The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: EconDiva on August 23, 2013, 07:36:18 PM
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Compared to your gross income, what do you consider a realistic maximum house purchase amount?
No more than 3 times your gross income? No more than 2 times your income?
Know anybody who bought a house close to their annual income...?
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Buy a house with payments that fit within your savings goal. Unless renting is cheaper.
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When we bought our house 13yrs ago, I think it cost around 1.5 times our combined income.
We wanted to make sure that we could live comfortably on one income just in case something bad happened.
Nothing bad happened and were able to pay it of fairly quickly.
I would suggest buying something that you think you would be comfortable in for a long time, with a price tag that still lets you meet your saving goals. Houses can be expensive- even if you are frugal and diy, there are still many things to buy. Often renting is a better option.
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I think the general rule out in the world is that you shouldn't mortgage more than 2.5x your annual income, but that ignores the relatively large impact that different down payment amounts can have on the total.
It's also complete BS for large swaths of the country. Around here, the median home price is about 4x the median salary.
It's a surprisingly germane question right now. That oft-quoted 2.5x number is based on a target debt to income ratio for your monthly payment. For a fixed amount of income and debt, how much house you can afford is totally dependent on what interest rates you can get. Since rates have been historically low recently, people have been buying home at crazy multiples of their incomes (5x? 7x?) because they can still hit the bank's required monthly debt to income ratio with a 2.5% mortgage.
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We are in the process of buying a $105k house, we made $168k last year. We are downsizing from a $150k house.
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I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.
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For most wage earners, a payment that is 25% or less of your monthly income toward a 15 year mortgage is prudent. Plenty leftover in the budget to save, debt term is short enough to see the light at the end of the tunnel.
Ramsey and others use this guideline. Many people see this as overly conservative but the more you pay the harder it is to save, and harder to get through downturns, layoffs, medical issue etc that can affect income...
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I live in an area that was not hit by the recession and has very reasonable home prices. Seriously upscale housing starts at about $200K and you can get mansion-type uber fancy for $400K, so middle class housing runs around $75-$150K roughly.
When we bought our house, we were approved based off my husband's salary alone, as my income was from freelance and they said that it was too uncertain to be included. The house we ended up buying was about $40k less than what the bank approved us for. It cost about 2.5 times what he made then (nice middle class neighborhood in my city) but with my income as well, it was more like 1.5x our combined income. Despite the fact that I have a job that now pays about double of husband's original salary (and he's making a bit more than then as well), we've stayed put as the house is a fine for our needs and in a good location for us. We could go out and buy a house that costs double of this one, but there's no point as we're happy where we are and VERY happy with the laughably low payment and the fact that we'll be paying it off in a year or so.
So basically in my opinion, you shouldn't go off of any "experts say this" type of advice. If it was me, I'd do the same thing all over again. The important thing is to not buy more house than you actually need just because of some idea of that's the type/size of house you should be buying based off of income levels or lifestyle inflation crap.
Find a decent neighborhood that is BELOW the range of what all the advice tells you you can technically afford and get a size of house that is reasonable for your family size. And also seriously consider how to maximize the usage of every room - having a formal living and dining room when you already have a family room and breakfast nook seems like wasted space to me, and definitely don't fall for the "gotta have a guest bedroom" unless it's a multipurpose type thing - office/guest room or the like. Buying a bunch of sq ft that you only use parts of occasionally is wasted space and wasted money (besides the initial mortgage outlay, also costs you to heat/cool and maintain).
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I bought a house 9x my annual income (I was making $42,000/year, and the house was $374,000) but I had a $200,000 downpayment. I was approved for a mortgage of 4.1x my annual income.
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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.
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We mostly stuck to no more than 2 to 2.5X annual income for the price of the house. My last purchase when we relocated was about 2.25X, but by that point the mortgage was a modest fraction of our net worth so income measures sort of start to look funny.
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I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.
The reckoning will come in that regard, just like in my country, Canada.
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So basically in my opinion, you shouldn't go off of any "experts say this" type of advice. If it was me, I'd do the same thing all over again. The important thing is to not buy more house than you actually need just because of some idea of that's the type/size of house you should be buying based off of income levels or lifestyle inflation crap.
Find a decent neighborhood that is BELOW the range of what all the advice tells you you can technically afford and get a size of house that is reasonable for your family size. And also seriously consider how to maximize the usage of every room - having a formal living and dining room when you already have a family room and breakfast nook seems like wasted space to me, and definitely don't fall for the "gotta have a guest bedroom" unless it's a multipurpose type thing - office/guest room or the like. Buying a bunch of sq ft that you only use parts of occasionally is wasted space and wasted money (besides the initial mortgage outlay, also costs you to heat/cool and maintain).
I completely agree.
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I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.
The reckoning will come in that regard, just like in my country, Canada.
I've been saying this for 10 years. It hasn't happened yet.
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I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.
The reckoning will come in that regard, just like in my country, Canada.
I've been saying this for 10 years. It hasn't happened yet.
I cannot see house prices collapsing in the near future, there's just too much demand in the cities, and if you actually read the financial statements of the big banks you will see that mortgage arrears are declining. Very, very few people are running into trouble paying the sky high prices.
FWIW I paid 6.5x income for my unit. I expect to be paying 8x-9x for a house soon enough.
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My house was 5x my gross income, but I put a 40% downpayment, so actually only mortgaged 3x my income. This brought the payments, even on a 15 yr loan at 5.625% at the time, to a very affordable level, so in my opinion 3x is not too high.
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I cannot see house prices collapsing in the near future, there's just too much demand in the cities, and if you actually read the financial statements of the big banks you will see that mortgage arrears are declining. Very, very few people are running into trouble paying the sky high prices.
FWIW I paid 6.5x income for my unit. I expect to be paying 8x-9x for a house soon enough.
I was going to state my 5 times income was too low. The thing is from a FI viewpoint buying a house this far over your income can't be a good thing especially with interest rates at around 6%.
I don't view my house as an asset towards FI. I view it solely as something that will reduce my living expenses. Assuming I own my house and I do not upgrade it will mean that I am rent free for life. To me that is huge but it isn't something to be utilised in my FI calculations other than as reduced expenses. Paying off my mortgage is also my first real check point on my path to FI. All of this to me means if house prices drop its not a big issue. Ideally I'd avoid it but I fail to see how anyone can predict a crash or better the timing of and severity of any price decline. My thoughts are that we won't see significant growth for the next 20-30 years or more.
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E) YOU HAVE A LOT OF CASH. If you buy a house, have 4x the amount of the mortgage sitting in cash in your bank account.
http://www.jamesaltucher.com/
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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.
We've gone as high as 3.5x (our first home, low salary) but we've gradually come down to 1.5x (our current home).
We were very fortunate and found a small fixer-upper bungalow in the suburbs which of the GTA (Oakville) for about $300k a few years back. We fixed it up over time with me doing most of the work (even before I read MMM, cool eh? :)).
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I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.
The reckoning will come in that regard, just like in my country, Canada.
I've been saying this for 10 years. It hasn't happened yet.
I cannot see house prices collapsing in the near future, there's just too much demand in the cities, and if you actually read the financial statements of the big banks you will see that mortgage arrears are declining. Very, very few people are running into trouble paying the sky high prices.
FWIW I paid 6.5x income for my unit. I expect to be paying 8x-9x for a house soon enough.
Interest rates are up 1% in Canada...there was a rush of buying before that happened...now sales tailing off. Condo sales are collapsing in the GTA, the canary in the coal mine. Houses over 1 million are sitting stagnant on the market as you can't get mortgage insurance anymore for houses at that price...but houses at 900 to a million are flying off the shelves, showing that people buying at that price are only putting minimum down (5% in Canada, anything under 20% down requires mortgage insurance). July sales hit a 10 year low here. There is a stock of over 2 years of condos in the GTA at the current and cottage sales have plummeted in Ontario. Some places will do well, others will implode. Real estate is local.
Oh, indeed, mortgage arrears are declining...people were getting 30 year or more mortgages at 3%. Those days are done. Increase in interest rates equals decrease in prices, every time.
http://www.businessinsider.com/the-three-reasons-canada-is-in-big-trouble-2013-6 (http://www.businessinsider.com/the-three-reasons-canada-is-in-big-trouble-2013-6)
The rest of the world sees it, I'm not really sure why so many Canadians don't see it. As for Australia, my impression was that house prices were already starting to dip. Mind you, you may not feel it much if they only go from completely insane to just insane prices.
As for the OP (sorry to thread hijack), I think 2x income is plenty, unless you're in a major city, where I don't think I could bring myself to go over 4x. If you're American, this is probably a decent time to buy. Just my take.
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I paid 2.4 times my annual income.
My opinion though is that you should always buy the cheapest house that meets your real needs (as oppose to perceived needs or wants).
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This becomes easy if you have either a high income or low housing prices where you live. For everyone else, I think it's trickier. When we bought, the house was about 1.5 times annual income; now it's about 1 times annual income since our household income has increased in the past 5 years (mine has doubled).
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For me, it had nothing to do with multiple of income, it was a debt to income ratio on monthly take home. My student loans were too high not to think of it that way. So we ended up buying a house at 1.6x but because of an additional 100k of student loans (pre-MMM) my debt to income is right around 25%.
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I paid 2.4 times my annual income.
My opinion though is that you should always buy the cheapest house that meets your real needs (as oppose to perceived needs or wants).
Because you can't have something you want?
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Don't buy more than you can afford to pay the monthly payments on (20-25% of monthly income is conservative 35% or higher is likely a mistake). - This prevents you from hamstringing your ability to save your income in the future.
Don't buy a house for more than 180x rental price (i.e. 15 years of rent) of the house. You can get a rough idea of the rental price by looking at similar houses for rent in the area. - This helps keep you from spending more than the house is likely to be worth down the road (obviously not a guarantee).
Don't deplete your savings entirely in order to buy a house. I.e. you should have 6 months worth of living expenses AFTER the sale is finished. - The last thing you want after losing your job is to also lose your credit because your mortgage payments are late.
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For most wage earners, a payment that is 25% or less of your monthly income toward a 15 year mortgage is prudent. Plenty leftover in the budget to save, debt term is short enough to see the light at the end of the tunnel.
Ramsey and others use this guideline. Many people see this as overly conservative but the more you pay the harder it is to save, and harder to get through downturns, layoffs, medical issue etc that can affect income...
25% of gross or net income?
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For most wage earners, a payment that is 25% or less of your monthly income toward a 15 year mortgage is prudent. Plenty leftover in the budget to save, debt term is short enough to see the light at the end of the tunnel.
Ramsey and others use this guideline. Many people see this as overly conservative but the more you pay the harder it is to save, and harder to get through downturns, layoffs, medical issue etc that can affect income...
25% of gross or net income?
Net. So if you bring home $4,000/month after taxes, your payment (including taxes and insurance) shouldn't be more than $1,000/month.
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Here's what i think: If you are going to be someplace at least 10 years, buy. Or someplace with a great buy/rent ratio. If you do buy, buy something you think can live in the rest of your life in a neighborhood you love. Within those parameters, buy the smallest, least expensive house you can. Otherwise, rent. I have seen more people make more foolish decisions on house purchases than on any other financial matter. (Unless you count choosing a spouse.)
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Just bumping this thread for more people's insight/opinions....
I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.
Does this seem like a bad move...or am I just being jealous perhaps? Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...? Or is buying so much never a good idea?
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Just bumping this thread for more people's insight/opinions....
I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.
Does this seem like a bad move...or am I just being jealous perhaps? Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...? Or is buying so much never a good idea?
Well what are her goals? Does she plan to work for her entire life? Is it likely her income will increase substantially over the years? At a fixed interest rate, even with the home and salary increasing at any kind of positive inflation, it could make sense... but probably not for ER.
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Just bumping this thread for more people's insight/opinions....
I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.
Does this seem like a bad move...or am I just being jealous perhaps? Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...? Or is buying so much never a good idea?
I think the thought "Surely the homes she's looking at will appreciate over the next 10-20 years or so..." got a LOT of people in trouble during the housing bubble.
Housing generally goes up in price, but not always.
I also think that no matter what the ratio of income to house, that using the maximum that the bank will loan you as a guide on how much you can spend isn't a good approach. I've found that the bank has always been willing to loan me much much much more than I'm willing to take on as debt. We have probably the most expensive and most anti-mustachian house of anyone on this forum, but the bank offered us a mortgage for more than twice what we spent on the house.
Income also isn't the only guide.
Which one can afford to spend more:
Some one with an annual income of $100K, and $20K in credit card debt, and $20K in student loans and $20K in car loan and no retirement savings.
Some one with an annual income of $100K and no debt and $500K in retirement savings.
Its the same income, but different result.
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I make 60k, my better half is in school right now but when he finished (Actuarial Science) he'll probably end up making a good deal more than me long term- we're guessing a start salary conservatively around 60k for him. So combined 120k- we'd like a house for no more than 200k regardless.
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We are in the process of buying a $105k house, we made $168k last year. We are downsizing from a $150k house.
badass!
We currently live in a higher COL area (cheapest house maybe 250k nearby, average house maybe 350k), but we rent.
We want to move in 2-5 years to a lower COL area, hopefully where we can buy a house for less than or around our current combined salary.
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I think the safest general rule of thumb when considering other people's financial moves is to assume they are 1) clueless, b) up to their eyeballs in debt, and iii) struggling to get by month to month, even if they do drive a Mercedes and live in a 4000 sq ft home.
Approach it that way and it's easier to see how you don't want to be in their shoes.
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I don't use a multiple of family income. I use cost per month based on a ten year fixed mortgage with 25 year amortization.
I only buy places with suites or potential for secondary units. My test is that the place must be cash flow positive if rented and must be cheaper than renting a comparable place if I occupy it. Right now two of our units pay the mortgage on our place. Our mortgage is approx. 1.5x income, but I would have gone higher than that if the cost per month made sense.
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My house cost me one year's salary, seven years ago. In hindsight I wish I'd spent more for a smaller place, but that's because I'm not handy. I don't know if my experience or advice are generalizable in any way... except I'd be careful if I heard myself saying "my region is special or different and so the regular rules don't apply."
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Just bumping this thread for more people's insight/opinions....
I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.
Does this seem like a bad move...or am I just being jealous perhaps? Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...? Or is buying so much never a good idea?
Her purchase, her decision. I wish I could buy a house on that income! How big is her deposit though? Can she meet her repayments? The average house price in Sydney is 600s-700s, and the touristy parts is 1M! I've been waiting for the bubble to go down since 2000. It is insane.
Just reading people's posts here, I am amazed that I can buy in parts of America where it is only 2-3x of my income! What does make Sydney's prices then? Londonish? Out of this world? I agree with @steveo, having a PPR isn't really part of my FI calculations. Can't. Not in Sydney especially if I want to continue living here...which I do :-)
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I saw a suggestion that whilst you are in accumulation phase, your house should be around 20% of your net worth. Of course in Australia this is not possible until your stash is huge! However, the blogger went on to say, once you are FI, then the proportion can get bigger. What I think he meant was, not to spend very much at all on your housing whilst in accumulation phase. Buy the least house you can. Concentrate on increasing your stash first, before getting more house.
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I was a bit clueless when I was buying a house, but I knew I didn't really want to go over 300k in my area based on my ~$6500 per month after tax income. I ended up buying a foreclosure for around 225k and before I did any work it appraised for 299k. I know that whenever we leave in 2 years we will either rent or sell, so it is more of an investment property than anything else. But I really don't enjoy seeing the break down of what my $1368 per month is. Tough to say what my price range would be for a "forever" home. But I still don't think I'd ever want to go over 300k, even if my income increases.
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I make about 50K/year. This calculator (http://www.myfico.com/loancenter/mortgage/calculators/loanbalancelimit.aspx) says I can get a loan for up to about 250K. That's 5x annual expenses! So, that's what you could potentially qualify for.
I would recommend setting an absolute limit at 2.5x expenses. Any higher and I would consider myself to be in solid danger of foreclosure at some point over 30 years. Optimally you get a loan at 1-2x income AND you have equivalent assets invested for higher rate of return. But when interest rates go back to 7%, higher rates of return will probably be impossible.
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At the time mine was slightly above 2x base pay, slightly below 2x if you count bonuses.
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I live in a major city. There was no way I was going to be able to limit myself to 2.5x my salary; the real estate just wasn't available. What that rule of thumb doesn't take into account is the cost-benefit analysis of living in an urban area and/or having extra rentable room. By buying a 2-bedroom condo in an expensive, in-demand area, I'm able to live car-free and to rent out a room. So while I spent 4.3333 x salary, my housing and transit combined ends up being something like 20% of my takehome pay per month, well within that other rule of thumb which I think states that you shouldn't spend more than 35% on housing ad 15% on transportation. I'm all over the map.
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My measure of affordability has always been 'can I afford to keep the mortgage paid, the lights/heat on and groceries in my cupboards if I have to work a minimum wage job?'
My mortgage, at a minimum payment of $68/week, meets that criteria, despite the fact that the house was 8.3x my annual income when I bought it 6 years ago.
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My measure of affordability has always been 'can I afford to keep the mortgage paid, the lights/heat on and groceries in my cupboards if I have to work a minimum wage job?'
My mortgage, at a minimum payment of $68/week, meets that criteria, despite the fact that the house was 8.3x my annual income when I bought it 6 years ago.
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I don't know if my experience or advice are generalizable in any way... except I'd be careful if I heard myself saying "my region is special or different and so the regular rules don't apply."
+1
Just because the average home value in your area is extremely high and everyone else is doing it doesn't make purchasing one a wise decision.
FWIW, after moving away from a very high COL area (where we rented) a year ago we bought a home for 1X our annual income. The financial flexibility feels great.
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Just because the average home value in your area is extremely high and everyone else is doing it doesn't make purchasing one a wise decision.
I couldn't agree more. One of my friends is falling into this trap right now. She feels that it's the right time in her life to buy a home, and since we live in a high COL area, she figures she'll just have to deal with an absurd mortgage payment. Meanwhile my fiance and I are almost certainly better off than she and her husband and surely could get approved for a mortgage here, but we're not comfortable with a $3000/month payment just because it's the norm for our area, so we're staying put in our falling-apart-but-cheap rental.
I don't want a house that I can afford on the condition that my fiance and I both continue to work full time at jobs we don't particularly like until we're 65. I want a house that will allow us the flexibility to work part time, stay at home with our kids, or switch to lower paying jobs in fields we love (we're both involved in theatre and would love to do it professionally). Barring any huge windfalls, that will probably mean moving to a lower COL area. We love where we live now, but not enough to become slaves to our jobs for the next 30 years.
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Just bumping this thread for more people's insight/opinions....
I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.
Does this seem like a bad move...or am I just being jealous perhaps? Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...? Or is buying so much never a good idea?
Her purchase, her decision. I wish I could buy a house on that income! How big is her deposit though? Can she meet her repayments? The average house price in Sydney is 600s-700s, and the touristy parts is 1M! I've been waiting for the bubble to go down since 2000. It is insane.
Just reading people's posts here, I am amazed that I can buy in parts of America where it is only 2-3x of my income! What does make Sydney's prices then? Londonish? Out of this world? I agree with @steveo, having a PPR isn't really part of my FI calculations. Can't. Not in Sydney especially if I want to continue living here...which I do :-)
oh dear...please don't wait any longer. It would have cost you $60-$90 thousand this year depending what end of town you are in. Just take the plunge and smash the ghastly mortgage you will start with. My interest cost started at $50 a day. After 3 years my interest cost is now $14.60 a day ($100 a week). If I had to rent it would be $425 a week here.
The cost of a mortgage is not the repayments. It's interest. Think of principal payments as just enforced savings.
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1X for me. Considering "upgrade" to 0.5X in the next 2 years.
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Just bumping this thread for more people's insight/opinions....
I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.
Does this seem like a bad move...or am I just being jealous perhaps? Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...? Or is buying so much never a good idea?
Her purchase, her decision. I wish I could buy a house on that income! How big is her deposit though? Can she meet her repayments? The average house price in Sydney is 600s-700s, and the touristy parts is 1M! I've been waiting for the bubble to go down since 2000. It is insane.
Just reading people's posts here, I am amazed that I can buy in parts of America where it is only 2-3x of my income! What does make Sydney's prices then? Londonish? Out of this world? I agree with @steveo, having a PPR isn't really part of my FI calculations. Can't. Not in Sydney especially if I want to continue living here...which I do :-)
oh dear...please don't wait any longer. It would have cost you $60-$90 thousand this year depending what end of town you are in. Just take the plunge and smash the ghastly mortgage you will start with. My interest cost started at $50 a day. After 3 years my interest cost is now $14.60 a day ($100 a week). If I had to rent it would be $425 a week here.
The cost of a mortgage is not the repayments. It's interest. Think of principal payments as just enforced savings.
This is what I'm worried about. Can't afford to buy now, can't afford not to buy now...
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I was totally clueless when I bought my house.
No money down, mortgaged $320K. Was making about $60K gross, maybe less. Yikes.
(By the way, the house is not a McMansion--it is a 720 square foot 116 year old cottage, which just happens to be in a very cool mountain town in Colorado.)
Treaded water for about 6 years, then was able to refi. Now I rent out the "main" house and live in the renovated ADU. Gross income now is about $80K, and mortgage is down to $230K. Feels much better. In 7-8 years, I hope to have mortgage crushed.
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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".
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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.
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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.
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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.
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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. :)
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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.
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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.
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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.
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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%
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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)
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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.
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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.
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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.
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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?
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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.
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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.
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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.