While many rules of thumb are quite useful, I find that the one for buying a house is at best an
approximation of a
ballpark estimate of a
SWAG. :) I think there are just too many additional factors, both explicit and implicit, to make such a rule of thumb very useful.
Really, I think it's more important to first have a fairly solid understanding of your personal finance situation before even considering the purchase of a house. And I believe that if you already have a detailed understanding of your household finances, it should be obvious how much house you can "afford". For the overwhelming majority of people, the purchase of their primary residence is the biggest financial engagement of their lives, so it seems foolish to jump into it with only a "rule of thumb" level of understanding.
Off the top of my head, I can think of a lot of factors that go above and beyond the purchase price:
- How much is financed versus how much down payment?
- What about maintenance and utilities? I think it's generally safe to assume that the maintenance and utilities will scale with the purchase price.
- Are you looking at your income from a gross or net perspective? For high earners, the rule of thumb could differ by nearly 40% depending on if net or gross income is used. Be conservative, use net. I'd even say to use net after taxes and 401(k) deductions.
- Property taxes. You can generally write them off your income taxes, but, be conservative, assume you can't. This is another area where the expense generally scales with the purchase price. If buying an existing property, be careful of using the existing property taxes are the basis for what you'll pay. I looked at some houses that had surprisingly low property taxes, but it was clear if I were to buy the house, the taxes would go up dramatically. Typical cause was due to an owner who had lived there a long time and gotten by without any new assessments despite multiple upgrades. One seller told me he got an extra exemption for living there as long as he had.
- Commute. If it materially changes your commute, either in time or distance, it's potentially a significant added expense. Of course it can work both ways: if your new house allows you to drop a car and walk, bike or take public transit, that's great. But just be aware, the exact opposite could happen, and your commute costs go up significantly.
- Utilities. Presumably, a more expensive house is bigger, and bigger usually costs more to heat and cool. So again, this is another area where a higher initial purchase price usually implies higher overall expenses.
- Cleaning. Bigger usually means more of a time cost for cleaning, or an outright money cost if you're paying for a cleaning service.
- HOA fees and rules. Upscale neighborhoods or buildings might have rules that force you to keep up with the Jonses.
FWIW, I bought my first house in 2004 for $164k and I think I was making around $65k/year (gross) at the time. So that's right around the 2.5x mark. But I bought it when a friend and I were sharing an apartment, and he moved with me and paid me rent (until he got married and moved out). Since then, I've become much more intimately involved in personal finances, so if I were to go back in time and follow my own rules, I may not have bought that house. I'm more conservative now than I was back then. :)