Salary to Home Value/Mortgage Ratio?

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wootwhoop
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Salary to Home Value/Mortgage Ratio?

Post by wootwhoop » Fri Jan 17, 2014 3:43 pm

Hi, I was wondering what the bogleheads standard was for the ratio of salary to home value?

OR what percentage is the general rule for home payments? Gross or net salary?

Thanks!
:sharebeer

doug4523
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Re: Salary to Home Value/Mortgage Ratio?

Post by doug4523 » Fri Jan 17, 2014 4:02 pm

Our gross salaries combined were exactly 1:2 to the price of our house. We did a 15 yr mortgage, and in four years the payments are still comfortable. Not sure if we are in the standard (probably not), but it is working for us so far. I think the general rule for percentage of home payments is no more then 30%, but ideally 20%. We were around 35% ourselves, but I wasn't concerned much by that number. It was the overall cost of the house that mattered most.

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hand
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Re: Salary to Home Value/Mortgage Ratio?

Post by hand » Fri Jan 17, 2014 4:23 pm

Assuming this is to inform a purchase decision, I would caution that a standard ratio may not be a good reference point for a number of reasons.

Off the top of my head:

1) One income or two paying the mortgage - if two incomes, risk of income going to zero for a period of time (layoff etc.) is lower
2) Early career with high likelihood of increased income in the future, or mid/late career with likelihood that income has plateaued?
3) Low income with little financial flexibility because most income is consumed by "needs" (basic food, transport, clothing etc.) or high income where a substantial portion of income goes to "wants" and could be redirected to the "want" of a fancier house than needed
4) Financial sophistication and willingness / ability to cut other expenses to pay for house
5) Is this a house that has strong resale possibilities (standard features, not priced above ability for average buyers in area to afford?)
6) Urban area where public transport reduces need for car related expenses
7) Recourse or non-recourse state
8) Amount borrowed and borrowing rate

As a mid-career, dual income household in a moderately high cost area, and significant income above our base needs, we spent 2.8x income with expectation of significant future expenses and short term plan reduce discretionary spending to pay down debt to get us to 2.4x income which feels about right.

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wootwhoop
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Re: Salary to Home Value/Mortgage Ratio?

Post by wootwhoop » Fri Jan 17, 2014 4:35 pm

To clarify – yes, this is for a purchase decision. No debt. We’re 27 and 28 years old and we might have a child ~3-5 years from now which would affect our salaries (not sure how to factor this part).

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Re: Salary to Home Value/Mortgage Ratio?

Post by Rayandron » Fri Jan 17, 2014 4:58 pm

I haven't bought a home, but in the my area, a single family home with 3 BR's is typically around 600-700k. I make ~100-120k in any given year, and my SO makes about the same. So if we were to buy a 3 BR for starting a family (something we're not anywhere near doing), we'd be looking at around a 2.5x to 3x income:price ratio. Just one of the many reasons I expect to rent for a good long while even though I plan to stay in the area, have enough for a decent sized downpayment, and have reasonably high income.

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Re: Salary to Home Value/Mortgage Ratio?

Post by CdnAppraiser » Fri Jan 17, 2014 4:59 pm

I bought my first house at just under 2.5 times my salary; however, it had a rental unit. After getting married and having a child, we out grew the place and moved. I'm cheap so I bought a fixer upper (mostly cosmetic) and the house cost less than 2 times my salary (mtg and property taxes = 15% of my gross income, not counting my wife's income). I did all repairs with cash when I had extra cash.

Buy a house with a payment less than what your budget tells you, this way you have extra money for the annoying extra bills (new lawn mower, new car tires, water bills, etc)

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wootwhoop
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Re: Salary to Home Value/Mortgage Ratio?

Post by wootwhoop » Fri Jan 17, 2014 5:03 pm

Are these ratios YOUR salary or your household income?

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tnbison
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Re: Salary to Home Value/Mortgage Ratio?

Post by tnbison » Fri Jan 17, 2014 5:09 pm

List price of our first home was 1.45 times our salaries. We put down 15%. 15 yr note. My rule of thumb is/was keep the payment under 25% of take home pay on a 15 year mortgage.

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Re: Salary to Home Value/Mortgage Ratio?

Post by cherijoh » Fri Jan 17, 2014 5:36 pm

I think the rule of thumb used to be less than 40% of take home pay to service all your debt (mortgage PITI, car loans, college loans, etc.) I'm not sure if this has changed with the tightening of lending standards.

The salary to home value ratio is flawed, since it depends on the prevailing interest rates. With historically low interest rates, you can afford a more expensive home than you could have when interest rates were higher.

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Re: Salary to Home Value/Mortgage Ratio?

Post by lrak » Fri Jan 17, 2014 5:39 pm

The loan was 2.9x gross when I bought the house. By the time I paid it off 6.5 years later the loan amount was only 1.5x gross and in reality 1.2x household gross since we were married 5 years by that point.

I purchased the house when I was 22 and only in the workforce just over a year. I went from being ostensibly homeless to owning a 4BR house in a decent school district. I was counting on having significant salary growth in the early years of my career and had far more than I expected.
Last edited by lrak on Sat Jan 18, 2014 12:13 pm, edited 1 time in total.

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Hector
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Re: Salary to Home Value/Mortgage Ratio?

Post by Hector » Fri Jan 17, 2014 7:22 pm

IMO spending as less as you can is the right thing.
Even if there is a reasonable %, I think it is very subjective. Lets say, we both are of same age and making the same money. You have saved 10X more than I. If we both spend same on mortgage/rent, is it really same?
I think ideal % is something that lenders came up with for average population. It is the % that makes them comfortable(making return on the landed money) to let consumers borrow.

aquifer
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Re: Salary to Home Value/Mortgage Ratio?

Post by aquifer » Fri Jan 17, 2014 8:36 pm

PITI payments per month on a home should not be more than 25% of your gross monthly pay. Lower is better. All monthly payments including the home loan should not exceed 36%. Those are absolute maximums and include all fixed payments; home, car, student loans, credit cards, etc. PITI = principal, interest, taxes and insurance.

Raladic
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Re: Salary to Home Value/Mortgage Ratio?

Post by Raladic » Fri Jan 17, 2014 9:27 pm

Combined gross salaries to home value was 1:2 for us.
Our monthly PITI is 15% of gross/23% of net income.

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Re: Salary to Home Value/Mortgage Ratio?

Post by Ged » Fri Jan 17, 2014 9:42 pm

wootwhoop wrote:To clarify – yes, this is for a purchase decision. No debt. We’re 27 and 28 years old and we might have a child ~3-5 years from now which would affect our salaries (not sure how to factor this part).
If you are considering your wife may stay at home I'd exclude her salary from the calculation of what you can afford. Also use debt payment ratio rather than salary to home price ratio because the later does not account for interest rate fluctuations and other debt you may have.

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Re: Salary to Home Value/Mortgage Ratio?

Post by denovo » Fri Jan 17, 2014 10:20 pm

Rule of thumb, 30 percent of income, not more to mortgage, property tax, homeowner's insurance.
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Re: Salary to Home Value/Mortgage Ratio?

Post by illiterateabc » Fri Jan 17, 2014 11:41 pm

It seems like I'm on the higher end compared to all of you. My wife and I just closed on our first house in December with a 30 year fixed mortgage, 20% down.

My house is in a high cost area, and our household gross salary to the sale price of our house is about 1:4. Our monthly PITI is about 24% gross/34% net.

We are very comfortable, thanks to a fairly frugal lifestyle and good savings habits. We are even thinking about kids very soon.

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Clark & Addison
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Re: Salary to Home Value/Mortgage Ratio?

Post by Clark & Addison » Sat Jan 18, 2014 9:00 am

When we bought our first house at ages 23/22, our salary:home ratio was 1:1.5. We paid off this house in 7.5 years last year and hope to build our dream home in 3-5 years with a very small (if any) mortgage. I'm predicting that our salary:home ratio for our next home will be 1:2.8. With whatever we put down, if we have a mortgage the payment shouldn't exceed 15% of our gross income.

traumadoc77
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Re: Salary to Home Value/Mortgage Ratio?

Post by traumadoc77 » Sat Jan 18, 2014 11:55 am

1.5:1 we had a 1:2 before and this feels nice!

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Re: Salary to Home Value/Mortgage Ratio?

Post by humandraydel » Sat Jan 18, 2014 12:13 pm

The lower the better - but I realize not everyone lives in a low COL area. My purchase price was 1.65x my salary. With 20% down, the mortgage was 1.3x my salary, resulting in a PITI payment that is 10% of my gross salary.

My salary is $85k so it's not like I'm a high earner. Try to buy the cheapest house in a good area - my house is $140k surrounded by $250k houses in the best school district in a large city in the Southeast.

killjoy2012
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Re: Salary to Home Value/Mortgage Ratio?

Post by killjoy2012 » Sat Jan 18, 2014 1:02 pm

Right now - 1:1
15 years ago when I bought it: 1:2.5

MichaelM24
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Re: Salary to Home Value/Mortgage Ratio?

Post by MichaelM24 » Sat Jan 18, 2014 1:21 pm

1:3 but housing is expensive where I live.
Last edited by MichaelM24 on Sat Jan 18, 2014 1:42 pm, edited 2 times in total.

Bungo
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Re: Salary to Home Value/Mortgage Ratio?

Post by Bungo » Sat Jan 18, 2014 1:26 pm

Bought two years ago in Silicon Valley. My salary:approximate house value ratio is 1:5. Salary:mortgage is around 1:3. I excluded stock compensation from the salary numbers because it's variable.

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Re: Salary to Home Value/Mortgage Ratio?

Post by veekay » Sat Jan 18, 2014 1:27 pm

Salary to home purchase price: 1:1.6

Salary to mortgage balance: 1:1.3

Salary to home value: 1:2.5

I was initially looking to buy a place that was 1:0.6 but the neighborhoods were bad. Then, we found this place. Large enough to support a family of 4 and in a great area.

Took out a 30 year loan at a great interest rate that I don't plan on paying off early. I just invest my monthly savings instead. My total housing payment is 19% of gross income from my job. Still a bit high but I'm young and just starting with my career. I expect my income to go up significantly over the next 10 years or so.

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Re: Salary to Home Value/Mortgage Ratio?

Post by Pajamas » Sat Jan 18, 2014 1:29 pm

When I bought my apartment it was worth roughly a year's salary, 1:1. Now it is 4:1 as the cost of housing has gone up much faster than my salary, but I no longer have a mortgage. The monthly charges are about 10% of my gross salary.

I suggest first looking at what house you need rather than at what you can afford. Hopefully you can easily afford what you need.

There is no point in buying all the house you can afford if it is more than you need, just more problems keeping it clean and in good repair, plus you are inclined to fill it up with more stuff.

Traveler
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Re: Salary to Home Value/Mortgage Ratio?

Post by Traveler » Sat Jan 18, 2014 10:00 pm

My current home is 0.46:1 but I got a great deal on a short sale townhouse.

My previous home when I bought it was 2.2:1. That wasn't too much home for my salary and I survived two pay cuts (corporate bankruptcy) and 18 months of unemployment while living in it, without having financial problems.

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Re: Salary to Home Value/Mortgage Ratio?

Post by Wolkenspiel » Sat Jan 18, 2014 10:29 pm

To give you some numbers from the other end of the spectrum (present numbers, relative to gross salary)
Home value to salary: 470%
Mortgage to salary: 380%
PITI to salary: 22%

I'm marveling at the 1:1 or less responses - that wouldn't buy a garage here, much less a house in a good school district with space for a family. Obviously, I also didn't subscribe to the "as low as possible" credo. We went looking for a house that we liked, that met our needs, and that we could afford with a fixed payment that was reasonable relative to the stable part of our household income (I'm cheating a little bit, as a 30yr fixed, no-interest, second mortgage from my employer helped, otherwise we probably would have looked at value:salary of 350% rather than > 450%).

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Re: Salary to Home Value/Mortgage Ratio?

Post by vveat » Sat Jan 18, 2014 10:47 pm

Salary to house value now is 1:1, when we bought was 1:2. Housing is expensive in NJ, but we bought within our means and are happy
Mortgage payments, insurance and taxes are 7% of gross income but we do pay extra principal.
Mortgage is 60% of salary, hope to be 0% in 2 years :sharebeer

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LowER
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Re: Salary to Home Value/Mortgage Ratio?

Post by LowER » Sun Jan 19, 2014 12:11 am

1:1 :dollar

ddj
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Re: Salary to Home Value/Mortgage Ratio?

Post by ddj » Sun Jan 25, 2015 5:48 pm

1:2.33

KlangFool
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Re: Salary to Home Value/Mortgage Ratio?

Post by KlangFool » Sun Jan 25, 2015 5:59 pm

TS,

After paying 20% down payment to avoid PMI and 30 years mortgage, the mortgage payment (plus property tax and so on) has to be lower than renting. In summary, I consider the house that I lived in as housing expense. The housing expense has to be lower by buying versus renting. Then, I buy..

I bought my current house with those consideration.

KlangFool

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Re: Salary to Home Value/Mortgage Ratio?

Post by Carefreeap » Sun Jan 25, 2015 6:23 pm

Bungo wrote:Bought two years ago in Silicon Valley. My salary:approximate house value ratio is 1:5. Salary:mortgage is around 1:3. I excluded stock compensation from the salary numbers because it's variable.
5:1 was our ratio back in 1990 (We're in San Mateo County). That was on DH's salary alone as we relocated with the company from Northern Virginia and I needed to find a new job. I did...the day escrow closed. :wink:

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Re: Salary to Home Value/Mortgage Ratio?

Post by Userdc » Sun Jan 25, 2015 7:13 pm

i don't know if there's a good rule of thumb for this, it depends on so many factors, and gross salary is only one of them.

To me, as long as you
1) can afford the PITI and still hit your savings goals AND
2) the cost to buy isn't way out of whack with the cost to rent AND
3) you plan to stay long enough to overcome the fixed costs of buying/selling (typically 5+ years)

Then go for it.

dsmil
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Re: Salary to Home Value/Mortgage Ratio?

Post by dsmil » Sun Jan 25, 2015 11:00 pm

We were 1:3 when we bought 2 years ago, and are now at 1:2. I found that I wasted a lot of time with ratios before buying our house, when applying the housing costs to our budget was much more useful.

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Re: Salary to Home Value/Mortgage Ratio?

Post by Traveller » Sun Jan 25, 2015 11:25 pm

My home value is approx 150% of my gross annual income. My mortgage P&I is roughly 10% of my net monthly income (single income family). This is my 4th home. All of them have been about 150% of income at the time I bought them, but mortgage has been getting smaller and smaller as I roll equity forward.

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Re: Salary to Home Value/Mortgage Ratio?

Post by HIinvestor » Mon Jan 26, 2015 4:01 am

Our house was valued at way more than 5x H's income & I was planning to stay and home to raise our kids. Fortunately, we were able to put down a substantial down payment so we could make the monthly mortgage & other payments by greatly economizing. Over time, H's income rose and it was less uncomfortable to pay the mortgage, but then the educational expenses for the kids started increasing.

When home prices are very high and incomes are relatively low, it's tough to put together a good down payment and be able to buy. Many buy condo units because they can't afford single-family houses (though of course, some prefer condo life).

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Re: Salary to Home Value/Mortgage Ratio?

Post by Tyrobi » Mon Jan 26, 2015 6:15 am

1 : 1.6
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kenyan
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Re: Salary to Home Value/Mortgage Ratio?

Post by kenyan » Mon Jan 26, 2015 11:20 am

HCOLA on 1.5 incomes (part-time work due to kids).

On purchase, income/purchase price was 1:4. 1.5 years later, that ratio is 1:3.4 due to income increases. 1:2.6 when talking about mortgage balance.

With current PITI after refinance into PenFed 5/5 ARM, PITI/gross income is 17%; PITI/take-home is 28%. That will change in 4 years when the teaser rate is up.

Rules-of-thumb and guidelines really need to be tailored to your personal situation, particularly your area. If you are in a HCOLA, your ratios will be higher. Incomes are not nearly enough larger in those areas to keep the ratios constant, and rents are correspondingly much higher. Analyze your cash flow, include a healthy chunk for maintenance/upgrades/increased utilities, and stress test your situation (one income instead of two due to children, 1.5 incomes minus childcare costs, etc).
Retirement investing is a marathon.

enc0re
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Re: Salary to Home Value/Mortgage Ratio?

Post by enc0re » Mon Jan 26, 2015 11:36 am

When I bought, it was 1:2. Now it's about 1:1.1.

Looking back, sticking to 1:2 was a great decision. I do dream about one day having a nicer, but not much bigger, house; perhaps even having it built exactly as I like. Probably as a reward when I have my mortgage paid off in 7 to 12 years.

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Re: Salary to Home Value/Mortgage Ratio?

Post by Quickfoot » Mon Jan 26, 2015 2:13 pm

Your question wont provide any useful information, someone with no debt can afford more house than someone with debt at the same income. What you need to consider is your total back-end debt ratio which is calculated with all debt and your income. The standard is your back end ratio should not be higher than 36% which means with no other debt your mortgage could be 2.78 times your income. The nice thing about back end is it reliably tells you how much you can afford while taking into consideration your other obligations which debt to income ratio and income to mortgage ratio do not.

To calculate your maximum multiply your annual income by .36 and divide by 12, subtract any monthly debt payments and you now have the maximum mortgage payment you can afford.

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Clearly_Irrational
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Re: Salary to Home Value/Mortgage Ratio?

Post by Clearly_Irrational » Mon Jan 26, 2015 2:42 pm

LowER wrote:1:1 :dollar
That would be amazing, but in my area you can't even buy bare land for that. Some median home prices for where I live:

Close in:

Portland $310k
Beaverton $295k
Tigard $316k
Lake Oswego $483k
Milwaukie $246k

Farther out:

Hillsboro $263k
Sherwood $329k
Tualatin $343k
Oregon City $289k

Really out there but still doable:

Scappoose $225k
Banks $290k
Forest Grove $244k
Gaston $279k
Mcminnville $207k
Newberg $238k
Wilsonville $375k
Damascus $350k
Gresham $230k

1:2 or less is optimal but in high cost of living areas you may have to go as high as 1:3.

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Re: Salary to Home Value/Mortgage Ratio?

Post by bigred77 » Mon Jan 26, 2015 2:53 pm

We are a 2 income household and expect to remain so for about 3 more years before dropping down to 1 income.

We bought our home in summer 2013. We actually live in a moderately low COL area but we bought in our dream location and paid what costs to live there. Even though we have over 3000 sq ft we're one of the smaller houses in the neighborhood.

At the time:
The purchase price was close 375% our our gross household income (taking only base salarys into account).
Mortgage Principal was about 340% of gross HHI.

We lucked out and saw the value of our home appreciate considerably in only 18 months. In fact, we would probably be priced out of neighborhood today. We plan to stay in the property for at least 15 more years. I'm in the process of refinancing to a 20 yr mortgage.

Currently:
House value is 400% of HHI
Mortgage Balance is 300% of HHI

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kenyan
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Re: Salary to Home Value/Mortgage Ratio?

Post by kenyan » Mon Jan 26, 2015 4:03 pm

Clearly_Irrational wrote: 1:2 or less is optimal but in high cost of living areas you may have to go as high as 1:3.
1:3 isn't even very doable for many of those living in HCOLA. Consider the South Bay employment hub area of Southern California:

"Don't bother" cities:
Manhattan Beach - $1.9m
Hermosa Beach - $1.3m
Palos Verdes - $1.8m
Rolling Hills - $1.4m

(Mostly) Good schools/safe cities:
El Segundo - $827k
Culver City - $783k
Redondo Beach - $844k
Torrance - $699k
Santa Monica - $1.13m
Westchester - $822k

Cities with mixed safe/unsafe areas and generally poor schools:
Hawthorne - $475k
Gardena - $414k
Lawndale - $413k
Los Angeles (kind of a big lump, but got to put it somewhere) - $529k
Playa Del Rey - $695k
Playa Vista - $700k
Inglewood - $380k
Lomita - $583k
San Pedro - $522k
Carson - $422k
Long Beach - $485k

Cities with very high crime, very poor schools (could list more):
Compton - $278k
Wilmington - $397k

Beyond that, you're looking at 2+ hours/day commute, and prices don't get any better until you take on a 3+ hour/day commute (Riverside County, Temecula, Coachella Valley, etc). Most of the cities there I deem "middle class" are $600k+ and up, which is not easy to do with a 3:1 ratio. Household incomes are nowhere near that level - for instance, median household income in Redondo Beach ($844k median price) is $99k.

The San Francisco Bay Area is even worse (though incomes are significantly higher), as is Manhattan; DC and Boston are comparable.

Does that mean you should stretch yourself to purchase these houses? No, but traditional ratios kind of need to be dumped for HCOLA, with a more personalized look at cash flow being more appropriate. Naturally, one could find small/run-down houses/condos for significantly less than these median values, so that's an option.
Retirement investing is a marathon.

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Re: Salary to Home Value/Mortgage Ratio?

Post by Quickfoot » Mon Jan 26, 2015 4:21 pm

No, but traditional ratios kind of need to be dumped for HCOLA
That would be precisely the wrong thing to do. The ratios work perfectly in telling people they can't afford a house, they can't afford a higher payment just because they live in a higher cost of living area. The answer isn't a higher debt to income ratio, it's one of three things (1) Earn more money, (2) Don't buy a house, or (3) Move to a lower cost of living area (not a suburb, another state). Where people get into trouble is wanting to live in a HCOLA without the income to do so. Not everyone can afford a house, not everyone can afford to live in a high cost of living area.

People desperately need to move away from high cost of living areas, when demand drops the cost of living will also drop. One of the next financial collapses is going to be unjustifiable high cost of living areas in some areas of our country and a lot of people are going to get severely hurt financially.

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Clearly_Irrational
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Re: Salary to Home Value/Mortgage Ratio?

Post by Clearly_Irrational » Mon Jan 26, 2015 4:28 pm

kenyan wrote:Beyond that, you're looking at 2+ hours/day commute, and prices don't get any better until you take on a 3+ hour/day commute (Riverside County, Temecula, Coachella Valley, etc). Most of the cities there I deem "middle class" are $600k+ and up, which is not easy to do with a 3:1 ratio. Household incomes are nowhere near that level - for instance, median household income in Redondo Beach ($844k median price) is $99k.
I used to live in Riverside for exactly that reason. That's one of the big reasons why SF, NY and LA are having problems, the working class and much of the middle class are being pushed out by unaffordable pricing.

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kenyan
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Re: Salary to Home Value/Mortgage Ratio?

Post by kenyan » Mon Jan 26, 2015 5:20 pm

Quickfoot wrote:
No, but traditional ratios kind of need to be dumped for HCOLA
That would be precisely the wrong thing to do. The ratios work perfectly in telling people they can't afford a house, they can't afford a higher payment just because they live in a higher cost of living area. The answer isn't a higher debt to income ratio, it's one of three things (1) Earn more money, (2) Don't buy a house, or (3) Move to a lower cost of living area (not a suburb, another state). Where people get into trouble is wanting to live in a HCOLA without the income to do so. Not everyone can afford a house, not everyone can afford to live in a high cost of living area.

People desperately need to move away from high cost of living areas, when demand drops the cost of living will also drop. One of the next financial collapses is going to be unjustifiable high cost of living areas in some areas of our country and a lot of people are going to get severely hurt financially.
I agree with your sentiment, but not all of the specifics. Your example (2) does not work well* if rents are in line with prices - unless one is only living there in a transient manner. Traditional ratios do not work perfectly as income rises. Rising income means that one has the baseline needs covered and can elect how to spend what's on top of that.

Quick example - Say that baseline, non-housing needs can be covered by $20k per year. Household (A) makes $50k before taxes, $45k after taxes. Household (B) makes $150k before taxes, $125k after taxes. Both households contribute 15 percent of pretax income to retirement.

Available income for (A) is therefore 17.5k after covering non-housing needs, and 82.5k for (B). Traditional ratios would now dictate that (B) spend no more than three times what (A) spends on housing, despite having nearly five times the available income, once baseline expenses are accounted for. I submit that one could choose to spend a bit more on housing in situation (B) as long as they did not scale up their other expenses accordingly. Will most people do this? Probably not, but some will, so considering one's specific situation is perfectly fine, rather than adhering to a blanket rule.

This doesn't account for the regressive nature of the tax benefits to housing, either. Do I think it's generally a good idea to ignore rules of thumb, even on this matter? No, I don't. However, I do think that those who live in lower-cost areas should not pedantically and rigorously hold to said rules (that also ignore current mortgage rates) without considering all angles.

*by "work well" I recognize that long-term renting is always an option - I did it for a very long time. However, it's not necessarily the best financial option.
Retirement investing is a marathon.

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kenyan
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Re: Salary to Home Value/Mortgage Ratio?

Post by kenyan » Mon Jan 26, 2015 5:25 pm

Clearly_Irrational wrote:
kenyan wrote:Beyond that, you're looking at 2+ hours/day commute, and prices don't get any better until you take on a 3+ hour/day commute (Riverside County, Temecula, Coachella Valley, etc). Most of the cities there I deem "middle class" are $600k+ and up, which is not easy to do with a 3:1 ratio. Household incomes are nowhere near that level - for instance, median household income in Redondo Beach ($844k median price) is $99k.
I used to live in Riverside for exactly that reason. That's one of the big reasons why SF, NY and LA are having problems, the working class and much of the middle class are being pushed out by unaffordable pricing.
No arguments. House prices - and rents - in these areas are a continuing problem, despite the media's unashamed touting of increasing house prices as a good thing. I'm sure there will be a bust again, but the ultra-low mortgage rates are helping to keep everything propped up.
Retirement investing is a marathon.

Quickfoot
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Re: Salary to Home Value/Mortgage Ratio?

Post by Quickfoot » Mon Jan 26, 2015 5:35 pm

Available income for (A) is therefore 17.5k after covering non-housing needs, and 82.5k for (B). Traditional ratios would now dictate that (B) spend no more than three times what (A) spends on housing, despite having nearly five times the available income, once baseline expenses are accounted for. I submit that one could choose to spend a bit more on housing in situation (B) as long as they did not scale up their other expenses accordingly. Will most people do this? Probably not, but some will, so considering one's specific situation is perfectly fine, rather than adhering to a blanket rule.
There are always exceptions to rules which is fundamentally what credit unions are for. My credit union offers loans they do not sell which means they have a lot more room for exceptions (something they actually advertise). As you point out it is exceptionally rare for someone to not scale other living expenses and large financial institution need large blanket rules due to their size.

Someone that is making 150K instead of 50K is already going to spend more than someone spending 50K because the ratio gives them more purchase room. Having no debt also gives them more purchase room because their total back-end ratio is lower. If they truly want more house they can save and make a larger down payment and keep their back end ratio where it needs to be.

The bottom line is people should not be house poor by having too much of their income or net worth tied up in a house. Although they *may* be able to stretch and afford more it limits their ability to do things like afford food, cars, and unexpected expenses. The bank wants to make sure you the borrower can have a few unexpected financial events and not default.

People tend to get so caught up in what they want or what they can make happen they forget to stop and think if it's a good idea and that's precisely what the back end ratio limit is for. Without it there would be exponentially more foreclosures and then none of us would be able to buy a house because the risk would be so high banks would abandon the mortgage business en-masse or require down payments more in the 40% to 50% range.

Carefreeap
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Re: Salary to Home Value/Mortgage Ratio?

Post by Carefreeap » Mon Jan 26, 2015 6:21 pm

From what I observed our SF Bay Area house didn't drop % as much as our AZ area house and the price difference was nearly half.

The big driver is employment. The SF Bay Area recovered a lot faster than many other parts of the country because of jobs. I am seeing some acquaintances leaving for Portland. One has a job (transferred within the organization) the other doesn't but is low enough down in the food chain that she'll find something.

I'm stalling putting any serious effort into selling my AZ house because I'm not hearing about the So. CA flight to AZ yet which seems to happen every economic cycle as well.

MnD
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Re: Salary to Home Value/Mortgage Ratio?

Post by MnD » Mon Jan 26, 2015 9:14 pm

1:1.8 back then
1:1.7 now.
Both our home value and household income have increased about 3.8X in nominal terms over 23 years.

Bought 2500SF and 3/4 acre lot in out late 20's. Now in our early 50's it is, in the words of Jack Bogle - "Enough".
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

itstoomuch
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Re: Salary to Home Value/Mortgage Ratio?

Post by itstoomuch » Tue Jan 27, 2015 1:15 am

Son's Seattle Home: 5 x Gross, single. 90 Walk score. Bikes/bus to work. Walking time 40 min.
PITI + utilities: 23% of gross , @2.65%, 7/1. He's been is getting ~200/mn average from Airbnb.
Mortgage/HV: 75% on recent purchase.
Furniture from grandmother's home.

Zillow/Trulia are your friends.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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