How much home can/should one buy?

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Gemini
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How much home can/should one buy?

Post by Gemini »

What is a Boglehead strategy in terms of first home purchase? How does one figure out how much home can be afforded?

I am in a VHCOL area and I am struggling to figure this out. Homes in this area are in the 1 mil range and that is insane!
mhalley
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Re: How much home can/should one buy?

Post by mhalley »

The ideal is often said to be no more than 25 percent of take home pay for your mortgage payment each month. Preferably on a 15 year fixed after a 20 percent down payment. In a hcol area, you might have to forgo the 15 year or the down payment.
KlangFool
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Re: How much home can/should one buy?

Post by KlangFool »

Gemini wrote:What is a Boglehead strategy in terms of first home purchase? How does one figure out how much home can be afforded?

I am in a VHCOL area and I am struggling to figure this out. Homes in this area are in the 1 mil range and that is insane!
Gemini,

1) You are buying a "House". You are not buying a "Home". If you are buying a "Home", you will be overbuying.

2) You had asked the wrong question. The correct question should be

How little house should one buy?

3) The house cannot feed you when you lose your job. In fact, it will destroy you financially.

4) If it is not 20% to 30% cheaper than renting, do not buy.

5) As per my rule, do not buy 1 million dollar house unless you have 2 million worth of investment elsewhere.

KlangFool
2Birds1Stone
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Re: How much home can/should one buy?

Post by 2Birds1Stone »

I like to use 2-3X gross income as a good rule of thumb.

Not wanting to be house poor, I would rather er on the side of caution.

I would also do a very deep analysis and self reflection of buying vs. renting makes sense, in my situation renting a nice apartment makes much more sense for the time being.
lightheir
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Re: How much home can/should one buy?

Post by lightheir »

I think all the 'rules' are out the window in a competitive HCOL area.

I live in a super HCOL area in Norcal, and if you had espoused the BH approach of being very conservative and erring on less-house, you'd likely be priced completely out of the market before you even started unless you were a multimillionaire to begin with.

And just as I thought I might have made a huge mistake by buying, turns out it was the single best purchase I've ever made - from a financial standpoint (best investment decision with highest return I've made so far), lifestyle standpoint, and even educational standpoint for the kids. You can't even price it.

The worst part - there were pretty much NO guidelines that would have steered me correctly into this decision, even in retrospect. And it still freaks me out as to how things could potentially have gone south instead had luck not been on my side.

This is coming from someone who avoids luck-based decisions like the plague, but just is acknowledging the role I've seen of luck in such life-changing decisions.

The only lesson I did learn from this whole experience is that stretching a bit to buy the right home in the right neighboorhood and school district can actually be highly advantageous as the home prices and demand goes up quickly in these areas. I of course won't say this is the rule, and you can absolutely get burned overpaying, but it's a reality that's seldom mentioned on the BH forums since everyone is so risk-averse here. (I'm EXTREMELY risk averse!)
fareastwarriors
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Re: How much home can/should one buy?

Post by fareastwarriors »

KlangFool wrote:
Gemini wrote:What is a Boglehead strategy in terms of first home purchase? How does one figure out how much home can be afforded?

I am in a VHCOL area and I am struggling to figure this out. Homes in this area are in the 1 mil range and that is insane!
Gemini,

1) You are buying a "House". You are not buying a "Home". If you are buying a "Home", you will be overbuying.

2) You had asked the wrong question. The correct question should be

How little house should one buy?

3) The house cannot feed you when you lose your job. In fact, it will destroy you financially.

4) If it is not 20% to 30% cheaper than renting, do not buy.

5) As per my rule, do not buy 1 million dollar house unless you have 2 million worth of investment elsewhere.

KlangFool

3) The house cannot feed you when you lose your job. In fact, it will destroy you financially.

If you get foreclosed on, you could probably drag out the process for like a year and live rent free. If you live in an apartment and you can't pay rent, then you're out within a month or 2 max. Am I just being naïve?
KlangFool
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Re: How much home can/should one buy?

Post by KlangFool »

fareastwarriors wrote:
3) The house cannot feed you when you lose your job. In fact, it will destroy you financially.

If you get foreclosed on, you could probably drag out the process for like a year and live rent free. If you live in an apartment and you can't pay rent, then you're out within a month or 2 max. Am I just being naïve?
fareastwarriors,

Yes, you are naive.

1) In general, people buy more house versus when they rent.

2) So, even without being foreclosed, they are paying extra tax every year because they pay more for housing and cannot contribute to the max to their Trad. 401K account. They are typically in the 25% and above marginal tax rate. Plus state income tax, they are paying 30+% tax for all the extra housing expense that they spent on buying the house.

3) If they are lucky, they keep their job long enough and they can sell the house for a "PROFIT". It is a "profit" if they do not count closely all the additional cost that they incurred for owning the house.

4) If they are unlucky, they lose their houses.

Essentially, the house is a leech that sucks them dry. But, this is a good thing for everyone else. It is good for the economy. Everyone makes more money when someone spends more, saves less, and pay more taxes.

KlangFool
rbaldini
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Re: How much home can/should one buy?

Post by rbaldini »

FYI, I believe Klangfool's suggestions are not representative of average boglehead opinion. I'd say this: buy a house such that you can pretty comfortably make all the necessary repeated payments: mortgage payments, property tax, insurance, extra utilities. "Comfortably" is vague: I mean they should be cheap enough to allow you to continue to put a lot into tax-advantaged retirement accounts, save extra money for other long-term costs on the side (college?), continue to make payments for a while if you lose your job, etc. Do the math and you'll be fine.
Dottie57
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Re: How much home can/should one buy?

Post by Dottie57 »

I bought a starter home for aboutm2.5 times my salary. I never upgraded to a bigger fancier home and I still like living here.
It is a small condo , but there are benefits. A smaller home means you cannot buy lots things because there isn't space. Works well if you want to be a saver.

I disagree with Klangfool a bit. My condo is my HOME not just a house. It is my refuge from the world and fits my lifestyle well.
RoadHouseFan
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Re: How much home can/should one buy?

Post by RoadHouseFan »

KlangFool wrote:
Gemini wrote:What is a Boglehead strategy in terms of first home purchase? How does one figure out how much home can be afforded?

I am in a VHCOL area and I am struggling to figure this out. Homes in this area are in the 1 mil range and that is insane!
Gemini,

1) You are buying a "House". You are not buying a "Home". If you are buying a "Home", you will be overbuying.

2) You had asked the wrong question. The correct question should be

How little house should one buy?

3) The house cannot feed you when you lose your job. In fact, it will destroy you financially.

4) If it is not 20% to 30% cheaper than renting, do not buy.

5) As per my rule, do not buy 1 million dollar house unless you have 2 million worth of investment elsewhere.

KlangFool
Agree! Financially savvy folks adhere to this type of rationale.
randomguy
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Re: How much home can/should one buy?

Post by randomguy »

2Birds1Stone wrote:I like to use 2-3X gross income as a good rule of thumb.

Not wanting to be house poor, I would rather er on the side of caution.

I would also do a very deep analysis and self reflection of buying vs. renting makes sense, in my situation renting a nice apartment makes much more sense for the time being.
Rent versus buy is a different discussion but it factors in. Paying 2k in rent when you buy for 1500 leads to different conclusions than 2k of rent versus 3k of mortgage payments.

Realistically 2x is very conservated.
100k salary
200k house
160k mortgage
697+taxes/month

That is very affordable.

100k
400k house
320k mortage
1393+taxes/month

This is also very doable . I made 90k and paid 1600/month in rent and things weren't even close (taxes and maintence would be balanced out by the tax write off in my case) as I was still able to save 30%+ of my income.


100k
600k house
2123/month+taxes

This is also doable. But you are starting to push it. Things change a bit with taxes (range from like 1% to 4%) and the like.

Personally I think this is looking at the problem the wrong way. There are 2 numbers that matter
a) what the bank will loan you (something like 35% of gross income towards housing)
b)What you want to pay. You max in this case is rent+current savings. This could be more or less than a depending on your lifestyle and other expense and your goals. The people looking to retire at 50 need to save more than the people who are working til 60.

The worst financial cases I have seen are when people don't buy enough house. They end up moving in 3 years and paying a ton of transaction costs. The second worse is buying too much house:)
czr
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Re: How much home can/should one buy?

Post by czr »

Depends on your age and where you are in your life. If you are going to stay put for 5 years then get something for that time period. Make a detailed monthly budget maxing out your 401k and other monthly expenses priced in then add mortgage, tax, insurance, utilities, and home maintenance. Too much house will cripple you and the next recession could be right around the corner.
Bogel0048
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Re: How much home can/should one buy?

Post by Bogel0048 »

I think rbaldini's advice represents a good summary of the standard Boglehead perspective: Buy a house such that you can comfortably make all the necessary payments for mortgage, property tax, insurance, and utilities, with sufficient income left over so you can max-out tax-advantaged retirement accounts and also fund additional needs such as cars, extra retirement savings, college (if needed), and vacations.

However, there is also a more extreme Bogle perspective that says buy as little house as you can comfortably live in, since every added dollar spent on housing reduces dollars available for your other needs and priorities.

My wife and I started out buying a house that cost about 2X our "early career" gross incomes. Fast forward twenty years - we had paid off our thirty year mortgage early and we could afford to move to a double-the-cost house, paying cash for the difference. We looked at some, and they were very nice, although further away from our employers. However, in addition to tying up a chunk of our savings, the higher cost houses would have added significant expenses to our annual costs for increased property tax, insurance, and utilities. We (lead by me) were ultimately too cheap to spend this money on extra housing consumption, preferring to allocate our money to other uses, including savings. We did end up making an addition to our home which has added some very desirable living space. Now retired, we continue to live w/o double-size baths and walk-in closets. We'd love to have these extras, but we have never made the move to a larger house.

On a final note, one of our adult sons and his wife rent in a high-cost urban center. With our assistance, they could buy an expensive condo where they are now, or buy an expensive house that would give them a half-hour commute on public transit. I once thought buying was a "no brainer", but post-2008 I am advising them to stick with renting for now, which gives them maximum flexibility on making a future buying decision. In today's economic environment I don't think they are necessarily incurring a large opportunity cost, compared to a 75/25 three fund savings portfolio, by deferring a house or condo purchase.
Grt2bOutdoors
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Re: How much home can/should one buy?

Post by Grt2bOutdoors »

2Birds1Stone wrote:I like to use 2-3X gross income as a good rule of thumb.

Not wanting to be house poor, I would rather er on the side of caution.

I would also do a very deep analysis and self reflection of buying vs. renting makes sense, in my situation renting a nice apartment makes much more sense for the time being.
2 or 3x gross income plus down payment or 2-3x gross income total? In HCOL area's 2-3x gross may not even afford you a co-op!!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
letsgobobby
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Post by letsgobobby »

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KlangFool
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Re: How much home can/should one buy?

Post by KlangFool »

letsgobobby wrote:This has been litigated repeatedly on Bogleheads.

Agree that most Bogleheads are conservative, but klangfool's position is an outlier even for this group. Even for me.

lightheir's post is very important and her position deserves to be taken into consideration in the most expensive areas - NYC, DC, Boston, Bay Area, increasingly Seattle.

In the end the dilemma is that you have to hold both ideas in tension in your mind simultaneously. That is, you could go wrong following either path. Following klangfool's advice, you could easily end up with much less home than you could afford, causing you to make unpleasant choices with regards to lifestyle, commute, school quality, control over your own destiny (renting vs buying), even what part of the country you live in; and you may have to move when you need more space. All of this has a cost.
letsgobobby,

1) For the benefits of others, I live in DC / Northern VA area. Aka, $200 per square feet area.

<< Following klangfool's advice, you could easily end up with much less home than you could afford, causing you to make unpleasant choices with regards to lifestyle, commute, school quality, control over your own destiny (renting vs buying), even what part of the country you live in; and>>

2) Not necessary. In fact, a person may consume more house since they are not buying and they are paying less for the house by renting.

<<you may have to move when you need more space.>>

3) Given that people move on the average of 5.9 years, this not necessary an issue. In fact, owning a house is a problem if a person needs to move.

KlangFool
keystone
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Re: How much home can/should one buy?

Post by keystone »

So many variables, but a formula that I like to follow is:

1) Down payment greater than or equal to 20% of the sales price

and

2) Mortgage less than or equal to 2.5 times gross earnings

I've managed to pull this off in a HCOL area, but if I were young and in a VHCOL area and expected my earnings to increase, I would stretch this.
User avatar
lthenderson
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Re: How much home can/should one buy?

Post by lthenderson »

RoadHouseFan wrote:
KlangFool wrote:
Gemini wrote:What is a Boglehead strategy in terms of first home purchase? How does one figure out how much home can be afforded?

I am in a VHCOL area and I am struggling to figure this out. Homes in this area are in the 1 mil range and that is insane!
Gemini,

1) You are buying a "House". You are not buying a "Home". If you are buying a "Home", you will be overbuying.

2) You had asked the wrong question. The correct question should be

How little house should one buy?

3) The house cannot feed you when you lose your job. In fact, it will destroy you financially.

4) If it is not 20% to 30% cheaper than renting, do not buy.

5) As per my rule, do not buy 1 million dollar house unless you have 2 million worth of investment elsewhere.

KlangFool
Agree! Financially savvy folks adhere to this type of rationale.
+2 on KlangFools advice!

I see so many people who are literally slaves to their house. With a big house comes big responsibilitie$$$$$. I'm thankful I have a roof over my head, heat and air conditioning and other little things but at the end of the day, it is just a tool that provides comfort. What brings me happiness is being able to do things I want to do much much sooner than my peers with huge mortgages.
rbaldini
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Re: How much home can/should one buy?

Post by rbaldini »

I personally find the Klangfool's rule that "one must not buy a house greater than 50% of his net worth" to be crazy. By that argument, I could not currently buy a $125,000 house, despite having a ~$200k household income with two earners, no kids, no debts - AND that such a house would have *substantially cheaper* repeated payments than I'm currently paying through rent (like $1000 less per month).

I understand, of course, the need to caution home buyers. Many people do overspend on homes.
randomguy
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Re: How much home can/should one buy?

Post by randomguy »

rbaldini wrote:I personally find the Klangfool's rule that "one must not buy a house greater than 50% of his net worth" to be crazy. By that argument, I could not currently buy a $125,000 house, despite having a ~$200k household income with two earners, no kids, no debts - AND that such a house would have *substantially cheaper* repeated payments than I'm currently paying through rent (like $1000 less per month).

I understand, of course, the need to caution home buyers. Many people do overspend on homes.
On this board there is a competition to see who can be most conservative. Before long someone will suggest that if you don't pay cash for a house, you should be renting. Minimizing risk is only half the equation. Maximizing opportunity is the other. Figuring out the balance is hard.
Wellfleet
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Re: How much home can/should one buy?

Post by Wellfleet »

I find that a PITI no more than 25% net monthly income of the lower earning partner to be about as conservative and admirable that I can agree with.

That doesn't work for me but it's admirable nonetheless.
KlangFool
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Re: How much home can/should one buy?

Post by KlangFool »

rbaldini wrote:I personally find the Klangfool's rule that "one must not buy a house greater than 50% of his net worth" to be crazy. By that argument, I could not currently buy a $125,000 house, despite having a ~$200k household income with two earners, no kids, no debts - AND that such a house would have *substantially cheaper* repeated payments than I'm currently paying through rent (like $1000 less per month).

I understand, of course, the need to caution home buyers. Many people do overspend on homes.
rbaldini,

Touche. It is crazy that a household with 200K income does not have 250K investment elsewhere. My rule should be easily reachable with your income level.

KlangFool
soboggled
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Re: How much home can/should one buy?

Post by soboggled »

randomguy wrote:
rbaldini wrote:I personally find the Klangfool's rule that "one must not buy a house greater than 50% of his net worth" to be crazy. By that argument, I could not currently buy a $125,000 house, despite having a ~$200k household income with two earners, no kids, no debts - AND that such a house would have *substantially cheaper* repeated payments than I'm currently paying through rent (like $1000 less per month).

I understand, of course, the need to caution home buyers. Many people do overspend on homes.
On this board there is a competition to see who can be most conservative. Before long someone will suggest that if you don't pay cash for a house, you should be renting. Minimizing risk is only half the equation. Maximizing opportunity is the other. Figuring out the balance is hard.
It's a welcome antidote to the brainwashing we get from the real estate industry. Owning a house is not an investment, though it has benefits, most of them intangible. See for example this recent thread as to what can happen even to those who can afford to lose money: viewtopic.php?f=2&t=93601&newpost=3102801
KlangFool
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Re: How much home can/should one buy?

Post by KlangFool »

randomguy wrote:
On this board there is a competition to see who can be most conservative. Before long someone will suggest that if you don't pay cash for a house, you should be renting. Minimizing risk is only half the equation. Maximizing opportunity is the other. Figuring out the balance is hard.
randomguy,

1) Paying cash for the house is RISKY even if the person can afford to.

2) The goal here is to minimize HOUSING EXPENSE. It could be done by buy or rent. The problem is most people justifying their increase in HOUSING EXPENSE by claiming that they invest in their "HOME".

KlangFool
JohnFiscal
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Re: How much home can/should one buy?

Post by JohnFiscal »

To my mind, using the oft-used rules of thumb that the home purchase shouldn't exceed x times annual income, nor mortgage payments not exceed some % of income overlook important consideration of the other expenses of home ownership: these include not only property taxes and insurance but also the possibly expensive costs for rehabbing and maintenance. Not only that but having the 'nest' makes one want to get nice furnishings, décor, etc. (which is fine and great, but the expense needs to be considered)

In two houses in the past 15 years I've had to refit both with new roofs (both very expensive to me) and new hvac systems (AC/furnace; all new ducts in one case). Very expensive. Fortunately, in both cases I had kept the purchase price and mortgage to levels that I felt comfortable with. My mortgage payments were probably 10% of my income, and total housing costs probably around 15%. This relatively low level of commitment to housing paid off for me quite nicely in financial security and wealth accumulation.
rbaldini
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Re: How much home can/should one buy?

Post by rbaldini »

KlangFool wrote:
rbaldini wrote:I personally find the Klangfool's rule that "one must not buy a house greater than 50% of his net worth" to be crazy. By that argument, I could not currently buy a $125,000 house, despite having a ~$200k household income with two earners, no kids, no debts - AND that such a house would have *substantially cheaper* repeated payments than I'm currently paying through rent (like $1000 less per month).

I understand, of course, the need to caution home buyers. Many people do overspend on homes.
rbaldini,

Touche. It is crazy that a household with 200K income does not have 250K investment elsewhere. My rule should be easily reachable with your income level.

KlangFool
The presumptuousness baffles me.

We have low net worth relative to our income because we are young. Two years ago, our household income was about ~$85k - I was in school, my wife was entry level. We actually max out both of our 401k's and Roth contributions, and still save quite a lot of money in taxable investments on top of that each month. So no, it is not crazy.

The fact is that a person has to live somewhere. He can either buy or rent. He should carefully consider the total cost of each case, and make the best decision. That's it.
remomnyc
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Re: How much home can/should one buy?

Post by remomnyc »

keystone wrote:So many variables, but a formula that I like to follow is:

1) Down payment greater than or equal to 20% of the sales price

and

2) Mortgage less than or equal to 2.5 times gross earnings

I've managed to pull this off in a HCOL area, but if I were young and in a VHCOL area and expected my earnings to increase, I would stretch this.
+1. In a HCOL area, you end up having to save more and put down more than 20% to get the mortgage at 2.5x or less, but it often doesn't make sense to buy in a HCOL. Some were lucky to buy before prices took off, but when they bought, they may have been at or about the above parameters; whereas, buying today may violate both and leave one with very compromised cash flow for savings and expenses.
letsgobobby
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Post by letsgobobby »

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bloom2708
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Re: How much home can/should one buy?

Post by bloom2708 »

rbaldini wrote:I personally find the Klangfool's rule that "one must not buy a house greater than 50% of his net worth" to be crazy. By that argument, I could not currently buy a $125,000 house, despite having a ~$200k household income with two earners, no kids, no debts - AND that such a house would have *substantially cheaper* repeated payments than I'm currently paying through rent (like $1000 less per month).

I understand, of course, the need to caution home buyers. Many people do overspend on homes.
The concept isn't so crazy. $1,000 in the bank and a $200k salary is "Rich". You are set. Loaded. Big $ income. But you haven't done anything yet.

It is completely "normal" to get the salary and start spending it before you have saved much. I think the message is that "normal" sucks. Your $200k income could go away quickly. Savings and investments previously earned are there.

You have your $200k salary. You save up $80k for the down payment. You buy your $400k dream house. The $80k goes to the down payment. Now you have a $400k house, a $320k (simplifying) mortgage and no cash. You are "house poor".

Having $800k to afford a $400k house might be conservative but the overall point should be to avoid normal when you can.

I like to hear the different perspectives and if you land somewhere between conservative and blowing the bank, then you should be ok. :sharebeer
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
bradshaw1965
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Re: How much home can/should one buy?

Post by bradshaw1965 »

KlangFool wrote: 1) You are buying a "House". You are not buying a "Home". If you are buying a "Home", you will be overbuying.
+1

I think this is the biggest issue that catches people up on housing. It's easy to think transactionally about almost everything we purchase, but in the US and UK we wrap up emotional issues in the housing category. I think that's fine as long as somewhere in the process you can be honest with yourself and let your logical process break out and analyze the transaction.
Zecht
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Re: How much home can/should one buy?

Post by Zecht »

Keep in mind that getting a non-conventional house in VHCOL areas could be doable through a variety of strategies.
-Houseboats or RVs
Depending on the situation, this may be a far more affordable option than a conventional house, particularly if you can find reasonably priced utility hookups.
-Lot & Build
If you can afford it, buying just empty land might be worth it if build costs are low enough. In some HCOL areas, colleagues have bought small chunks of land to put their houses on that have been less than 1/3 the cost of a comparable area home.
-Modular Homes
This is sort of a catch-all since you can purchase whole tiny homes and find a lot or share a lot with others to be more able to afford the area. Other larger homes are also available as modular units that can work well, but it's very difficult to assess build quality on the modular pieces.
-The "Google" Strategy
Somewhat infamous because of the workaholic culture in Silicon Valley, some Google employees choose to purchase SUVs or vans, put a bed in them, and sleep in the Google parking lot, while using the headquarters building for all sanitary facilities, showers, and kitchen/food service needs. Many companies are beginning to adopt this idea in VHCOL environments, so consider that when looking around.
-Suburbia
The conventional strategy for VHCOL areas is to move far enough away so that it is not. This of course has its drawbacks, but might be considered.

These may or may not help, but at least they can be options or potential sources of inspiration for a new strategy. Good luck!
KlangFool
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Re: How much home can/should one buy?

Post by KlangFool »

rbaldini wrote:
KlangFool wrote:
rbaldini wrote:I personally find the Klangfool's rule that "one must not buy a house greater than 50% of his net worth" to be crazy. By that argument, I could not currently buy a $125,000 house, despite having a ~$200k household income with two earners, no kids, no debts - AND that such a house would have *substantially cheaper* repeated payments than I'm currently paying through rent (like $1000 less per month).

I understand, of course, the need to caution home buyers. Many people do overspend on homes.
rbaldini,

Touche. It is crazy that a household with 200K income does not have 250K investment elsewhere. My rule should be easily reachable with your income level.

KlangFool
The presumptuousness baffles me.

We have low net worth relative to our income because we are young. Two years ago, our household income was about ~$85k - I was in school, my wife was entry level. We actually max out both of our 401k's and Roth contributions, and still save quite a lot of money in taxable investments on top of that each month. So no, it is not crazy.

The fact is that a person has to live somewhere. He can either buy or rent. He should carefully consider the total cost of each case, and make the best decision. That's it.
rbaldini,

So, when did you bought the house?

A) 2 years ago when the household income was 85K

Or

B) Now, when the household is 200K.

Aka, what household income was used to make your decision?

KlangFool
rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: How much home can/should one buy?

Post by rbaldini »

KlangFool wrote:rbaldini,

So, when did you bought the house?

A) 2 years ago when the household income was 85K

Or

B) Now, when the household is 200K.

Aka, what household income was used to make your decision?

KlangFool
We haven't bought a house. We are currently renting. If you must know, we are looking for something under $450k, with 20% down. I.e. $360k mortgage, so <2x our current income. After buying, most of our net worth will still be in other places: retirement accounts, taxable investments, bank accounts.
stoptothink
Posts: 8923
Joined: Fri Dec 31, 2010 9:53 am

Re: How much home can/should one buy?

Post by stoptothink »

lthenderson wrote: +2 on KlangFools advice!

I see so many people who are literally slaves to their house. With a big house comes big responsibilitie$$$$$. I'm thankful I have a roof over my head, heat and air conditioning and other little things but at the end of the day, it is just a tool that provides comfort. What brings me happiness is being able to do things I want to do much much sooner than my peers with huge mortgages.
Although I personally completely agree, and my wife and I chose to wait to buy until we had all our ducks in a row and bought far less home than we could afford (at the time, total home value 1.4x income, now ~1x), it simply isn't reality for a lot of families. For me, a larger home would have actually decreased my quality of life as I view it only as a structure to keep is warm/safe and I personally think our 1500^ft home is too much space for our 4-person family, but I can respect that others view it differently. You can't tell others what will make them happy.

I think the huge majority of families buy too much home, but like most "rules", it is useless to generalize when each situation has so many individual factors.
RoadHouseFan
Posts: 279
Joined: Sat Aug 13, 2016 6:55 pm

Re: How much home can/should one buy?

Post by RoadHouseFan »

Housing, like transportation, is an expense. The objective for most of us is to reduce expenses. Moreover, we never include real estate or vehicles in net worth assessments.
LiterallyIronic
Posts: 1493
Joined: Sat Dec 05, 2015 10:36 am

Re: How much home can/should one buy?

Post by LiterallyIronic »

KlangFool wrote: 4) If it is not 20% to 30% cheaper than renting, do not buy.
If that were the rule, then we'd never buy. A mortgage 20% to 30% less than $400 is not going to happen. That rule would keep us living in a poorly-insulated basement with no kitchen and no living room forever.
What if there aren't houses for sale in your area that are less than 3x your income?
mhalley wrote:The ideal is often said to be no more than 25 percent of take home pay for your mortgage payment each month.
Does this rule override the ones above? My take home pay is ~$2,500/month (after ~22% to taxes and ~29% to retirement). There are no houses for sale in my city for less than $200,000. I was thinking a $60,000 down payment (30%) would get us to a monthly mortgage of no more than $800. But based on the rules I'm reading here, it sounds like the 30% down payment still won't be enough to let us afford a house.
KlangFool
Posts: 19613
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much home can/should one buy?

Post by KlangFool »

rbaldini wrote:
KlangFool wrote:rbaldini,

So, when did you bought the house?

A) 2 years ago when the household income was 85K

Or

B) Now, when the household is 200K.

Aka, what household income was used to make your decision?

KlangFool
We haven't bought a house. We are currently renting. If you must know, we are looking for something under $450k, with 20% down. I.e. $360k mortgage, so <2x our current income. After buying, most of our net worth will still be in other places: retirement accounts, taxable investments, bank accounts.
rbaldini,

Let's assume that you buy the 450K house and carry a 360K mortgage. Could you really say that most of your net worth is in other places if your net worth besides the house is

A) less than 450K?

B) 450K to 900K?

C) Above 900K?

Please note that in the case of (A), if the house price drop and you are forced to move and sell the house, the house could potentially wipe out all your other net worth. In the case of (B), the answer is maybe. In the case of (C), the answer is no.

If you have less than 250K net worth, how safe is it to carry a 450K house? You had put most of your eggs in THE HOUSE.

KlangFool
alfaspider
Posts: 3337
Joined: Wed Sep 09, 2015 4:44 pm

Re: How much home can/should one buy?

Post by alfaspider »

KlangFool wrote:
rbaldini wrote:
KlangFool wrote:rbaldini,

So, when did you bought the house?

A) 2 years ago when the household income was 85K

Or

B) Now, when the household is 200K.

Aka, what household income was used to make your decision?

KlangFool
We haven't bought a house. We are currently renting. If you must know, we are looking for something under $450k, with 20% down. I.e. $360k mortgage, so <2x our current income. After buying, most of our net worth will still be in other places: retirement accounts, taxable investments, bank accounts.
rbaldini,

Let's assume that you buy the 450K house and carry a 360K mortgage. Could you really say that most of your net worth is in other places if your net worth besides the house is

A) less than 450K?

B) 450K to 900K?

C) Above 900K?

Please note that in the case of (A), if the house price drop and you are forced to move and sell the house, the house could potentially wipe out all your other net worth. In the case of (B), the answer is maybe. In the case of (C), the answer is no.

If you have less than 250K net worth, how safe is it to carry a 450K house? You had put most of your eggs in THE HOUSE.

KlangFool
If you are young and looking at your first potential house purchase, most of your eggs are really in your further career development and earning potential. If that were to be seriously derailed, you are likely in trouble regardless of your housing and investment choices.
rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: How much home can/should one buy?

Post by rbaldini »

KlangFool wrote: If you have less than 250K net worth, how safe is it to carry a 450K house? You had put most of your eggs in THE HOUSE.
KlangFool
I was mistaken: Technically our net worth would be about $250k after purchasing the house (well, less, due to closing costs, etc), and the house would be $450k, and therefore >100% of our net worth.

Of course, that would be true even if we bought a $300k house. So let's think about this. We are currently renting at about $1750/month, while still maxing out 401(k) and Roth contributions and saving quite a bit on top of that. Now, if I use the calculator here (http://www.nytimes.com/interactive/2014 ... lator.html), set the house price to about $300k, and set the property tax and insurance rates to what I think I would get, then I get a monthly PITI of around $1350/month. $1575/month if you include 1% annual maintenance and renovation costs. $1675 if you assume $100 extra per month in additional utilities that are included in rent. Furthermore, I would *very likely* (but not necessarily) come out ahead in the end when I sell the house (i.e. have more net worth at the end of my house ownership than I would have if I had continued renting), even given the investment opportunity cost of buying a home. Are you really suggesting that, because of your arbitrary 2x net worth rule, buying this house would be a bad idea for us?

Look, I realize that the house itself might drop in value. Say the above house price drops 10% over 10 years during my ownership (statistically unlikely, I think, but certainly possible). Then according to the calculator we would *still* come out ahead. But no, according to your wisdom, buying is a bad idea.
KlangFool
Posts: 19613
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much home can/should one buy?

Post by KlangFool »

alfaspider wrote:
If you are young and looking at your first potential house purchase, most of your eggs are really in your further career development and earning potential. If that were to be seriously derailed, you are likely in trouble regardless of your housing and investment choices.
alfaspider,

That statement is not true. If a person owns a house that is underwater, the person could not move elsewhere. That definitely will impact the young person's career development and future earning potential.

KlangFool
KlangFool
Posts: 19613
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much home can/should one buy?

Post by KlangFool »

rbaldini wrote:
Look, I realize that the house itself might drop in value. Say the above house price drops 10% over 10 years during my ownership (statistically unlikely, I think, but certainly possible). Then according to the calculator we would *still* come out ahead. But no, according to your wisdom, buying is a bad idea.
rbaldini,

1) Statistically, it is unlikely that you will stay at the house for 10 years. Average people move every 5.9 years.

2) You pay 6% to 7% real estate agent fee to buy the house.

3) But, you had proven my point again. You rent at $1,750 but want to buy a 450K house.

4) You have no kids. Do you plan to have any kids? If yes, you are buying more house than you need in preparation for the kids. Aka, you are upgrading your housing expense.

5) What if the school system in this house gone bad, you will have to move.

You are taking on more RISK by house ownership. It should be compensated by lowering housing expense. Or else, why should you pay more and taking on more risk at the same time?

KlangFool
rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: How much home can/should one buy?

Post by rbaldini »

KlangFool wrote: rbaldini,

1) Statistically, it is unlikely that you will stay at the house for 10 years. Average people move every 5.9 years.

2) You pay 6% to 7% real estate agent fee to buy the house.

3) But, you had proven my point again. You rent at $1,750 but want to buy a 450K house.

4) You have no kids. Do you plan to have any kids? If yes, you are buying more house than you need in preparation for the kids. Aka, you are upgrading your housing expense.

5) What if the school system in this house gone bad, you will have to move.

You are taking on more RISK by house ownership. It should be compensated by lowering housing expense. Or else, why should you pay more and taking on more risk at the same time?

KlangFool
You are grasping at straws. The calculator accounts for buying and selling fees. You are asking me about my family life and arguing about school districts. I have given you hard numbers. A $300k house would be *easier* (easier!) for us to make monthly payments, and would *very likely* cause us to come out ahead when we sell (even if we only stay for 5 years). Do you really maintain that it would be better for us to continue rent at $1775 than take on the $1350 PITI of a $300k house, simply because our net worth is $250k instead of $600k? If so, I think you're silly.
KlangFool
Posts: 19613
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much home can/should one buy?

Post by KlangFool »

rbaldini wrote:
You are grasping at straws. The calculator accounts for buying and selling fees. You are asking me about my family life and arguing about school districts. I have given you hard numbers. A $300k house would be *easier* (easier!) for us to make monthly payments, and would *very likely* cause us to come out ahead when we sell (even if we only stay for 5 years). Do you really maintain that it would be better for us to continue rent at $1775 than take on the $1350 PITI of a $300k house, simply because our net worth is $250k instead of $600k? If so, I think you're silly.
rbaldini,

Let's say you agree to one of my rules and buy a cheaper 300K house. And, your net worth besides the house is 250K and you are carrying a 240K mortgage on a 300K house.

<<If so, I think you're silly.>>

Is it possible that we may have a recession over the next 5 years? And, the house price may drop and you may need to move in order to get a new job? In that case, THE HOUSE may wipe out most of your net worth.

This had happened to many of my peers.

<<would *very likely* cause us to come out ahead when we sell (even if we only stay for 5 years). >>

If it could had gone well, it could go bad too. We need to look at both sides of the equation.

KlangFool
alfaspider
Posts: 3337
Joined: Wed Sep 09, 2015 4:44 pm

Re: How much home can/should one buy?

Post by alfaspider »

KlangFool wrote:
alfaspider wrote:
If you are young and looking at your first potential house purchase, most of your eggs are really in your further career development and earning potential. If that were to be seriously derailed, you are likely in trouble regardless of your housing and investment choices.
alfaspider,

That statement is not true. If a person owns a house that is underwater, the person could not move elsewhere. That definitely will impact the young person's career development and future earning potential.

KlangFool
As long as you have a sufficient emergency fund to be able to fund the difference between what you owe and what the house is worth, you can still sell the house and move. But in non-recourse states, you can just walk away from the house. Also, some are not willing to relocate for work, regardless of the financial implications.
Last edited by alfaspider on Wed Nov 02, 2016 11:46 am, edited 1 time in total.
bigred77
Posts: 2042
Joined: Sat Jun 11, 2011 4:53 pm

Re: How much home can/should one buy?

Post by bigred77 »

This is one of the more contentious topics I see discussed here. Cost of living in the area you live, how far along you are in your career, availability of housing stock (and/or rental stock), interest rates, it all changes the story for everyone.

For me, I would recommend buying if your reasonably certain you're going to stay in that city indefinitely, want/need to set down some roots, find a property that will suit your current and planned needs for the next decade, AND can reasonably afford it.

My current house I bought at age 28 with 10% down. My networth at the time was roughly 50% of the purchase price. The amount financed was roughly 3X our gross household income at the time. The monthly PITI + HOA fee was roughly 25% of our gross income. Ended up being the best decision we ever made as we'd likely be priced out of our neighborhood after prices jumped after we bought it (no way to predict that the time however, just lucky).

I went with the "buy a lower end house in the best location/neighborhood you can afford" route. I've seen others recommend buying into a location/neighborhood where your household income is on the high end so you don't feel pressure to spend more or feel inadequate when comparing yourself to your peers. I see merits to both but I like the results I've gotten with the route we took.

There may be risk associated with home ownership but we all invest in stocks and those are heck of a lot riskier than reasonably leveraged residential real estate.
Grt2bOutdoors
Posts: 23322
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: How much home can/should one buy?

Post by Grt2bOutdoors »

KlangFool wrote:
letsgobobby,

1) For the benefits of others, I live in DC / Northern VA area. Aka, $200 per square feet area.

<< Following klangfool's advice, you could easily end up with much less home than you could afford, causing you to make unpleasant choices with regards to lifestyle, commute, school quality, control over your own destiny (renting vs buying), even what part of the country you live in; and>>

KlangFool
^^^ That's cheap, I wish my location had homes for $200 a square foot, here in the NYC suburbs you are looking at $250 and up (much higher for NYC proper) and it will need work to bring it to modern living standards, unless you don't mind residing in a home where June Cleaver last made eggs and bacon for Ward, Wally and Theodore aka The Beaver with a toilet from the art deco era of the 70's - pink and black tile.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
KlangFool
Posts: 19613
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much home can/should one buy?

Post by KlangFool »

alfaspider wrote:
KlangFool wrote:
alfaspider wrote:
If you are young and looking at your first potential house purchase, most of your eggs are really in your further career development and earning potential. If that were to be seriously derailed, you are likely in trouble regardless of your housing and investment choices.
alfaspider,

That statement is not true. If a person owns a house that is underwater, the person could not move elsewhere. That definitely will impact the young person's career development and future earning potential.

KlangFool
As long as you have a sufficient emergency fund to be able to fund the difference between what you owe and what the house is worth, you can still sell the house and move. But in non-recourse states, you can just walk away from the house. Also, some are not willing to relocate for work, regardless of the financial implications.
alfaspider,

That only works if a person has substantial net worth besides THE HOUSE. And, in a recession, those investments probably go down in value too. Hence, my 2 times HOUSE PRICE rule. It works even if the investment goes down by 50%.

<<Also, some are not willing to relocate for work, regardless of the financial implications.>>

Willingness means the freedom to choose. That only happen when we have enough to feed our family.

KlangFool
KlangFool
Posts: 19613
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much home can/should one buy?

Post by KlangFool »

bigred77 wrote:This is one of the more contentious topics I see discussed here. Cost of living in the area you live, how far along you are in your career, availability of housing stock (and/or rental stock), interest rates, it all changes the story for everyone.

For me, I would recommend buying if your reasonably certain you're going to stay in that city indefinitely, want/need to set down some roots, find a property that will suit your current and planned needs for the next decade, AND can reasonably afford it.

My current house I bought at age 28 with 10% down. My networth at the time was roughly 50% of the purchase price. The amount financed was roughly 3X our gross household income at the time. The monthly PITI + HOA fee was roughly 25% of our gross income. Ended up being the best decision we ever made as we'd likely be priced out of our neighborhood after prices jumped after we bought it (no way to predict that the time however, just lucky).

I went with the "buy a lower end house in the best location/neighborhood you can afford" route. I've seen others recommend buying into a location/neighborhood where your household income is on the high end so you don't feel pressure to spend more or feel inadequate when comparing yourself to your peers. I see merits to both but I like the results I've gotten with the route we took.

There may be risk associated with home ownership but we all invest in stocks and those are heck of a lot riskier than reasonably leveraged residential real estate.
bigred77,

1) Just to complete your story, how long had you stay at this house?

<<I went with the "buy a lower end house in the best location/neighborhood you can afford" route.>>

2) I go by this route too.

KlangFool
rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: How much home can/should one buy?

Post by rbaldini »

KlangFool wrote: Let's say you agree to one of my rules and buy a cheaper 300K house. And, your net worth besides the house is 250K and you are carrying a 240K mortgage on a 300K house.
No - to follow your net worth rule, I wouldn't be allow to buy any house that costs more than $125,000. Your rule is that you must not buy a house unless your net worth is double its value. I quote:
KlangFool wrote: 5) As per my rule, do not buy 1 million dollar house unless you have 2 million worth of investment elsewhere.
I'm saying this is ridiculous in my situation, when I pay $1750/month in rent. Maybe it makes sense for some, but not for me. That's my point: don't presume that your rules will be applicable to all.
Last edited by rbaldini on Wed Nov 02, 2016 12:06 pm, edited 2 times in total.
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