# X Gross = Home price?

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Tech
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# X Gross = Home price?

Post by Tech » Sat Feb 24, 2018 1:08 pm

Hi BH,
How many time your annual gross income is considered the highest for home price ?
In my area VHCOL the starter home is 5.5 times my gross.

chevca
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Re: # X Gross = Home price?

Post by chevca » Sat Feb 24, 2018 1:13 pm

I'd say 3x at the highest. Although, the down payment can change things. I think 3x for a mortgage amount is the highest. That's pushing it too.

Unless you have a large down payment, I'd say 5.5x is too much.

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unclescrooge
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Re: # X Gross = Home price?

Post by unclescrooge » Sat Feb 24, 2018 1:18 pm

Tech wrote:
Sat Feb 24, 2018 1:08 pm
Hi BH,
How many time your annual gross income is considered the highest for home price ?
In my area VHCOL the starter home is 5.5 times my gross.
If you want to buy a house in southern California, then 5.5x seems about right. Condos can be cheaper, be not always.

Buying a house is mainly a lifestyle decision, and not always a financial one.

Topic Author
Tech
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Re: # X Gross = Home price?

Post by Tech » Sat Feb 24, 2018 1:21 pm

I plan to do 40% down if/when(I buy). The payment include tax, insurance is still quite horribly high.

I read the " keep renting while you can afford thread."
That keeps me steer clear of buying in VHCOL area. Just curious to see how people think in general.

bstewie
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Re: # X Gross = Home price?

Post by bstewie » Sat Feb 24, 2018 1:24 pm

We are in the process of taking a mortgage at 1.83x our gross or 2.32x the largest household income. After accounting for taxes, maintenance, etc. even that is a non-trivial step up from renting. We also live in a HCOL area. I couldn't imagine going past 2.5x.

Cycle
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Re: # X Gross = Home price?

Post by Cycle » Sat Feb 24, 2018 1:34 pm

Tech wrote:
Sat Feb 24, 2018 1:08 pm
Hi BH,
How many time your annual gross income is considered the highest for home price ?
In my area VHCOL the starter home is 5.5 times my gross.
can you rephrase the question? it is difficult to understand.

I have a very nice unit in duplex we rennovated. Our unit is .63 X our gross annual income from megacorps. By metropolitan area, Minneapolis-St. Paul ranks first among the 30 largest metropolitan areas in the number of Fortune 500 companies per capita... yet its cold, so wages are high and housing is affordable.

According to this website, Minneapolis is 28th in cost of living... similar to Irvine Ca. 43rd in rent index, similar to Toronto.
https://www.numbeo.com/cost-of-living/r ... region=019
Never look back unless you are planning to go that way

Topic Author
Tech
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Re: # X Gross = Home price?

Post by Tech » Sat Feb 24, 2018 1:45 pm

Cycle wrote:
Sat Feb 24, 2018 1:34 pm
Tech wrote:
Sat Feb 24, 2018 1:08 pm
Hi BH,
How many time your annual gross income is considered the highest for home price ?
In my area VHCOL the starter home is 5.5 times my gross.
can you rephrase the question? it is difficult to understand.

I have a very nice unit in duplex we rennovated. Our unit is .63 X our gross annual income from megacorps. By metropolitan area, Minneapolis-St. Paul ranks first among the 30 largest metropolitan areas in the number of Fortune 500 companies per capita... yet its cold, so wages are high and housing is affordable.

According to this website, Minneapolis is 28th in cost of living... similar to Irvine Ca. 43rd in rent index, similar to Toronto.
https://www.numbeo.com/cost-of-living/r ... region=019
If you make $127K annual gross income and buying a house at $700,000.
That's 5.5 times.

mega317
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Re: # X Gross = Home price?

Post by mega317 » Sat Feb 24, 2018 1:50 pm

Rules of thumb are next to worthless and we don't know anything else about your situation to comment.

That said 5.5 sounds tough to swing. I just bought a house that's about 2.25 gross, and daycare is almost as much as our PITI so the cash flow equivalent of about 4 or 4.25 for now. Feeling just a little tight.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

TheDDC
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Re: # X Gross = Home price?

Post by TheDDC » Sat Feb 24, 2018 1:58 pm

When I purchased in 2007 it was roughly 3.86xgross. Today the same home is it's 2.4 x gross, excluding added equity in the property.

Everything is relative with home buying and affordabIlity. How much furniture do you need? MRCs? Maintenance? Desirability of comp real estate in your market. I wouldn't stick to a hard and fast number. More important is how much your gross amount is as well as future earning power.

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raisinsaregrapes
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Re: # X Gross = Home price?

Post by raisinsaregrapes » Sat Feb 24, 2018 3:01 pm

I know someday I want to purchase a home that is in the range of 7-8 x gross, but that is 20+ years of investing away.

Cycle
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Re: # X Gross = Home price?

Post by Cycle » Sat Feb 24, 2018 3:11 pm

Tech wrote:
Sat Feb 24, 2018 1:45 pm
If you make $127K annual gross income and buying a house at $700,000.
That's 5.5 times.
I'm guessing you are wondering if there is a rule of thumb on housing cost in relation to gross income. There isn't a rule of thumb in that regard.

Just calculate your annual savings under various housing scenarios, taking into account commuting costs and times. Your savings rate will determine how many years you need to work before you reach FI.

FWIW, our multiplier is .63 which is roughly what we save each year. Owning in our scenario saves us $5-10k per year over renting, but ymmv
Never look back unless you are planning to go that way

LiterallyIronic
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Re: # X Gross = Home price?

Post by LiterallyIronic » Sat Feb 24, 2018 3:22 pm

We're at 3.3x. A 29% down payment made the actual loan amount 2.3%. My income is much lower than the typical Boglehead's.

darrvao777
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Re: # X Gross = Home price?

Post by darrvao777 » Sat Feb 24, 2018 4:30 pm

My rule of thumb is 2x gross income MAX for the mortgage

This will ensure I don't overspend on housing.

I realize this may not be possible in many HCOL locations.

HEDGEFUNDIE
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Re: # X Gross = Home price?

Post by HEDGEFUNDIE » Sat Feb 24, 2018 5:40 pm

This is not the right way to think about it. Down payments vs. PITI will vary significantly.

My bank is happy to write me a mortgage with PITI up to 45% of my gross income, which I find ridiculous. I wouldn’t be comfortable with more than 25%.

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Re: # X Gross = Home price?

Post by KlangFool » Sat Feb 24, 2018 5:47 pm

OP,

If you want to be a millionaire, 1.49 or lower

http://www.thomasjstanley.com/2011/11/m ... rule-1-49/

<< I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median]. >>

KlangFool

John Laurens
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Re: # X Gross = Home price?

Post by John Laurens » Sat Feb 24, 2018 6:00 pm

I would buy a house that is 5.5 times the gross salary of someone who makes half my salary.

Regards,
John

Slacker
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Re: # X Gross = Home price?

Post by Slacker » Sat Feb 24, 2018 6:11 pm

The metro we currently live in: a "starter home" would be about 0.8x our gross annual salary (combined).

Though, I'm not clear if you were asking for a comparison or asking for details on how you should proceed.

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corn18
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Re: # X Gross = Home price?

Post by corn18 » Sat Feb 24, 2018 6:42 pm

When we bought our house, it was 3x gross, we had over $160k of consumer debt, were spending more than we made and had a negative net worth.

Still live in the same house and it is now .8x gross, no consumer debt, spend way less than we make and have a 7 figure net worth.

I am happier now, but I live in the same house. Money in, money out. You don't need a rule of thumb to determine if you can afford a house.
Don't do something, just stand there!

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Re: # X Gross = Home price?

Post by TropikThunder » Sat Feb 24, 2018 6:49 pm

KlangFool wrote:
Sat Feb 24, 2018 5:47 pm
OP,

If you want to be a millionaire, 1.49 or lower

http://www.thomasjstanley.com/2011/11/m ... rule-1-49/

<< I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median]. >>

KlangFool
Good Lord, that article is from 2011. How many of those "first home purchases" were bought at or near market bottom after the crash?

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Re: # X Gross = Home price?

Post by KlangFool » Sat Feb 24, 2018 7:26 pm

TropikThunder wrote:
Sat Feb 24, 2018 6:49 pm
KlangFool wrote:
Sat Feb 24, 2018 5:47 pm
OP,

If you want to be a millionaire, 1.49 or lower

http://www.thomasjstanley.com/2011/11/m ... rule-1-49/

<< I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median]. >>

KlangFool
Good Lord, that article is from 2011. How many of those "first home purchases" were bought at or near market bottom after the crash?
TropikThunder,

Please note that

A) This is their first home purchase. Way before they become a millionaire. So, it is many years before 2011.

B) This is a ratio of their household income to the house price at that point in time.

C) This number is accurate as per my own personal circumstance. My first house purchase was way below this ratio.

KlangFool

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Re: # X Gross = Home price?

Post by Mudpuppy » Sat Feb 24, 2018 7:42 pm

Tech wrote:
Sat Feb 24, 2018 1:08 pm
Hi BH,
How many time your annual gross income is considered the highest for home price ?
In my area VHCOL the starter home is 5.5 times my gross.
I dislike rules of thumb like this. The rule of thumb does not account for whether or not YOU can afford the house based on YOUR circumstances. I know some people who should buy a house even if it's only 2x their gross pay. Others might be able to afford 5.5x gross because they've saved up enough of a downpayment to lower the need to take out a large mortgage.

So your question is bettered asked as "can I afford a house in this price range?" with all the relevant financials given, not "what is the rule of thumb?"

Edit: And I'll add that my home in California was 3.5x my gross when I bought it. I probably should have waited a couple years to buy as I bought in 2007, but since my other expenses are simple (no kids, within 3 miles of work so no expensive commute, etc) it was not a problem for me to afford it. The bigger problem was getting stuck massively underwater when the market crashed.

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Re: # X Gross = Home price?

Post by bi0hazard » Sat Feb 24, 2018 8:02 pm

I'm doing 0.7-8 of gross income. Feels right. I don't keep up with the Joneses. I was going to submit my opinion about 3-8x gross but don't want to offend some folks. :beer

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Re: # X Gross = Home price?

Post by Mudpuppy » Sat Feb 24, 2018 8:14 pm

KlangFool wrote:
Sat Feb 24, 2018 7:26 pm
A) This is their first home purchase. Way before they become a millionaire. So, it is many years before 2011.
And that's a problem unrelated to the 2008 housing collapse. The housing market of the past in certain VHCOL areas is nothing like the housing market of the present in those areas. There was a much lower barrier to entry in those housing markets in the past, meaning the median housing price was not disproportionally higher than the median wage. Honestly, some parts of California are quite insane in how fast housing prices have risen compared to wages. Even the relatively saner parts of California's housing market are still insane compared to other parts of the country.

Take this survey on the Bay Area real estate market: https://www.paragon-re.com/trend/bay-area-market-survey. Scroll down about mid-way down to page to see the historic median house price for various markets in the Bay Area. Just as an example, the median price in Marin has gone from a bit below $400k in the early-to-mid 1990s to around $600k in 2000 to about $1 million before the 2008 crash. And it's already fully recovered from the crash and gone up to about $1.25 million last year. Other markets in the Bay Area had a similar trend in that graph. The rate of price increases has vastly outpaced the rate of inflation and the rate of wage increases.

So frankly, the 1.49x gross median found in that millionaire article do not reflect the modern realities of the housing market in certain VHCOL areas. Even renting won't insulate one from the trends, as rents have also risen dramatically in those areas. At some point, one has to ask whether or not it is worth living there at those prices.

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corn18
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Re: # X Gross = Home price?

Post by corn18 » Sat Feb 24, 2018 8:26 pm

Is there something in CA that makes it worth spending, on average, 9x your income for a house vs. the national average of 3x?

Image
Last edited by corn18 on Sat Feb 24, 2018 8:27 pm, edited 2 times in total.
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KlangFool
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Re: # X Gross = Home price?

Post by KlangFool » Sat Feb 24, 2018 8:27 pm

Mudpuppy wrote:
Sat Feb 24, 2018 8:14 pm

So frankly, the 1.49x gross median found in that millionaire article do not reflect the modern realities of the housing market in certain VHCOL areas. Even renting won't insulate one from the trends, as rents have also risen dramatically in those areas. At some point, one has to ask whether or not it is worth living there at those prices.
Mudpuppy,

<< So frankly, the 1.49x gross median found in that millionaire article do not reflect the modern realities of the housing market in certain VHCOL areas. >>

There are multiple ways to interpret this

A) There is no millionaire in those VHCOL -> obviously not true.

B) Or, the millionaire in that VHCOL area only buys a house much much later. Aka, when their income reaches that ratio.

I live in Nothern Virginia area. It is not as crazy as the Bay area. But, I buy my house in this area much much later than almost all my peers. But, even in this case, I did not buy my first house in this area.

<< At some point, one has to ask whether or not it is worth living there at those prices.>>

Some folks earn enough to justify living in that area. Meanwhile, some folks don't.

KlangFool

MnD
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Re: # X Gross = Home price?

Post by MnD » Sat Feb 24, 2018 8:39 pm

We paid 1.75X gross income for the money pit in 1991.
2500 SF 3/4 acre lot.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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Re: # X Gross = Home price?

Post by mega317 » Sat Feb 24, 2018 8:54 pm

corn18 wrote:
Sat Feb 24, 2018 8:26 pm
Is there something in CA...
For many people it's family or a job that isn't portable.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

bi0hazard
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Re: # X Gross = Home price?

Post by bi0hazard » Sat Feb 24, 2018 9:50 pm

mega317 wrote:
Sat Feb 24, 2018 8:54 pm
corn18 wrote:
Sat Feb 24, 2018 8:26 pm
Is there something in CA...
For many people it's family or a job that isn't portable.
You could argue that it you need to pay 5x your income for a "starter house" , you're getting paid very little, and your job isn't worth keeping.

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Re: # X Gross = Home price?

Post by Noobvestor » Sat Feb 24, 2018 10:05 pm

bi0hazard wrote:
Sat Feb 24, 2018 9:50 pm
mega317 wrote:
Sat Feb 24, 2018 8:54 pm
corn18 wrote:
Sat Feb 24, 2018 8:26 pm
Is there something in CA...
For many people it's family or a job that isn't portable.
You could argue that it you need to pay 5x your income for a "starter house" , you're getting paid very little, and your job isn't worth keeping.
That, or maybe you're just a normal person living in the Bay Area ... ?

https://www.mercurynews.com/2017/08/11/ ... er-179000/

http://abc7news.com/realestate/report-$ ... a/3094201/

Etc...
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

bi0hazard
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Re: # X Gross = Home price?

Post by bi0hazard » Sat Feb 24, 2018 10:27 pm

Noobvestor wrote:
Sat Feb 24, 2018 10:05 pm
bi0hazard wrote:
Sat Feb 24, 2018 9:50 pm
mega317 wrote:
Sat Feb 24, 2018 8:54 pm
corn18 wrote:
Sat Feb 24, 2018 8:26 pm
Is there something in CA...
For many people it's family or a job that isn't portable.
You could argue that it you need to pay 5x your income for a "starter house" , you're getting paid very little, and your job isn't worth keeping.
That, or maybe you're just a normal person living in the Bay Area ... ?

https://www.mercurynews.com/2017/08/11/ ... er-179000/

http://abc7news.com/realestate/report-$ ... a/3094201/

Etc...
My comment actually suggests getting a job in another part of the country, where one can actually afford a house ...

msk
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Re: # X Gross = Home price?

Post by msk » Sat Feb 24, 2018 10:40 pm

My rules-of-thumb that have allowed me to retire at age 55:

1. Save and invest 30% of after tax income. Paying off principal (not interest) in a home mortgage counts as saving and investing.
2. Never buy a home costing more than 3x gross income (2.5x combined income)
3. Never acquire car(s) worth more than 6 months income.

But we all have different hobbies to splurge on. E.g. your wife's passionate hobby might well be the family home, and as long as 1. above is satisfied, there needs to be no upper limit. Your family home is often not an excellent investment, but in many (most?) cases it's not too shabby either if you stay there many years. Normal expectation is that the value will keep up with inflation and you also have an excellent tenant (yourself) paying the rent.

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Re: # X Gross = Home price?

Post by LiterallyIronic » Sat Feb 24, 2018 10:42 pm

darrvao777 wrote:
Sat Feb 24, 2018 4:30 pm
My rule of thumb is 2x gross income MAX for the mortgage

This will ensure I don't overspend on housing.

I realize this may not be possible in many HCOL locations.
It's not even possible for most people in LCOL locations. Median home price in my city (https://www.zillow.com/provo-ut/home-values/) is $231,800, while the median income is (http://www.deptofnumbers.com/income/utah/provo/) $69,288, way short of the necessary $115,900 to have a 2x for a median house.

Cheapest house I could find for sale on Zillow is $169,900 (2bd, 1ba, 1040 sq ft). A person with the median income of $69,288 can't even afford the worst house for sale in the city with a 2x gross income max. You'd need an income of $84,950 to afford the worst house for sale. I know software developers in my city with eight years of experience who don't make that much.

TOJ
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Re: # X Gross = Home price?

Post by TOJ » Sat Feb 24, 2018 10:48 pm

The only way I could afford more than 3x gross income is if I had a very large down payment. For the average folks who are putting down less than 20%, or as low as 5%, even a 3x multiplier would be impossibly tight on the monthly budget. I would question if such budgets are allowing for retirement savings. The magic is when you buy a house within reason and let your income rise and get it paid off ASAP.

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Re: # X Gross = Home price?

Post by CFM300 » Sat Feb 24, 2018 10:52 pm

Cycle wrote:
Sat Feb 24, 2018 1:34 pm
I have a very nice unit in duplex we rennovated. Our unit is .63 X our gross annual income from megacorps.
The market value of your duplex is just 63% of your current gross annual income? As in, you earn $200,000 per year (say) and your duplex is worth $126,000? That's pretty incredible.

Cycle
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Re: # X Gross = Home price?

Post by Cycle » Sat Feb 24, 2018 10:59 pm

CFM300 wrote:
Sat Feb 24, 2018 10:52 pm
Cycle wrote:
Sat Feb 24, 2018 1:34 pm
I have a very nice unit in duplex we rennovated. Our unit is .63 X our gross annual income from megacorps.
The market value of your duplex is just 63% of your current gross annual income? As in, you earn $200,000 per year (say) and your duplex is worth $126,000? That's pretty incredible.
Market value is probably 340k. Our half is 170k. Our gross income is 270k. We live 3 miles from downtown, 1 mile from a lake for swimming/sailing/fishing, walk score 80.
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Re: # X Gross = Home price?

Post by DrGoogle2017 » Sat Feb 24, 2018 11:17 pm

corn18 wrote:
Sat Feb 24, 2018 8:26 pm
Is there something in CA that makes it worth spending, on average, 9x your income for a house vs. the national average of 3x?

Image
No bugs, no crocs, temperate climate, dry heat. That’s good enough reason for many people.

CFM300
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Re: # X Gross = Home price?

Post by CFM300 » Sun Feb 25, 2018 12:00 am

Cycle wrote:
Sat Feb 24, 2018 10:59 pm
Market value is probably 340k. Our half is 170k. Our gross income is 270k. We live 3 miles from downtown, 1 mile from a lake for swimming/sailing/fishing, walk score 80.
Sounds like you're in or near Uptown. Is $340k for a nice duplex common? Things looks more expensive on Trulia.

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Re: # X Gross = Home price?

Post by MathIsMyWayr » Sun Feb 25, 2018 12:14 am

You also have to consider your future expected financial situation and life style. There is no general rule of thumb. You have to look at your complete financial picture . We bought our house in the Bay area with a 30-year mortgage (at 5-6%) at about 2.6X gross income about 13 years ago. I would have been uncomfortable with a mortgage of 4X. We were able to max out both 401(k) and 403(b) at the same time. With income increase and after some lump sum payment to the principal to get the lowest rate available (2.5%), our 15-year mortgage is now 1.3X. Our current monthly mortgage payment is also about 20% lower than the original, maybe lower than a rent of a decent 2-bedroom apartment. This is our 2nd home ownership. I always regret under-buying. Since the mortgage rate is expected to rise for the foreseeable future, things may be different. In a VHCOL area, under-buying is also a real risk. You must be comfortable with your home at the least. I suggest, not necessarily recommend, to consider spending the maximum on housing as long as the rest of your financial matter is in order.

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Re: # X Gross = Home price?

Post by Mudpuppy » Sun Feb 25, 2018 12:52 am

KlangFool wrote:
Sat Feb 24, 2018 8:27 pm
A) There is no millionaire in those VHCOL -> obviously not true.

B) Or, the millionaire in that VHCOL area only buys a house much much later. Aka, when their income reaches that ratio.
Or C) They spent their early careers in a low-to-medium COL and only moved to the VHCOL in their mid-to-late careers. People move around a lot in some careers.

bogglizer
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Re: # X Gross = Home price?

Post by bogglizer » Sun Feb 25, 2018 1:02 am

I am in LA metro and purchased a 6.5x. Seems consistent with the plot above.

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Re: # X Gross = Home price?

Post by Mudpuppy » Sun Feb 25, 2018 1:06 am

corn18 wrote:
Sat Feb 24, 2018 8:26 pm
Is there something in CA that makes it worth spending, on average, 9x your income for a house vs. the national average of 3x?
There's more to California than the Bay Area (San Fran and San Jose). One can find pockets of affordability in many parts of the state. The problems come when the pocket of affordability is far from one's place of employment. For median-wage employees in some parts of California, it's not uncommon to hear of two hours or more commute each day because they're priced out of housing in the immediate vicinity of their place of employment.

It's thankfully not something I have personally experienced, but I did select my agency carefully to have reasonable (by California standards at least) housing options within a reasonable commuting distance. I rejected other job offers that were in higher COL areas because the offered wages+benefits were not proportionally higher when compared to the higher COL for that area.

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Re: # X Gross = Home price?

Post by Mudpuppy » Sun Feb 25, 2018 1:22 am

Tech wrote:
Sat Feb 24, 2018 1:21 pm
I plan to do 40% down if/when(I buy). The payment include tax, insurance is still quite horribly high.

I read the " keep renting while you can afford thread."
That keeps me steer clear of buying in VHCOL area. Just curious to see how people think in general.
Getting back to the OP's "can I afford it?" question, planning to put 40% down is good. I see from your prior finance thread, viewtopic.php?f=1&t=240334&p=3759268#p3759268, that you have nearly $1 million in assets, depending on how your ESPP has fared in the market the past month. Hopefully, you have started work on divesting ESPP shares with the advice given in that thread.

I also see from a previous housing thread of yours, viewtopic.php?f=2&t=239853&p=3751345#p3751345, that my guess of the Bay Area was spot on.

Given your assets, your situation is quite different than the average first-time home buyer in the Bay Area. But your assets are well in excess of your current income, so you want to find equilibrium in your housing expenses so your total expenses do not exceed your net income. If your wife plans to re-enter the workforce when your children are older, perhaps you can continue to rent and accumulate assets until you have two incomes coming in.

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Re: # X Gross = Home price?

Post by CyclingDuo » Sun Feb 25, 2018 1:53 am

Tech wrote:
Sat Feb 24, 2018 1:08 pm
Hi BH,
How many time your annual gross income is considered the highest for home price ?
In my area VHCOL the starter home is 5.5 times my gross.
There is more to factor into it such as current debt (CC, car, student loan), taxes, size of down payment, repair/maintenance, etc...).

We bought a brand new home in 2003. Ratio of home price to gross income at the time was 6 to 1. However, we put 50% down, bought the home because it had a 5 year tax abatement, we had no other debt, and knew our annual gross income would be climbing in a few years after purchase once SAHM went back to work. PITI was 24% of gross income that first year and has steadily declined each and every year to today where PITI is only 10%.

In addition, to maintain your home's value, factor in about a monthly average cost of repair/maintenance (roof, driveway repair, painting, carpet/wood floor refinishing, remodeling, appliances, landscaping, etc...). Usually, a good rule of thumb is between 1.5 to 4% of purchase price annually.

https://budgeting.thenest.com/annual-ex ... 21312.html

https://www.gobankingrates.com/investin ... ican-home/
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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steadyeddy
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Re: # X Gross = Home price?

Post by steadyeddy » Sun Feb 25, 2018 10:14 am

There are too many factors for using a multiple of gross salary as a rule of thumb.

A person borrowing at 3% interest rather than 7% interest can afford a higher multiple.

A person with a very large down payment can afford a higher multiple.

A person that already has 35x expenses saved rather than 1x expenses can afford a higher multiple.

A person who pays $3k/yr rather than $30k/yr on property taxes and insurance can afford a higher multiple.

A person early in their career with very high income growth ahead can afford a higher multiple.

A person with extremely high income that dwarfs their living expenses can afford a higher multiple.

A person that spends very little of their income, saves like crazy, but wants to prioritize spending money on an expensive house, can afford a higher multiple.

I’m sure there are many more “exceptions” you can think of.

Like someone said above, what really matters is cash-in and cash-out. Let’s say I make $100M/yr and only spend $60k per year outside of housing. Can I afford a $500M house if I want one? Definitely!

Let’s say I make $50k/yr and spend $40k outside of housing. Can I afford a $100k mortgage? Probably not.

A rule of thumb is fine, but cash-in and cash-out tells you concretely what you can afford. And don’t forget to factor savings into the cash-out side of the ledger.

tmcc
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Re: # X Gross = Home price?

Post by tmcc » Sun Feb 25, 2018 10:20 am

If you can save properly and buy it, do it.

here is some historical tax return data to consider when contemplating nominal housing prices. it is a table of AGI>100,000USD by year. this is particularly relevant if you're buying in a high demand area: socal, sofla, etc.

Code: Select all

year	return count AGI>$100,000 ($K)	% of total returns for year	return size $	% of all returns
1996	 6,135,961 	5.1	 1,410,280,305 	31.1
1997	 7,185,800 	5.8	 1,712,301,479 	34.4
1998	 8,351,469 	6.6	 2,027,273,843 	37.4
1999	 9,534,654 	7.6	 2,366,099,652 	40.5
2000	 10,855,026 	8.4	 2,766,532,321 	43.4
2001	 11,036,418 	8.4	 2,513,078,136 	40.8
2002	 10,836,730 	8.4	 2,361,380,613 	39.2
2003	 11,415,083 	8.7	 2,522,731,085 	40.7
2004	 12,757,005 	9.54	 3,021,387,311 	44.5
2005	 14,376,492 	10.6	 3,600,729,001 	48.5
2006	 16,153,307 	11.6	 4,112,350,376 	51.2
2007	 17,993,500 	12.5	 4,640,225,550 	53.4
2008	 18,227,000 	12.7	 4,307,111,221 	52.1
2009	 17,446,538 	12.4	 3,765,742,657 	49.4
2010	 18,293,959 	12.8	 4,148,880,905 	51.4
2011	 19,455,822 	13.4	 4,409,777,850 	52.5
2012	 20,898,640 	14.4	 5,143,096,337 	56.5
2013	 21,983,691 	14.8	 5,063,491,561 	55.7
2014	 23,725,064 	16.1	 5,708,181,973 	58.5
2015	 25,284,439 	16.8	 6,106,172,869 	59.7

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steadyeddy
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Re: # X Gross = Home price?

Post by steadyeddy » Sun Feb 25, 2018 10:28 am

tmcc wrote:
Sun Feb 25, 2018 10:20 am
If you can save properly and buy it, do it.

here is some historical tax return data to consider when contemplating nominal housing prices. it is a table of AGI>100,000USD by year. this is particularly relevant if you're buying in a high demand area: socal, sofla, etc.

Code: Select all

year	return count AGI>$100,000 ($K)	% of total returns for year	return size $	% of all returns
1996	 6,135,961 	5.1	 1,410,280,305 	31.1
1997	 7,185,800 	5.8	 1,712,301,479 	34.4
1998	 8,351,469 	6.6	 2,027,273,843 	37.4
1999	 9,534,654 	7.6	 2,366,099,652 	40.5
2000	 10,855,026 	8.4	 2,766,532,321 	43.4
2001	 11,036,418 	8.4	 2,513,078,136 	40.8
2002	 10,836,730 	8.4	 2,361,380,613 	39.2
2003	 11,415,083 	8.7	 2,522,731,085 	40.7
2004	 12,757,005 	9.54	 3,021,387,311 	44.5
2005	 14,376,492 	10.6	 3,600,729,001 	48.5
2006	 16,153,307 	11.6	 4,112,350,376 	51.2
2007	 17,993,500 	12.5	 4,640,225,550 	53.4
2008	 18,227,000 	12.7	 4,307,111,221 	52.1
2009	 17,446,538 	12.4	 3,765,742,657 	49.4
2010	 18,293,959 	12.8	 4,148,880,905 	51.4
2011	 19,455,822 	13.4	 4,409,777,850 	52.5
2012	 20,898,640 	14.4	 5,143,096,337 	56.5
2013	 21,983,691 	14.8	 5,063,491,561 	55.7
2014	 23,725,064 	16.1	 5,708,181,973 	58.5
2015	 25,284,439 	16.8	 6,106,172,869 	59.7

You’re saying that nearly 60% of tax returns in 2015 showed AGI >$100k? Am I misunderstanding?
Last edited by steadyeddy on Sun Feb 25, 2018 10:36 am, edited 1 time in total.

tmcc
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Re: # X Gross = Home price?

Post by tmcc » Sun Feb 25, 2018 10:32 am

steadyeddy wrote:
Sun Feb 25, 2018 10:28 am
tmcc wrote:
Sun Feb 25, 2018 10:20 am
...

You’re saying that newly 60% of tax returns in 2015 showed AGI >$100k? Am I misunderstanding?
negative. it means that returns over 100k contributed 60% of total AGI per the IRS.

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steadyeddy
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Re: # X Gross = Home price?

Post by steadyeddy » Sun Feb 25, 2018 10:38 am

tmcc wrote:
Sun Feb 25, 2018 10:32 am
steadyeddy wrote:
Sun Feb 25, 2018 10:28 am
tmcc wrote:
Sun Feb 25, 2018 10:20 am
...

You’re saying that newly 60% of tax returns in 2015 showed AGI >$100k? Am I misunderstanding?
negative. it means that returns over 100k contributed 60% of total AGI per the IRS.
Many thanks. I didn’t see the additional column headers, and thought the columns were aligned with different headers.

tmcc
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Re: # X Gross = Home price?

Post by tmcc » Sun Feb 25, 2018 10:44 am

steadyeddy wrote:
Sun Feb 25, 2018 10:38 am
tmcc wrote:
Sun Feb 25, 2018 10:32 am
steadyeddy wrote:
Sun Feb 25, 2018 10:28 am
tmcc wrote:
Sun Feb 25, 2018 10:20 am
...

You’re saying that newly 60% of tax returns in 2015 showed AGI >$100k? Am I misunderstanding?
negative. it means that returns over 100k contributed 60% of total AGI per the IRS.
Many thanks. I didn’t see the additional column headers, and thought the columns were aligned with different headers.
sure. the point is simply to articulate that nominal housing prices will grow with income. its obvious that the distribution of income has increased and will continue to increase as inflation and wage growth occurs.

(not directed at you)

ultimately, shelter is pretty high on the need list and there will be buyers even if there is a dip, no matter how large. thus it becomes a discussion of whether or not a person in question is affected personally by the dip, not if the long term value is sustainable - which goes back to home equity as a percent of total assets. the only things i can think of that will truly change the demand curve in high demand, high cost of living is famine, war and disease. suggesting that home pricing will collapse long term is just silly. it is probably more short sighted than suggesting the capitalism will collapse in my lifetime (35yo).

DrGoogle2017
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Re: # X Gross = Home price?

Post by DrGoogle2017 » Sun Feb 25, 2018 10:52 am

3 times income.

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