K house.   

I'm always amazed when people won't spend a penny on restaurants but will pay 400K for a house.  When MMM bought his luxury pad I did a little research on his town and found nice homes for rent for $1,000 a month.   He is paying about 4K per month.  So all his savings ideas don't come close to equaling the 3K per month difference.    (he is very well off financially so I don't begrudge him living wherever he wants.  But I doubt that he is anymore hedonistically happy in the 4K house vs the 1K house)

Areas differ,  but I assume there is always a less expensive housing option.

If you don't have the cash to buy a house outright then rent an inexpensive place.  Yes!  Rent until you've saved the money -- shocking!

300 sq ft per person is more than enough space.

And lastly ---- You don't own a house -- It owns you. 


*(former home builder/marketer,  current owner of a way too big house that we paid very little for)
Title: Re: How much is too much for a house?
Post by: RetiredAt63 on April 22, 2015, 09:58:41 AM
Really, I don't think actual dollar figures are very informative - if I quote house prices in Canadian dollars, not only are they massively dependent on location, but look at the Canadian dollar fluctuation versus other currencies over the past few years.  Plus since we pay our mortgages, and save for our down payments, out of after tax dollars, what % of income we have in our hands after tax is also going to vary enormously.  We are an international community, please let's remember that in these discussions.

So maybe the discussion would be more useful if we looked at after-tax and % income, not numbers?

And location is so important - if you want a "nice" house on the Ottawa River in/near Ottawa, you will be paying about a million.  If you are willing to commute, you can get a similar house in the L'Orignal/Hawkesbury area for roughly half that.  In Toronto - more. Or way more.
Title: Re: How much is too much for a house?
Post by: Avidconsumer on April 22, 2015, 10:06:13 AM
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
Title: Re: How much is too much for a house?
Post by: mm1970 on April 22, 2015, 10:19:09 AM
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.
Or, you could buy one anyway.  Just wait, and maybe put more down.

We waited until we were in our mid 30s.  Put 20% down, the market went into the toilet (at the bottom of the market, our house was worth $300k less than we paid for it).

We have been paying it off aggressively and refinancing.  So we were never actually underwater (at the bottom of the market, the house was worth about $20k over our mortgage).

Now we owe 1.5x our gross income on the mortgage and 2.5x our highest individual income. (Had we timed it better, we'd be better off).

I regret not timing it better, but hindsight is 20/20.  If we were renting right now, we'd be paying the same amount a month (mortgage+prop tax).  Of course, even if we waited to buy until RIGHT NOW we'd probably have been better off, because our particular house is worth a tiny bit less than we paid for it, and interest rates are low.

Very interesting article in the local paper about it all, about how we have two different groups of professionals locally - those who bought houses 15 years ago and the rest of us.
Title: Re: How much is too much for a house?
Post by: nereo on April 22, 2015, 10:24:54 AM
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
yes, but the leveraging aspect is exactly what gets many into trouble, and why people (erroneously) think that their home has been such a great investment compared to the broader market.  If you are going to make a fair comparison you have to also 'leverage' the market to a similar degree.  See my previous post for a bit more detail, but the danger here is that you are leveraged in both directions.  If the house drops 10% your  'loses' are compounded and you are suddenly in the dreaded "underwater" debt-trap.  Plus there's the unavoidable fees and taxes both in the purchase and the sale, not to mention any maintenance and labor required on the property over the duration that you own it.
Title: Re: How much is too much for a house?
Post by: Avidconsumer on April 22, 2015, 10:35:45 AM
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
yes, but the leveraging aspect is exactly what gets many into trouble, and why people (erroneously) think that their home has been such a great investment compared to the broader market.  If you are going to make a fair comparison you have to also 'leverage' the market to a similar degree.  See my previous post for a bit more detail, but the danger here is that you are leveraged in both directions.  If the house drops 10% your  'loses' are compounded and you are suddenly in the dreaded "underwater" debt-trap.  Plus there's the unavoidable fees and taxes both in the purchase and the sale, not to mention any maintenance and labor required on the property over the duration that you own it.

You are right, however it's still more than a 50% return.
Title: Re: How much is too much for a house?
Post by: Avidconsumer on April 22, 2015, 10:39:02 AM
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
yes, but the leveraging aspect is exactly what gets many into trouble, and why people (erroneously) think that their home has been such a great investment compared to the broader market.  If you are going to make a fair comparison you have to also 'leverage' the market to a similar degree.  See my previous post for a bit more detail, but the danger here is that you are leveraged in both directions.  If the house drops 10% your  'loses' are compounded and you are suddenly in the dreaded "underwater" debt-trap.  Plus there's the unavoidable fees and taxes both in the purchase and the sale, not to mention any maintenance and labor required on the property over the duration that you own it.

You are right, however it's still more than a 50% return. Property investment creates more millionaires than the stock market...
Title: Re: How much is too much for a house?
Post by: nereo on April 22, 2015, 10:53:15 AM
You are right, however it's still more than a 50% return. Property investment creates more millionaires than the stock market...
I think you are completely missing it here.  The 50% number came from Cynthia1848's post about buying a home in need of lots of repairs, working extensively on it and after 7 years having the home's value increase by 50%.
You are correct that her gains relative to her initial outlay of cash + mortgage payments would have been much greater than 50%, but you are ignoring two key things.  First, that return on investment required substantially more than just the initial down payment + monthly mortgage payments.  There was clearly a lot of 'sweat-equity', plus extensive renovations, transaction fees and taxes.  Second, if you are going to compare leveraged returns to the market, you have to compare them to leveraged returns on the market.

Quote
Property investment creates more millionaires than the stock market...
[citation needed]
what about the millions of homeowners who went underwater when the value of their homes went down and they were effectively stuck because the bank owned 90% of the home?  What about lost opportunity costs because they could not move. 

The idea that, broadly speaking and across all markets people can make more money with their homes than in the market seems unlikely to me.
Title: Re: How much is too much for a house?
Post by: Jeremy E. on April 22, 2015, 11:16:50 AM
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
I would read this it's very helpful
Title: Re: How much is too much for a house?
Post by: nereo on April 22, 2015, 11:29:48 AM
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
I would read this it's very helpful
thanks for the link.
Title: Re: How much is too much for a house?
Post by: yandz on April 22, 2015, 11:30:50 AM
I can't remember which interview, but MMM referred to himself as "a bit of a house slut" in that it is worth it to him to have a nice home.  I had a good long chuckle about that.  The reality is I feel the same way.  We spend a lot of time at home. We entertain family and friends. We cook nearly every meal there. We stay home one weekends. We are serious home bodies. Since our home captures so much of our time, we bought at a higher (but still reasonable) price point than we could have (2.2x ONE of our incomes or 1x our joint incomes) and are putting some remodeling time and $$ in.  The short commutes, close walking trails, what will be a lovely kitchen, and "just right" size and layout for us.....it makes it so worth it.  We don't know if we plan to sell later, but am much as I agonized the added cost (2x the previous home value), it really does contribute to our happiness over our previous home/location.

ETA: we are still at a 70+% savings rate, so yay.  But we could be saving even more had we decided on something that was just "sufficient" vs. as awesome as we feel about our current home.
Title: Re: How much is too much for a house?
Post by: cynthia1848 on April 22, 2015, 11:59:20 AM
So you have to live somewhere.  If you rent, your rent + utilities etc. is the COL.  If you own, PITI is the COL.  If your home is increasing in value as you own it, then you get part of the PITI back in appreciation and equity.

In our case, if we were to have rented, our rent payment for a similar home would have equaled PITI, but at the end of the 7 years, (1) we wouldn't have built any equity in the house,  (2) we wouldn't have been able to take the mortgage interest deduction, and (3) we wouldn't have been able to invest that money in the market anyway.  So it's kind of a false dichotomy to compare it to market returns.  If you have free cash flow to invest somewhere, then you can compare real estate to other investments, but the calculation is different when it is your primary residence.
Title: Re: How much is too much for a house?
Post by: thd7t on April 22, 2015, 12:01:34 PM
So you have to live somewhere.  If you rent, your rent + utilities etc. is the COL.  If you own, PITI is the COL.  If your home is increasing in value as you own it, then you get part of the PITI back in appreciation and equity.

In our case, if we were to have rented, our rent payment for a similar home would have equaled PITI, but at the end of the 7 years, (1) we wouldn't have built any equity in the house,  (2) we wouldn't have been able to take the mortgage interest deduction, and (3) we wouldn't have been able to invest that money in the market anyway.  So it's kind of a false dichotomy to compare it to market returns.  If you have free cash flow to invest somewhere, then you can compare real estate to other investments, but the calculation is different when it is your primary residence.
I think the other advantage is that a fixed mortgage is a pretty nice inflation hedge.
Title: Re: How much is too much for a house?
Post by: Kris on April 22, 2015, 12:11:13 PM
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.

What is the alternative then? Rents in the Bay have been going up somewhere in the 6-10% range every year. The salary multiple, absolute cost is irrelevant IMO. If the alternative is renting, punch your numbers in the NYTimes buy vs rent calculator and see what you get.


Smaller house.  Move to LCOL.  Get a better job.  Apartment or townhouse. 

My point being, this forum is about living within your means so you can achieve financial independence.  Part of that is taking a good look at your lifestyle and realizing what things you think you need to spend money on, and think critically about it.  Many or most reasons, if examined critically, start to look less reasonable, or important, or justifiable... Or set in stone.  If you feel you need to spend 7x your annual income to get the house you want, that is a financially bad decision.  Write down the various factors involved (area, size of abode and cost per sq foot, salary,  etc.) and figure out a way to live that is financially sensible.
Title: Re: How much is too much for a house?
Post by: nereo on April 22, 2015, 01:57:12 PM
So you have to live somewhere.  If you rent, your rent + utilities etc. is the COL.  If you own, PITI is the COL.  If your home is increasing in value as you own it, then you get part of the PITI back in appreciation and equity.

In our case, if we were to have rented, our rent payment for a similar home would have equaled PITI, but at the end of the 7 years, (1) we wouldn't have built any equity in the house,  (2) we wouldn't have been able to take the mortgage interest deduction, and (3) we wouldn't have been able to invest that money in the market anyway.  So it's kind of a false dichotomy to compare it to market returns.  If you have free cash flow to invest somewhere, then you can compare real estate to other investments, but the calculation is different when it is your primary residence.
I agree with (almost) everything you just said.  Most of my postings in this thread have been in response to a few individuals who are spouting the idea that investing in 'the largest home you can afford' is a better wealth-building strategy than investing in the market under most circumstances. It sounds like you have made a lot of smart financial decisions with your home, buying an undervalued home, renovating it yourself and staying in it for several years.  This is a similar strategy to what we are doing.

My issue is that many people delude themselves into thinking their homes have appreciated much more than they actually have, and then make misinformed statements like "my return was much better than the market's".  It's a kind of willful amnesia that homeowners make so that they feel better about their purchase.  Common mistakes include not factoring inflation (often substantial given how long people own their homes), ignoring buying and selling fees (especially substantial when a home is owned for a very short period of time) and ignoring the energy and time spent on maintaining their own home.

My only concern with your situation is that you mentioned a rent payment would have been about equal to your PITI. To address your specific responses:
1) True, you would have no equity if you rented.  But for the same price you would have spent no time or money renovating your home.  Those are very real costs that should be factored in.
2) Mortgage deduction works for some but not for everyone. It's less useful when the interest rate is low (like now), the principle balance is low (e.g. towards the latter half of the loan).  Many find they only save a few hundred over the standardize deduction.  Hopefully you benefit more
3) agreed - if you couldn't have otherwise invested the money this is all just a thought exercise.  The aim of which is to answer the question "how good of an investment has my home been."  To that end comparing it to other metrics (SP500, bonds, savings account) can still be a useful yardstick.  It doesn't change anything but it gives a frame of reference.
Title: Re: How much is too much for a house?
Post by: louloulou on April 22, 2015, 04:06:35 PM
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.

What is the alternative then? Rents in the Bay have been going up somewhere in the 6-10% range every year. The salary multiple, absolute cost is irrelevant IMO. If the alternative is renting, punch your numbers in the NYTimes buy vs rent calculator and see what you get.


Smaller house.  Move to LCOL.  Get a better job.  Apartment or townhouse. 

My point being, this forum is about living within your means so you can achieve financial independence.  Part of that is taking a good look at your lifestyle and realizing what things you think you need to spend money on, and think critically about it.  Many or most reasons, if examined critically, start to look less reasonable, or important, or justifiable... Or set in stone.  If you feel you need to spend 7x your annual income to get the house you want, that is a financially bad decision.  Write down the various factors involved (area, size of abode and cost per sq foot, salary,  etc.) and figure out a way to live that is financially sensible.

Not everywhere is like America though. In my country, this is just the reality. Even in lowest LCOL areas, medican house cost= 3x median income. But people living there for the most part would earn less as there are just not the jobs.  To get a higher income, you would need to move to the big cities where median house price = 12x median income. It is a real issue here. The reality for many is that they will rent for life.

Title: Re: How much is too much for a house?
Post by: Mrkineticz on April 22, 2015, 04:43:40 PM
im in the same predicament as the OP. One thing I did was use my fiances credit by herself and was approved for a 300k house by herself. Knowing if i put my name on the house with her we would be approved for 500k easily. so by using only one persons credit we are in a way stopped at 300k to buy a house! try that if u can
Title: Re: How much is too much for a house?
Post by: Ricky on April 22, 2015, 09:01:15 PM
I can't remember which interview, but MMM referred to himself as "a bit of a house slut" in that it is worth it to him to have a nice home.  I had a good long chuckle about that.  The reality is I feel the same way.  We spend a lot of time at home. We entertain family and friends. We cook nearly every meal there. We stay home one weekends. We are serious home bodies. Since our home captures so much of our time, we bought at a higher (but still reasonable) price point than we could have (2.2x ONE of our incomes or 1x our joint incomes) and are putting some remodeling time and $$ in.  The short commutes, close walking trails, what will be a lovely kitchen, and "just right" size and layout for us.....it makes it so worth it.  We don't know if we plan to sell later, but am much as I agonized the added cost (2x the previous home value), it really does contribute to our happiness over our previous home/location.

ETA: we are still at a 70+% savings rate, so yay.  But we could be saving even more had we decided on something that was just "sufficient" vs. as awesome as we feel about our current home.

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

Of course, in your particular case, you may make well above six figures, but I remember another thread where so many were saying they had homes no more than 2x their income.
Title: Re: How much is too much for a house?
Post by: nereo on April 23, 2015, 05:13:54 AM

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

I've had a similar question.  We make well below the $55k threshold yet we decided to purchase a home that's about 4x our annual income.  We were aided by having a large down payment and extensive savings but the bottom line for us was we couldn't find anything to rent that was even close to what our current mortgage payment are.  Our housing portion of our budget is a larger percentage than I'd like it to be, but it would be the same (actually worse) if we were renting in this area.  Shrug.
"Rules of thumb" are just guidelines.
Title: Re: How much is too much for a house?
Post by: badger1988 on April 23, 2015, 05:58:40 AM
I can't remember which interview, but MMM referred to himself as "a bit of a house slut" in that it is worth it to him to have a nice home.  I had a good long chuckle about that.  The reality is I feel the same way.  We spend a lot of time at home. We entertain family and friends. We cook nearly every meal there. We stay home one weekends. We are serious home bodies. Since our home captures so much of our time, we bought at a higher (but still reasonable) price point than we could have (2.2x ONE of our incomes or 1x our joint incomes) and are putting some remodeling time and $$ in.  The short commutes, close walking trails, what will be a lovely kitchen, and "just right" size and layout for us.....it makes it so worth it.  We don't know if we plan to sell later, but am much as I agonized the added cost (2x the previous home value), it really does contribute to our happiness over our previous home/location.

ETA: we are still at a 70+% savings rate, so yay.  But we could be saving even more had we decided on something that was just "sufficient" vs. as awesome as we feel about our current home.

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

Of course, in your particular case, you may make well above six figures, but I remember another thread where so many were saying they had homes no more than 2x their income.

Zillow http://www.zillow.com/home-values/ (http://www.zillow.com/home-values/) says that the median sale price for all of the United States is currently at 207k (up from 152K in 2012). So roughly half of all the houses sold in the U.S. are less expensive than the 200K upper end of the range you gave.
Title: Re: How much is too much for a house?
Post by: ShoulderThingThatGoesUp on April 23, 2015, 06:19:55 AM
I can't remember which interview, but MMM referred to himself as "a bit of a house slut" in that it is worth it to him to have a nice home.  I had a good long chuckle about that.  The reality is I feel the same way.  We spend a lot of time at home. We entertain family and friends. We cook nearly every meal there. We stay home one weekends. We are serious home bodies. Since our home captures so much of our time, we bought at a higher (but still reasonable) price point than we could have (2.2x ONE of our incomes or 1x our joint incomes) and are putting some remodeling time and $$ in.  The short commutes, close walking trails, what will be a lovely kitchen, and "just right" size and layout for us.....it makes it so worth it.  We don't know if we plan to sell later, but am much as I agonized the added cost (2x the previous home value), it really does contribute to our happiness over our previous home/location.

ETA: we are still at a 70+% savings rate, so yay.  But we could be saving even more had we decided on something that was just "sufficient" vs. as awesome as we feel about our current home.

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

Of course, in your particular case, you may make well above six figures, but I remember another thread where so many were saying they had homes no more than 2x their income.

There are lots of these. Random example for my county (https://www.redfin.com/PA/Trexlertown/7668-Brandywine-Cir-18087/home/5904758). Built in 1992, no HOA, right around $100/sf. One of the best school districts in the state.

Lots of value in small metro areas if you can find a job.
Title: Re: How much is too much for a house?
Post by: nereo on April 23, 2015, 06:26:00 AM

Zillow http://www.zillow.com/home-values/ (http://www.zillow.com/home-values/) says that the median sale price for all of the United States is currently at 207k (up from 152K in 2012). So roughly half of all the houses sold in the U.S. are less expensive than the 200K upper end of the range you gave.

Sure, but ignoring Zillow's flaws, what matters isn't the median price of a home across all of the US (which includes lots and lots of very cheap rural houses), but what the price is for the area where you live and work.  If you make the median salary in a more urban/suburban area with higher home prices, it doesn't matter that you could buy a home 200 miles away.  Likewise, if renting is considerably more expensive than mortgage payments, it may make sense to buy even if you are above that 2x threshold, especially if you plan on living there for several years.
EDIT:  To put it more succinctly, there's a correlation between median home prices in an area and median salaries.
Title: Re: How much is too much for a house?
Post by: cynthia1848 on April 23, 2015, 07:14:56 AM

1) True, you would have no equity if you rented.  But for the same price you would have spent no time or money renovating your home.  Those are very real costs that should be factored in.
2) Mortgage deduction works for some but not for everyone. It's less useful when the interest rate is low (like now), the principle balance is low (e.g. towards the latter half of the loan).  Many find they only save a few hundred over the standardize deduction.  Hopefully you benefit more

#1.  Very true - I think for those of us (MMM included) who like working on homes the time spent feels more like leisure than work.

#2.  When you get into the high dollar values for income and deductions, the deduction available is much higher.  Off the top of my head, I think the first few years we were deducting around $35-$40K in mortgage interest.
Title: Re: How much is too much for a house?
Post by: zurich78 on April 23, 2015, 08:44:22 AM
My metric is "don't have a room in your house that you don't use at least weekly". Any house price can be frugal if the circumstances are right: earning potential in a high COL area; close to family, friends and amenities to reduce travel time/cost; and finding a place you're happy to call home.

IMO, what's really wasteful is too much space, not the sticker price on the building. More space has to be heated and/or cooled, furnished, cleaned, maintained, etc. The sticker price can often be made up in the resale, the upkeep costs cannot.

I think that is a good secondary metric.  For me, it still boils down to the price/value.  If you can get lucky and score a good deal on a bigger home at a small home price in the same neighborhood, I think one should do it if the upside has a higher ceiling and the worst case scenario is essentially the same.
Title: Re: How much is too much for a house?
Post by: xenon5 on April 23, 2015, 07:32:32 PM
So you have to live somewhere.  If you rent, your rent + utilities etc. is the COL.  If you own, PITI is the COL.  If your home is increasing in value as you own it, then you get part of the PITI back in appreciation and equity.

In our case, if we were to have rented, our rent payment for a similar home would have equaled PITI, but at the end of the 7 years, (1) we wouldn't have built any equity in the house,  (2) we wouldn't have been able to take the mortgage interest deduction, and (3) we wouldn't have been able to invest that money in the market anyway.  So it's kind of a false dichotomy to compare it to market returns.  If you have free cash flow to invest somewhere, then you can compare real estate to other investments, but the calculation is different when it is your primary residence.

But there are other factors that affect the rent vs mortgage payment ratio.

1)The absolute cost of property tax goes up over time, and the % can also go up if your city runs into budget troubles
2)If you live in a condo/co-op, HOA costs also go up over time and the association can also run into trouble.  So that's 1-3 budgets (city, state, HOA) that you have little control over directly influencing your costs.
3)All maintenance costs and utilities are your responsibility (in my area, heat and water is usually included in rent).  Maintenance costs also go up over time.
4)Transaction costs are high on buying and selling, so if you need to leave sooner than expected, you can end up with 0 or negative total return
5)A mortgage is a bigger commitment than a rental agreement.  Selling can take months and renting out takes work.  If you didn't buy with renting out in mind, it could be a lousy rental.
6)You take on the risk of the house losing value over time.  If the house loses 50% of its value, you lose out significantly.   See Detroit.
7)Some areas have rent control that indexes the max annual rent increases to inflation.  Such guarantees for homeowner taxes/maintenance are pretty rare.

There are plenty of factors influencing the buy/rent decision.  My point is that $1000/month of mortgage isn't automatically better than $1000/month rent for an equivalent home.  If anything the mortgage needs to be less than the rent to fairly compensate you for the extra risk you're taking on and pay for maintenance.
Title: Re: How much is too much for a house?
Post by: Abe on April 26, 2015, 09:26:04 AM
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.
Title: Re: How much is too much for a house?
Post by: nereo on April 26, 2015, 11:25:54 AM
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential....
I won't pretend to answer for all 35 million Californians, but I lived there for a decade.  Home ownership was never in the realm of possibilities, but I still loved living there.  I have family there, a lot of friends and a job I loved.  I enjoyed the culture, the food and the physical location.  Even though my current location makes much more financial sense (for example, my mortgage is about half what a one-bedroom apartment cost me in California), I still miss living there.

Sometimes it's about more than where the most financially optimal place to live is.
Title: Re: How much is too much for a house?
Post by: Bob W on April 26, 2015, 12:10:31 PM
I can't remember which interview, but MMM referred to himself as "a bit of a house slut" in that it is worth it to him to have a nice home.  I had a good long chuckle about that.  The reality is I feel the same way.  We spend a lot of time at home. We entertain family and friends. We cook nearly every meal there. We stay home one weekends. We are serious home bodies. Since our home captures so much of our time, we bought at a higher (but still reasonable) price point than we could have (2.2x ONE of our incomes or 1x our joint incomes) and are putting some remodeling time and $$ in.  The short commutes, close walking trails, what will be a lovely kitchen, and "just right" size and layout for us.....it makes it so worth it.  We don't know if we plan to sell later, but am much as I agonized the added cost (2x the previous home value), it really does contribute to our happiness over our previous home/location.

ETA: we are still at a 70+% savings rate, so yay.  But we could be saving even more had we decided on something that was just "sufficient" vs. as awesome as we feel about our current home.
. Like your thinking.  Our home was 1 times our annual as well.   I think that is a reasonable number for someone leveraging with a mortgage.   I think most people won't like buying a 100k house on 100k income in most areas but it can be done.   Or just save more.  Leveraging at 80% is not a good idea if you don't have the cash to back it up.
Title: Re: How much is too much for a house?
Post by: Rein1987 on April 27, 2015, 12:13:08 PM
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.

I'd like to mention two things as a bay area resident. First, it's not like cost of housing far exceed earning potentials..In fact, there's too much earning potential recent years. New grad in high tech company can easily get $100k or more salary. If you are willing to take some risk, a startup can be bought by large company or go IPO in a few years, making you multi-millionaire by 30 (more than 10% of my classmates get to a million net worth now, by 30.). Because a lot of people have too much money to spend, which makes other professions easier to get rich too. For example, in other areas, piano teacher might be $40 a hour in other area but in the bay area I know a few charge more than $100 a hour, with more than 50 students. By simple math, I guess she can make 20k a month gross, or at least 10k. In other words, bay area is a heaven for people who are willing to take adventure and seek wealth.

Also, home owner in the bay area can be those who lived here for a long time. Because of prop 13, their expense on the house is really low. New home owners are not likely to be medium wage earners. New home owners I know either makes top 5% or got more than 200k or even 1 million support from parents.

The reason I choose to live here is: 1. too much earning potentials which might make me FIRE earlier. 2. My home country's housing price is way more expensive than here (1.5 million USD for a 1500sqft condo, much less income level). At least here houses here are more "affordable" in my mind.
Title: Re: How much is too much for a house?
Post by: nereo on April 27, 2015, 12:30:53 PM
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.

I'd like to mention two things as a bay area resident. First, it's not like cost of housing far exceed earning potentials..In fact, there's too much earning potential recent years. New grad in high tech company can easily get $100k or more salary. 
I'll just chime in with an example - my niece's kindergarden teacher has a salary of $68k and spends her summer teaching surfing (hey, it's California) to have a gross-income around $100k.  This is in the SF Bay Area.  Not bad for someone in her late 20s without an advanced degree.

Quote
Also, home owner in the bay area can be those who lived here for a long time. Because of prop 13, their expense on the house is really low.
Ah Prop 13... has there ever been a better-intentioned piece of legislation with such unintended consequences?

Quote

2. My home country's housing price is way more expensive than here (1.5 million USD for a 1500sqft condo, much less income level). At least here houses here are more "affordable" in my mind.
Just curious here - what is your home country?  Taking a stab in the dark here... Iceland?
Title: Re: How much is too much for a house?
Post by: myrax on April 27, 2015, 12:47:10 PM
The NY Times Rent vs. Buy calculator can help you calculate whether renting or buying is a better option, though it doesn't take into account time spent on repairs: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Title: Re: How much is too much for a house?
Post by: slugline on April 27, 2015, 01:26:27 PM
My point is that $1000/month of mortgage isn't automatically better than $1000/month rent for an equivalent home.  If anything the mortgage needs to be less than the rent to fairly compensate you for the extra risk you're taking on and pay for maintenance.

+1 I view ownership as insourcing the tasks of landlord and property manager. So I think it has to cost less than renting to be financially advantageous, really, so you can "pay yourself."
Title: Re: How much is too much for a house?
Post by: mm1970 on April 27, 2015, 01:34:41 PM
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.
I live in Santa Barbara, so...similar to NorCal in many ways.

In the Bay Area, what I've seen is booms and busts.  For example, there have been times in the last decade or so where the typical Bay Area house was actually cheaper than the Santa Barbara equivalent.  The difference is that now, that same house is $500k more than it was a decade ago, because of the boom cycle.

Santa Barbara is a really nice place to live. My kids were born here, we both have jobs here, our friends are here - we came and just never left.  The traffic isn't bad like the Bay Area.

But the Bay Area has more jobs, more competition.  During the booms, people in my industry could go across the street and get a big raise. So if you were already living there and had a house or condo, you could save a ton of money.  That gives you more stability if there are more jobs.  (Santa Barbara doesn't have quite the job market.)

At this point, I think it would be difficult for us to find jobs in our areas of expertise in the same location, unless it was the Bay Area (I don't want to go there).  So, there aren't a huge number of places that have semiconductors, and those who do might not have jobs for my husband.  Regardless, he makes more money.  If we were to move, it would be for his job.  Well the easiest place to go would be the DC area (his company has an office there), but that's hardly a huge step up.  And I could get *a job* there, probably, but it would be more of a struggle, and I'd likely have to have an awful commute, so - just no.

What else is there?  I'd hate to move "somewhere else" and leave my friends and my kids' friends, unless it meant we were going to be near family. No jobs for either of us near my family.  There *are* jobs near his family - a house "our size and age" in his home town is $110k a year, vs. the $750k+ it is where we are now.  No brainer, right?  Well, it's effing cold there and they've had awful winters.  And he doesn't want to move back home.

Anyway, the whole "retire to a nice beach location" - I just figure that our overpriced "starter home" in SB is going to also be our "retirement home", assuming we don't run out of water between now and then.
Title: Re: How much is too much for a house?
Post by: I'm a red panda on April 27, 2015, 01:44:20 PM
My house cost 2x our annual salary.  It is way too much house for us- right now it has 3 unused rooms.  But it was impossible to find our desired feature (room for my husband's workshop) in a smaller house

However, I'm a complete homebody.  I don't regret getting a bigger house, even if it costs more than our last smaller one because I am happier at home, which means I have no desire to go out anymore. I don't need to go out to eat because it is fun to cook in the beautiful kitchen rather than just being a utilitarian place to get it done. I don't feel the need to go out and wander the mall, because just lazing around the house is fulfilling to me because it is a beautiful space.

And I am happier with the neighbors. It is difficult to put a price on great neighbors.  This is a million times improvement of our old house.

And it is single family. In our area zero lots are so common. From starter homes to 500k homes- people share walls.  My house costs significantly less than 500k. I have no understanding of why people buy those. (There is no condo association that takes care of the yard/pool/snow removal etc- if there was that would make more sense.)

If we have kids, our house will make more sense. But even without them, I feel silly with the wasted space, but not financially.