Housing Heuristics - Rising Income

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Mimmz
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Housing Heuristics - Rising Income

Post by Mimmz » Sun Dec 03, 2017 9:40 am

One of the common caveats in housing affordability discussions is the importance of a stable job/income, and most affordability related heuristics assume a flat level of income.

As many homebuyers are younger wage earners, who have yet to reach peak earning levels, do the common rules of thumb already take income growth into account? Or rather, is there some type of adjustment that would benefit workers with anticipated future wage increases?

I’m interested in the general thought approach to how the expectation of rising income impacts home affordability guidelines, as each individual’s affordability guidelines will likely differ (eg. Desire to only pay cash, willingness to borrow 2x income, or 4x-5x income).

10YearPlan
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Re: Housing Heuristics - Rising Income

Post by 10YearPlan » Sun Dec 03, 2017 9:47 am

I think many, if not most, Bogleheads would prescribe buying a house that comfortably fits the smaller income and staying put, despite the rise in income. That said, I don't know that that particular approach is realistic for everyone.

If I had to give advice to someone today, I'd advise them to buy something that does not render them house poor when they're young, and stay put for 7-10 years. Use those years to beef up savings, travel, start a family, whatever. If in 10 years you need to "trade up", go for it. By that point, not only will their earnings have increased, but their lifestyle will potentially have stabilized and they will be better able to predict what they really need in the long run.

Edited to add: heuristics don't always apply, so I am careful about those. However, I think staying under 30% of net income is a safe bet. If one must go higher, as in high COL areas, that has to be done after careful risk assessment and contingency plans (ie could they take on a roommate if needed to make payment, get second job, have extra cushion in emergency fund, etc.)
Last edited by 10YearPlan on Sun Dec 03, 2017 9:49 am, edited 1 time in total.

Jags4186
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Re: Housing Heuristics - Rising Income

Post by Jags4186 » Sun Dec 03, 2017 9:47 am

Not everyone’s income is on a linear up trajectory. Bonuses come and go, industries boom and bust, individuals go through personal ups and downs which affect their work. Buy what you can afford now and if you find yourself making significantly more money move up later on if you so desire.

chevca
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Re: Housing Heuristics - Rising Income

Post by chevca » Sun Dec 03, 2017 9:48 am

I'd say it's more about what on earns in the present. Especially younger buyers. What is the average time in first homes... I think 5 - 7 years? Part of the first home/starter home deal is folks figure out what they like and want in their more permanent house. Then as earnings rise, they can make that upgrade move and get what they want.

I don't think many would recommend buying something that really stretches the budget in hopes of future income. Stuff happens. What if that income never comes to be? Not to mention, unless one is paying cash, they're only going to qualify for so much based on current income... not future.

noco-hawkeye
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Re: Housing Heuristics - Rising Income

Post by noco-hawkeye » Sun Dec 03, 2017 9:56 am

I think many times a younger buyer is encouraged to "buy as much house as you can afford" in todays dollars. This behavior can have a number of bad side effects (see 10 years ago). However, when things work themselves out - then this buyer usually ends up in a house that matches up with their income levels.

I think in places where housing affordability is an acute issue usually it's not just related to these first time buyers. It's when a 45yr old worker moves into town and has starting home prices at 1.5M - this is an entirely different problem that I would not confuse with the first item.

tibbitts
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Re: Housing Heuristics - Rising Income

Post by tibbitts » Sun Dec 03, 2017 9:56 am

Mimmz wrote:
Sun Dec 03, 2017 9:40 am
One of the common caveats in housing affordability discussions is the importance of a stable job/income, and most affordability related heuristics assume a flat level of income.

As many homebuyers are younger wage earners, who have yet to reach peak earning levels, do the common rules of thumb already take income growth into account? Or rather, is there some type of adjustment that would benefit workers with anticipated future wage increases?

I’m interested in the general thought approach to how the expectation of rising income impacts home affordability guidelines, as each individual’s affordability guidelines will likely differ (eg. Desire to only pay cash, willingness to borrow 2x income, or 4x-5x income).
Rising income levels? You must be thinking of the 80s or 90s. For a long time now what I've seen (admittedly just personal observation) is flat or falling real income for the vast majority of workers, although the most skilled and in-demand workers are an exception (and probably over-represented here.) That contrasts dramatically the previous situation, when the majority of workers saw rising real wages through most of their careers (and were rewarded for essentially not much except for getting old.)

student
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Re: Housing Heuristics - Rising Income

Post by student » Sun Dec 03, 2017 10:04 am

I purchased my place when I was in my mid-30's. The purchase price was 2.5 times my salary. In retrospect, I should have spent 3 times my salary and bought something better.

KlangFool
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Re: Housing Heuristics - Rising Income

Post by KlangFool » Sun Dec 03, 2017 10:29 am

tibbitts wrote:
Sun Dec 03, 2017 9:56 am
Mimmz wrote:
Sun Dec 03, 2017 9:40 am
One of the common caveats in housing affordability discussions is the importance of a stable job/income, and most affordability related heuristics assume a flat level of income.

As many homebuyers are younger wage earners, who have yet to reach peak earning levels, do the common rules of thumb already take income growth into account? Or rather, is there some type of adjustment that would benefit workers with anticipated future wage increases?

I’m interested in the general thought approach to how the expectation of rising income impacts home affordability guidelines, as each individual’s affordability guidelines will likely differ (eg. Desire to only pay cash, willingness to borrow 2x income, or 4x-5x income).
Rising income levels? You must be thinking of the 80s or 90s. For a long time now what I've seen (admittedly just personal observation) is flat or falling real income for the vast majority of workers, although the most skilled and in-demand workers are an exception (and probably over-represented here.) That contrasts dramatically the previous situation, when the majority of workers saw rising real wages through most of their careers (and were rewarded for essentially not much except for getting old.)
+1000.

KlangFool

Pacman
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Re: Housing Heuristics - Rising Income

Post by Pacman » Sun Dec 03, 2017 10:41 am

I think you should equally consider the possibility of decreasing income. As soon as the baby comes around, I've seen parents drastically scale back from work and go part time, or even stop working entirely for a few years. And in many of these cases, it wasn't even planned in advanced.

KlangFool
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Re: Housing Heuristics - Rising Income

Post by KlangFool » Sun Dec 03, 2017 10:45 am

Pacman wrote:
Sun Dec 03, 2017 10:41 am
I think you should equally consider the possibility of decreasing income. As soon as the baby comes around, I've seen parents drastically scale back from work and go part time, or even stop working entirely for a few years. And in many of these cases, it wasn't even planned in advanced.
Or, the young person started work in a prolonged recession.

KlangFool

runner540
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Re: Housing Heuristics - Rising Income

Post by runner540 » Sun Dec 03, 2017 10:50 am

Mimmz wrote:
Sun Dec 03, 2017 9:40 am
One of the common caveats in housing affordability discussions is the importance of a stable job/income, and most affordability related heuristics assume a flat level of income.

As many homebuyers are younger wage earners, who have yet to reach peak earning levels, do the common rules of thumb already take income growth into account? Or rather, is there some type of adjustment that would benefit workers with anticipated future wage increases?

I’m interested in the general thought approach to how the expectation of rising income impacts home affordability guidelines, as each individual’s affordability guidelines will likely differ (eg. Desire to only pay cash, willingness to borrow 2x income, or 4x-5x income).
What is actionable here?

Keep in mind that many financial heuristics were developed in a different time, when individuals didn't have to save as much for retirement, higher ed, or healthcare as we do now. Sure, back then other things (food, clothing) were more expensive relative to income, but my point is that a family budget 40 years ago had different "future liabilities" that today.

sailaway
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Re: Housing Heuristics - Rising Income

Post by sailaway » Sun Dec 03, 2017 10:57 am

The income you hope to have should not affect the house you buy today.

goingup
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Re: Housing Heuristics - Rising Income

Post by goingup » Sun Dec 03, 2017 12:01 pm

Not aware of any heuristics regarding increasing wages. That's a big variable.

We've owned 3 homes. Each time we bought the best house we could comfortably afford at the time.

GAAP
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Re: Housing Heuristics - Rising Income

Post by GAAP » Wed Dec 06, 2017 12:16 pm

Something else to consider: the current corporate environment encourages job hopping every few years and income is frequently directly affected by willingness to relocate -- either with the current or a different employer.

In that environment, house ownership is a disadvantage -- it's hard to break even when the sales costs for the asset exceed the value growth rate. If you're going to buy, buying small and staying small is probably your best choice.

snowox
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Re: Housing Heuristics - Rising Income

Post by snowox » Wed Dec 06, 2017 12:22 pm

I'd say dont spend money you dont have but to some extent thats what your doing if your spending a portion of your paycheck to make a mortgage BUT i for sure would not spend money I am assuming I might have over and beyond that. Save your raises if and when they come!

Valuethinker
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Re: Housing Heuristics - Rising Income

Post by Valuethinker » Wed Dec 06, 2017 12:42 pm

tibbitts wrote:
Sun Dec 03, 2017 9:56 am
Mimmz wrote:
Sun Dec 03, 2017 9:40 am
One of the common caveats in housing affordability discussions is the importance of a stable job/income, and most affordability related heuristics assume a flat level of income.

As many homebuyers are younger wage earners, who have yet to reach peak earning levels, do the common rules of thumb already take income growth into account? Or rather, is there some type of adjustment that would benefit workers with anticipated future wage increases?

I’m interested in the general thought approach to how the expectation of rising income impacts home affordability guidelines, as each individual’s affordability guidelines will likely differ (eg. Desire to only pay cash, willingness to borrow 2x income, or 4x-5x income).
Rising income levels? You must be thinking of the 80s or 90s. For a long time now what I've seen (admittedly just personal observation) is flat or falling real income for the vast majority of workers, although the most skilled and in-demand workers are an exception (and probably over-represented here.) That contrasts dramatically the previous situation, when the majority of workers saw rising real wages through most of their careers (and were rewarded for essentially not much except for getting old.)
There is progression by aging - increased seniority. I still see that. For people sort of 23-40 still see that.

But that tops out at c. 45 *unless* you are headed for the top levels of management or the professions. At least that's what I see around me.. And I believe the stats suggest your earning power starts to fall surprisingly rapidly in your 50s (again with caveat).

The "previous situation" was actually a postwar thing. If I talked to my grandparents, there was not in the 1919-1939 period that sense of things getting better. You were lucky to have a job, and you were lucky to be able to hold on to it. Retirement then was quite short because life expectancies were a lot shorter.

It was that period maybe 1945-1985 when people thought they could get "ahead". Since then, as you say, static to down. Much more frequent loss of job, change of career, sometimes taking a big cut in pay just to keep working. And for those who kept their jobs, ever increasing pressure to do more work and be more productive (as coworkers are cut etc.). Read about Amazon warehouse workers sometime.

Where I think things were getting "better" in 1919-1939 was technology change-- in North America the icebox became an electric fridge, radios became almost universal, cars became much more common etc. Bicycles more widespread. For the affluent there was more railroad travel and leisure locations, the beginnings of air travel, and most people began to get at least some Saturdays off work.

This reminds me of Japan since 1990. The average Japanese is not better off than 1990, and unemployment and poverty are far higher, but there has been deflation in price of many things, and technology has continued to change.

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