Author Topic: You shouldn't buy a home more than xxx ?  (Read 23741 times)

SwordGuy

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Re: You shouldn't buy a home more than xxx ?
« Reply #50 on: January 11, 2014, 07:39:15 PM »
Living in GTA (Greater Toronto Area), you'll be hard pressed to find ANYTHING decent for under $375k.  Condos are like $300k and beyond as well in the downtown core.

http://www.zoocasa.com/en/search/properties?search[location]=toronto+ontario&search[price_min]=&search[price_max]=&search[bedrooms]=&search[bathrooms]=&_kk=real%20estate%20listings%20in%20toronto&_kt=8b16bd76-5e58-42ed-997a-1d06fc2a7615?utm_campaign=Hoop_Traffic_ON-Cities&gclid=CKid0KLN97sCFU_NOgodWiEAWQ

As of my search, 91 properties in Toronto with 3+bedrooms, 2+bathrooms, and 200,000 dollars or less.

Surely one of them is "decent".

ArcticaMT6

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Re: You shouldn't buy a home more than xxx ?
« Reply #51 on: January 13, 2014, 11:34:58 AM »
We bought our house (townhouse, actually) for 3x our income this past summer. The original plan was to get an old house to gut and put $50-75k into, but that didn't exist at the right price in the areas we wanted to live. They were all the same price as our townhouse, and still needed gutting. So instead we got a larger than average townhouse with a 2 car garage (rare in this city) that was built in 2008 so it doesn't need anything mechanically for a long time. I could have gotten a house that needed minimal work in other parts of the city, or outside of city limits, but then it would require commuting for both my wife and I, which would require another car, etc. For reference, she rides her bicycle to work, I ride a motorcycle to work. The car gets filled up about once a month at most. 

the fixer

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Re: You shouldn't buy a home more than xxx ?
« Reply #52 on: January 13, 2014, 11:54:18 AM »
This is what I'm worried about. Can't afford to buy now, can't afford not to buy now...
As soon as this type of thinking becomes commonplace, you have a bubble. I saw it in the US in 2005 or 2006, when a friend told me I needed to buy a townhouse out in the exurbs NOW because prices will just keep going up forever.

I also learned from the subsequent crash, from watching my parents, that buying a house is NOT an investment unless you can generate income from it while you're holding it (e.g. by finding tenants) or, possibly, by offsetting the amount of rent you would have paid elsewhere if you weren't living in it. There are two big problems with realizing appreciation in personal residences. First, you cannot always sell or buy at an optimal time due to life circumstances. My Dad was thinking about selling at the top of the market but didn't get the house listed until after it started to tank. After that, it sat on the market for over a year and he got no offers, with an asking price below the appraisal. If he sells it this summer, it will have taken five years to get rid of it from the time he originally wanted to. Second problem is that it's dangerously easy to let emotions creep into the decision-making process, e.g. "this is the house that my kids grew up in!" or "across the street is the house my past-away best friend lived in, I need to move." As soon as this starts, the house stops being an investment and starts being just more "stuff" that you won't make rational decisions about.

Gen Y Finance Journey

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Re: You shouldn't buy a home more than xxx ?
« Reply #53 on: January 13, 2014, 12:27:31 PM »
This is what I'm worried about. Can't afford to buy now, can't afford not to buy now...
As soon as this type of thinking becomes commonplace, you have a bubble. I saw it in the US in 2005 or 2006, when a friend told me I needed to buy a townhouse out in the exurbs NOW because prices will just keep going up forever.

I see this with my friend as well. I mentioned to her that one of the reasons I don't want to overextend myself by purchasing a house here is because the prices are already so insanely high compared to the rest of the country that I don't see how I can count on the values continuing to go up as they have in the past. Her response: they ALWAYS go up.

WageSlave

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Re: You shouldn't buy a home more than xxx ?
« Reply #54 on: January 13, 2014, 01:28:11 PM »
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.  :)



Anatidae V

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Re: You shouldn't buy a home more than xxx ?
« Reply #55 on: January 13, 2014, 04:10:47 PM »
This is what I'm worried about. Can't afford to buy now, can't afford not to buy now...
As soon as this type of thinking becomes commonplace, you have a bubble. I saw it in the US in 2005 or 2006, when a friend told me I needed to buy a townhouse out in the exurbs NOW because prices will just keep going up forever.

I see this with my friend as well. I mentioned to her that one of the reasons I don't want to overextend myself by purchasing a house here is because the prices are already so insanely high compared to the rest of the country that I don't see how I can count on the values continuing to go up as they have in the past. Her response: they ALWAYS go up.

I'm in Australia, and the house prices in my area seem comparable to the other cities. Only other option is to go regional/rural, which reduces our chances of employment. We're waiting until we can afford one instead.

Zamboni

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Re: You shouldn't buy a home more than xxx ?
« Reply #56 on: January 13, 2014, 04:32:13 PM »
This question reminds me of a story I once heard about a man interviewing drivers for a very dangerous cliff-side road in Peru.

Man: How close to the edge of the cliff are you comfortable driving?
Driver #1: I can drive 3 feet from the edge with no problem.
Driver #2: I drive 1 foot from the edge all the time.
Driver #3: I always drive as far from the edge as I can.

Guess who got the job.  ;)

When shopping for houses, it's easy to get caught up in looking at more and more expensive options to see what your money can buy.  But if you instead look for the least expensive house you can find that you'll be perfectly happy living in, you'll generally be better off in the long run.

+1

I bought a slightly larger house than I needed because it was right at the bottom in terms of price after the downturn in the market.  So I got a great deal on a bigger house, but now I have to pay to heat it, cool it, paint it, etc.  Ugh, should have just gotten the smallest house I could stand.

slugsworth

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Re: You shouldn't buy a home more than xxx ?
« Reply #57 on: January 13, 2014, 04:39:02 PM »
This is a tough one for those of us without 6 figure incomes in high RE areas. So my house is now worth about 4x my annual income, I owe about 2.35x my annual income and my month PITI is about 18% of my gross income. . . and I think I have one of the cheapest houses in Seattle.

At least while I live here I think I made about as good of a housing situation I could make as a single person as my ITI is way lower than rent would be in a 1bdrm apt in a mustachian (by Seattle standards) neighborhood. . . it isn't quite as good if I account for the opportunity cost, but a big piece of that is appreciation since I bought near the low.

It would be great to live in a place where one could buy a place for well, for something under $200k. All this being said, I think that the multiple of your income metric is close to worthless.

CDP45

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Re: You shouldn't buy a home more than xxx ?
« Reply #58 on: January 13, 2014, 07:04:44 PM »
Can someone help me understand how people can afford to service the debt at 5x gross and higher with just 20% down and even a low rate of like 3.75%? Are people just making significantly more than $100,000 take home in these cities? Are property taxes way lower or do people just not save anything for retirement?

$100K gross 70% Take Home pay.

                              Total Pay/mo   PI   Tax        Ins    % of take home
8x Gross   800000   $4,301   $3,249   $952   100      73.73%
7x Gross   700000   $3,763   $2,840   $833   90      64.51%
6x Gross   600000   $3,226   $2,431   $714   80      55.30%
5x Gross   500000   $2,688   $2,023   $595   70      46.08%
4.2x Gross420000   $2,258   $1,698   $500   60       38.71%

dragoncar

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Re: You shouldn't buy a home more than xxx ?
« Reply #59 on: January 13, 2014, 07:16:13 PM »
Can someone help me understand how people can afford to service the debt at 5x gross and higher with just 20% down and even a low rate of like 3.75%? Are people just making significantly more than $100,000 take home in these cities? Are property taxes way lower or do people just not save anything for retirement?

$100K gross 70% Take Home pay.

                              Total Pay/mo   PI   Tax        Ins    % of take home
8x Gross   800000   $4,301   $3,249   $952   100      73.73%
7x Gross   700000   $3,763   $2,840   $833   90      64.51%
6x Gross   600000   $3,226   $2,431   $714   80      55.30%
5x Gross   500000   $2,688   $2,023   $595   70      46.08%
4.2x Gross420000   $2,258   $1,698   $500   60       38.71%

These numbers look wrong.  Are you forgetting the down payment?  Tax deductibility is a factor too.  I agree you can't go nigh higher than 5x at these rates but the average national 30 year rates bottomed around 3.3% which makes a huge difference.  If we are talking variable rates it's even lower (but obviously more dangerous)


Anatidae V

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Re: You shouldn't buy a home more than xxx ?
« Reply #60 on: January 13, 2014, 07:37:55 PM »
In Perth, homes are generally >$500k, often $750k. Interest rates are 5% at the low end... But people are still buying houses. No bursting of property bubble here, but there has been some slowdown. Rent is normally $500/week for a 3by2 kind of family home. So... It's all expensive? I believe the median household income is probably around $100k here. Don't have data to back myself, though.
« Last Edit: January 13, 2014, 08:42:46 PM by anatidaev »

Abe

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Re: You shouldn't buy a home more than xxx ?
« Reply #61 on: January 13, 2014, 08:06:36 PM »
My parents live in a low cost area, their house cost about 75% of their annual income. Over the years they've added a sun room and garage, paid in cash. Living outside of a major city has many perks, this being one. My wife and I are currently looking at houses that are about 50% of our income. I would not make any decisions on buying a house based on perceived increases in value. The less money in illiquid savings, the better one can handle financial storms. This was made painfully clear in the last 5 years.

Self-employed-swami

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Re: You shouldn't buy a home more than xxx ?
« Reply #62 on: January 13, 2014, 09:29:58 PM »
My parents live in a low cost area, their house cost about 75% of their annual income. Over the years they've added a sun room and garage, paid in cash. Living outside of a major city has many perks, this being one. My wife and I are currently looking at houses that are about 50% of our income. I would not make any decisions on buying a house based on perceived increases in value. The less money in illiquid savings, the better one can handle financial storms. This was made painfully clear in the last 5 years.

I think that's a very wise approach.

mpbaker22

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Re: You shouldn't buy a home more than xxx ?
« Reply #63 on: January 13, 2014, 10:58:04 PM »
Can someone help me understand how people can afford to service the debt at 5x gross and higher with just 20% down and even a low rate of like 3.75%? Are people just making significantly more than $100,000 take home in these cities? Are property taxes way lower or do people just not save anything for retirement?

$100K gross 70% Take Home pay.

                              Total Pay/mo   PI   Tax        Ins    % of take home
8x Gross   800000   $4,301   $3,249   $952   100      73.73%
7x Gross   700000   $3,763   $2,840   $833   90      64.51%
6x Gross   600000   $3,226   $2,431   $714   80      55.30%
5x Gross   500000   $2,688   $2,023   $595   70      46.08%
4.2x Gross420000   $2,258   $1,698   $500   60       38.71%

Look at it this way.  Someone makes 70K gross.  They buy an 800K house and they have 18K left every year.  That's more than I spend including housing!  Of course, I'm a single guy and the type of person buying an 800K house probably isn't very frugal.  Also, I'm not sure I read your chart right?

iwasjustwondering

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Re: You shouldn't buy a home more than xxx ?
« Reply #64 on: January 14, 2014, 01:41:47 PM »
I took out a mortgage for $360,000 three years ago, which was just about 2x my income.  The weird thing was that I was pre-approved (not pre-qualified) for a mortgage of $1 million.  I found that completely insane.  I didn't even have enough take-home salary to make the monthly payment, and this was in 2010, well after the mortgage crisis. 

So I'm proud to say that I bought a house for around 40% of what the bank was willing to lend me to buy.  That might be my most mustachian thing ever, but I can't pat myself on the back too hard, because it was very clear that I couldn't afford a $1 million mortgage.
« Last Edit: January 14, 2014, 01:44:15 PM by iwasjustwondering »

Insanity

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Re: You shouldn't buy a home more than xxx ?
« Reply #65 on: January 14, 2014, 02:15:34 PM »
When my wife and I bought our house roughly 8 years go, the finance company ran the pre-approval.  He said he could get us approved for debt to income ratio of 55-60% on the backend.  That would have put the house at approximately 5x our gross income.  Before DW could look at me for a response I laughed at the guy.  There was no way we were doing that. 

As it was, we bought a house that was roughly 3x our combined gross income at the time.  With the money from the sale of my townhouse, we covered the downpayment to remove PMI.  That also got us down to about 2.5 gross income for the mortgage payment.




the fixer

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Re: You shouldn't buy a home more than xxx ?
« Reply #66 on: January 14, 2014, 02:44:11 PM »
This is a tough one for those of us without 6 figure incomes in high RE areas. So my house is now worth about 4x my annual income, I owe about 2.35x my annual income and my month PITI is about 18% of my gross income. . . and I think I have one of the cheapest houses in Seattle.

At least while I live here I think I made about as good of a housing situation I could make as a single person as my ITI is way lower than rent would be in a 1bdrm apt in a mustachian (by Seattle standards) neighborhood. . . it isn't quite as good if I account for the opportunity cost, but a big piece of that is appreciation since I bought near the low.

It would be great to live in a place where one could buy a place for well, for something under $200k. All this being said, I think that the multiple of your income metric is close to worthless.
Some places/times just don't make sense to buy. Seattle is one of them right now. I wanted to buy property this year but we've given up on the idea. You have one of the cheapest houses in Seattle... well I'm in one of the cheapest 1-bedroom apartments in Seattle! $900/month. Of course, "Mustachian" would only begin to describe this place.