Housing affordability - what is your take?

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stocknoob4111
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Housing affordability - what is your take?

Post by stocknoob4111 » Sun Aug 12, 2018 11:41 am

For someone Single making an income of $120k/yr, what do you think should be the maximum to be spent on housing related expenses (PITI + HOA + Maintenance) monthly? I like Dave Ramsey's formula of 25% of take home on a 15 year fixed with 20% down but it is impossible here in SoCal (and will remain impossible, EVEN IF home prices drop 50% tomorrow the formula STILL would not work! :shock:)

After tax income for $120k/yr after contributing max to 401k and Roth and $200/mo health insurance is $5,063.89
Max housing expenses @ 30% of Net: $1,520 (PITI+HOA+Maintenance)

Going backwards from payment at 20% down and a 30 yr fixed at 4.8% that would be a max home of $200,000. There are very few homes in the entire SoCal region even at triple this price level so obviously the $200k figure is far removed from reality unless prices drop 70%!!

PI = $1049
T = $209
HOA = $300
Maintenance = $100

Total: ~$1,658

Houses around my area (I don't live in any ritzy area just average suburbia), 1500sqft, 3bd run around $750,000 :shock: I'm trying to understand the disconnect between the numbers I am running above, affordability metrics and home prices. Are only very high income dual income people buying real estate in the large metros? How are single income individuals affording homes with traditional affordability metrics? Or are they using different metrics?

A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.

HEDGEFUNDIE
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Re: Housing affordability - what is your take?

Post by HEDGEFUNDIE » Sun Aug 12, 2018 11:50 am

Look on the bright side, if you lived in the Bay Area a 1500sqft 3bd would cost $1.5M

livesoft
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Re: Housing affordability - what is your take?

Post by livesoft » Sun Aug 12, 2018 11:52 am

stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
Are only very high income dual income people buying real estate in the large metros?
Yes.
How are single income individuals affording homes with traditional affordability metrics? Or are they using different metrics?
They get married or shack up or rent out part of the house or get help from others like parents.

Also they give up on contributing to 401(k) plans and use their home as a retirement plan.

The above all assumes they don't just move elsewhere.
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BeneIRA
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Re: Housing affordability - what is your take?

Post by BeneIRA » Sun Aug 12, 2018 11:56 am

I am in a High Cost of Living Area as well, and unless house prices drop a fair amount, which seems to be inevitable at some point, I know I won't be able to buy a house. I read a rule on here to target a house that is three times your pre-tax income and that sounds about right. So if you make $120,000 a year, you could afford a $360,000 house. In SoCal, that probably won't get you much, but it's better not to buy than becoming house poor and buying a $700,000 house you really can't afford. Anyone in any place who is buying more house than they can afford is taking a risk. If you buy a house and the value goes down, then the whole theory collapses on itself. Welcome to 2008.

Very high income individuals can afford to buy, everyone else has to stick with renting, or at least they probably should.

EHEngineer
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Re: Housing affordability - what is your take?

Post by EHEngineer » Sun Aug 12, 2018 11:58 am

Couple things.

Seems like you are buying a family house as a single person.

You are buying in a ritzy area. $500/sqft is ritzy.

Dave ramsey is trying to give you guidelines to put you on a comfortable/stable financial path. Buying a house that's 6X your income is not comfortable. 6X is a recipe for running on a financial treadmill for the next 30 years.

120k is a very nice income in 90% of america. But you are looking in the other 10%. It sounds like where my sibling lives. Try driving inland about 5-10 more miles.
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Re: Housing affordability - what is your take?

Post by KyleAAA » Sun Aug 12, 2018 12:08 pm

Single people either buy condos or continue renting. A few will do something like buy a duplex and rent out the other unit. Dave Ramsey's metrics are simply bad in this case.
Last edited by KyleAAA on Sun Aug 12, 2018 12:14 pm, edited 2 times in total.

stocknoob4111
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Sun Aug 12, 2018 12:09 pm

EHEngineer wrote:
Sun Aug 12, 2018 11:58 am
Seems like you are buying a family house as a single person.
Buying a home is a long term commitment and since it is extremely expensive to sell and upsize one needs to be able to reasonably grow into something. However, with that said, the smaller homes are not that much more cheaper... if a 3bd 1500sqft home costs $700,000 a 2bd, 1100sqft home is not half that, it is $100k cheaper at $600,000 LOL! so it's a moot point. In my neighborhood I saw a for sale 980sqft single family home and the asking price was $825,000 :shock: No, I don't live by the beach and I don't live in a ritzy area, I would classify my area as squarely middle class.

The thing about SoCal was I came here 20 years ago, at the time I couldn't afford anything as I was rather young and broke in my early 20s, but I do remember the real estate situation to be nothing like it is today. This was the mid to late 90s, nobody cared about real estate, prices were completely reasonable... I remember I even saw a 2bd condo my Aunt wanted to buy and it was listed at $75,000 LOL! Even low income people could very easily buy a place. It has totally and radically changed since 2003.
BeneIRA wrote:
Sun Aug 12, 2018 11:56 am
but it's better not to buy than becoming house poor and buying a $700,000 house you really can't afford. Anyone in any place who is buying more house than they can afford is taking a risk.
I have this same philosophy... I contribute the max to my 401k, save a good chunk in my taxable and rent quite cheaply. I also have a good rental deal and i'm comfortable and i'm in my desired neighborhood close to the things I like. It's a small place but it works for me now as it's close to my work as well.

I will buy if the numbers make sense and IF it adds to my quality of life and also strengthens and NOT WEAKENS my financial position going forward. I just don't understand why I would need to buy otherwise.

In NO circumstances do I want to touch my 401k to put money down or forego contributing the max to my tax deferred or compromise my emergency savings or go to high DTI ratios to buy something, that is just a terrible idea in my opinion.

runner3081
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Re: Housing affordability - what is your take?

Post by runner3081 » Sun Aug 12, 2018 12:37 pm

From personal experience, I would continue to rent until you are at least married or have a family.

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unclescrooge
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Re: Housing affordability - what is your take?

Post by unclescrooge » Sun Aug 12, 2018 12:38 pm

livesoft wrote:
Sun Aug 12, 2018 11:52 am
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
Are only very high income dual income people buying real estate in the large metros?
Yes.
How are single income individuals affording homes with traditional affordability metrics? Or are they using different metrics?
They get married or shack up or rent out part of the house or get help from others like parents.

Also they give up on contributing to 401(k) plans and use their home as a retirement plan.

The above all assumes they don't just move elsewhere.
+1

When I was single, I rented out a room in my 2 bed condo. One of my single friends rents out both spare room in his house.

Otherwise it takes 2 incomes to buy a decent single family home in Socal.

stocknoob4111
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Sun Aug 12, 2018 2:30 pm

I feel even with a typical dual income couple the numbers still are away off unless they are hugely overleveraging themselves with debt up to their eyeballs and also not saving adequately for retirement. Dual income folks are much more likely to have children and require a larger space and have double the expenses in some areas like personal, transportation, health insurance, groceries, dining out etc. Children cost a bomb and increase expenditures quite significantly in every aspect of a budget.

That second income is most likely not even going to keep pace with the expense of raising children. And what is the likelihood of both people typically making a very high income? I'm sure there are some couples like that but statistically I don't think they are in the majority. The statistical median income for a family of 4 in Irvine where homes are around $750,000 is only $90,000/yr. They also did a study that said that a large majority of current homeowners would not be able to afford to re-purchase their home at the current value. That seems odd to me.

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Watty
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Re: Housing affordability - what is your take?

Post by Watty » Sun Aug 12, 2018 3:01 pm

Here is a "rent vs buy" calculator that might help.

https://www.nytimes.com/interactive/201 ... lator.html


It was a long time ago but I was living in the Bay Area, which has always been expensive, when I was ready to buy my first house. I ended up moving to an area with better quality of life where housing cost maybe a fifth of what it did in the Bay Area. That worked out very well for me so you might consider that option.

I would guess that in maybe 80% of the country you can still get an acceptable house for the low $200's or even less and many of these are nice areas.

https://www.nar.realtor/research-and-st ... ordability

https://www.nar.realtor/sites/default/f ... -08-08.pdf

Calsaver
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Re: Housing affordability - what is your take?

Post by Calsaver » Sun Aug 12, 2018 3:07 pm

stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
Are only very high income dual income people buying real estate in the large metros? How are single income individuals affording homes with traditional affordability metrics? Or are they using different metrics?
I also live in a HCOL area (Santa Cruz, CA) with prices higher than what you're stating. My observations from where I live are:

1. People are using different metrics, and are thus buying houses they can't afford, even though they are high income earners, paving their way to be "house poor" and stuck with a huge mortgage payment. My mother in law rented for 20 years in SF since it wasn't affordable, even then, and has now bought out of SF for retirement. In plenty of California it is cheaper to rent than buy, which most online calculators will tell you. I think the New York Times has a good calculator for making this evaluation.

2. Almost no-one in the town I live in buys if they aren't dual income, it's just too damn expensive. Alternatively some manage through creative purchases, either auction if they can find the cash, or the previously mentioned rent out the other room(s) and/or duplex arrangement. Another example, we found our house on craigslist so there was no bidding war, but still used a realtor w/ all the protections that affords.

3. A friend of mine who makes less money than you just moved to SoCal since he wasn't able to buy here. He bought a small condo a bike ride from the beach from ~$300k and is happy. Have you considered a Condo or townhouse? We used to live in one and though I love my house I do on occasion hark back to the simpler days when we didn't have to do all the maintenance that we now do on the house. Our townhouse was in a basic complex without any pool/gym/tennis court or other stuff and that kept the HOA fees reasonable.

4. I second a previous post, a 1500 sq ft 3 br house is a lot of house in California, look for something smaller. We live in a just over 1000 sq ft house and are extremely happy. As you mention, this may not drop the price a huge amount, but keep in mind it does drop the expenses as well. There are less rooms to paint, less square footage to maintain, etc. Particularly if you hire contractors instead of DIY. It doesn't seem like a lot, but we have a friend who has spent what seems like a lot on a 4 br house where we have really managed to do a lot to our 2br place for relatively little.

stocknoob4111
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Sun Aug 12, 2018 6:43 pm

thanks. I've considered moving to Texas or Georgia but my salary would drop and i'm not sure if I should do it just to get into a home. I've been asking myself if owning a home is even important in my case. I am single, no kids, 44 years old and don't intend to get married or have kids.

So here is my situation, sorry if this sounds like long winded rambling! I actually earn a bit more than the above, around $143k/yr including bonuses.. I have no debts - no credit card payments, car loans, student loans etc. no contractual liabilities at all, my investment portfolio between taxable and tax deferred is just over half a million. In addition I have around $20k in cash (emergency fund).

I rent a small 750 sqft, 1 bed with 1 car garage which works nicely for myself. It's in a superb location close to hiking etc. which I like (I am into the outdoors) and I pay only $1,300/mo. (increasing to $1,350 starting October 1). Rent has been increasing 3-4% every 18 months which is reasonable - the management here has stated that they want to keep turnover low, been living here last 5 years. Homes in this neighborhood start around $1.2M since it's 2 miles from the beach.

As you can see I have a pretty good deal going which also makes substantially increasing my housing costs questionable - I would have to move to a worse neighborhood, have more expenses etc. At least if I get something substantially more than I am currently getting I am fine but what inventory is available does not make any sense.. why would I increase my housing from $1,300/mo. to $3,500-4,000/mo. to upgrade from 750sqft to 1100 sqft, then move to a less desirable location, do my own maintenance, take market fluctuation risk, lock myself into a contract etc. for not much of an upgrade? Makes virtually no sense to me.

Besides, right now I am saving a boatload of money for retirement. I contribute the max to my 401k, I contribute to a tIRA that I intend to do a backdoor Roth on, I save an additional $2,500/month to my taxable and I also am contributing max to my HSA. My monthly budget is around $2,800 with rent + all my expenses including $4,000/yr that I allocated to travel which is one of my vices.

Life is good and stress free. Is it a good idea to introduce a $700,000 mortgage into the picture and start stressing about it? On one hand it would be nice to own a home - yes, perhaps because it's what you are told all your life.. the American dream etc. you have not made it until you own your home etc. but perhaps it's time to rethink that. Owning still is a great concept but not at the expense of future financial security. And to me a home purchase does not substitute as a retirement savings plan like many seem to be using it.

denovo
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Re: Housing affordability - what is your take?

Post by denovo » Sun Aug 12, 2018 6:46 pm

I would not plan on buying a home in your circumstances until you marry or settle down.
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livesoft
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Re: Housing affordability - what is your take?

Post by livesoft » Sun Aug 12, 2018 6:49 pm

My personal experience living near NYC and later in Texas:

Children are not as expensive as many people on this forum make them out to be.

My salary went up when I moved from NY to TX, so I don't think one's salary has to drop when they move from a HCOL area.

We rented until our late 30's. We missed a few housing busts by doing so. Our home value has not kept up with inflation either.

I don't think one needs to buy a house if they like renting.

Your rent of $1300 a month is cheap compared to my rent in the early 1990s when I was paying more than $1,000 a month for an apartment. See what happened with inflation between then and now. And my salary was a fraction of yours.
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Re: Housing affordability - what is your take?

Post by denovo » Sun Aug 12, 2018 6:57 pm

livesoft wrote:
Sun Aug 12, 2018 6:49 pm


Children are not as expensive as many people on this forum make them out to be.

I think this is an issue of generational changes.

1. If one spouse is staying at home anyways, you don't need a child-care outlay when having children. As you noted above though, most the people buying homes in these neighborhoods are dual-income so one spouse either has to give up their income or pay for child care.

2. Related to this, a lot of people in earlier generations, lived with a grandparent either nearby or in-home that would take care of the aforementioned child-rearing if both spouses were working.

The above scenarios are less frequent these days.
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Re: Housing affordability - what is your take?

Post by AlphaLess » Sun Aug 12, 2018 7:04 pm

HEDGEFUNDIE wrote:
Sun Aug 12, 2018 11:50 am
Look on the bright side, if you lived in the Bay Area a 1500sqft 3bd would cost $1.5M
3MM in NYC.

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Re: Housing affordability - what is your take?

Post by blinx77 » Sun Aug 12, 2018 7:36 pm

In the most desirable metros in the country (SF especially but also NYC, DC, Boston, LA, Seattle) a 3-4 bedroom single family home with a yard in a safe neighborhood and high performing school district within reasonable commuting distance to downtown is a scarce commodity and thus at this point basically a luxury purchase.

Most people will need to compromise (different city, farther out, get a condo), etc. In fact, even most of the people who live in these houses make compromises -- typically, they work VERY hard and save less than they may otherwise be able to. Such is life.

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Re: Housing affordability - what is your take?

Post by T4REngineer » Sun Aug 12, 2018 7:45 pm

stocknoob4111 wrote:
Sun Aug 12, 2018 12:09 pm
the asking price was $825,000 :shock: No, I don't live by the beach and I don't live in a ritzy area, I would classify my area as squarely middle class.
Middle class? HUH?

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Re: Housing affordability - what is your take?

Post by acegolfer » Sun Aug 12, 2018 8:05 pm

stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
If one lives in those areas, he will hear these stories all the time. This is why ppl buy houses 10x their income. Obviously, they use different metrics. Even with the 2006 housing crisis, many ppl think house is a sound investment.

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Re: Housing affordability - what is your take?

Post by AerialWombat » Sun Aug 12, 2018 8:10 pm

stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
How are single income individuals affording homes with traditional affordability metrics?
We move.

I left Seattle area in March to move far inland to keep buying rental properties.

Just as most people can’t comprehend my nomadic ways, I will never for the life of me understand why people feel the need to stay rooted, especially in HCOL areas with insane tax regimes.

Move inland. We have jobs, healthcare facilities, and restaurants, too. :)

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Re: Housing affordability - what is your take?

Post by AlphaLess » Sun Aug 12, 2018 9:43 pm

AerialWombat wrote:
Sun Aug 12, 2018 8:10 pm
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
How are single income individuals affording homes with traditional affordability metrics?
We move.

I left Seattle area in March to move far inland to keep buying rental properties.

Just as most people can’t comprehend my nomadic ways, I will never for the life of me understand why people feel the need to stay rooted, especially in HCOL areas with insane tax regimes.

Move inland. We have jobs, healthcare facilities, and restaurants, too. :)
Curious as to where you moved.

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Re: Housing affordability - what is your take?

Post by gunn_show » Mon Aug 13, 2018 11:14 am

livesoft wrote:
Sun Aug 12, 2018 11:52 am
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
Are only very high income dual income people buying real estate in the large metros?
Yes.
How are single income individuals affording homes with traditional affordability metrics? Or are they using different metrics?
They get married or shack up or rent out part of the house or get help from others like parents.

Also they give up on contributing to 401(k) plans and use their home as a retirement plan.

The above all assumes they don't just move elsewhere.
This. Not a ton of "single dudes" out there buying half million to million dollar homes, nor should they - unless you have a big need for 3 bedrooms and a yard, stay renting closer to the beach or your work or wherever you want to live. Or have a very high income.

Based on all the OP's follow on responses, clearly this was more of a "vent / mental exercise" than a true need. You have no need to buy a SFH given your details. Continue to rent and enjoy life in other ways. Owning a home costs more money, up front, ongoing maintenance, property tax, etc. In your situation I don't see how it would add any value. As other's pointed out, often the Dave Ramsey type calculations and such just don't jive in HCOL areas like Socal. I live here too and wouldn't own a SFH if I didn't have a family. Owning in my neighborhood belies all normal calculators.

Go plan your next vacation around the world and enjoy.
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Re: Housing affordability - what is your take?

Post by rgs92 » Mon Aug 13, 2018 11:29 am

What is causing this steep price rise in CA housing in the major coastal metro areas (and Seattle and Portland I guess)?

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slayed
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Re: Housing affordability - what is your take?

Post by slayed » Mon Aug 13, 2018 11:38 am

Prices are high because people are willing to spend a huge (and in my opinion unwise) percentage of their income on housing. Your choice is to either compete with them (and make the same poor decision) or move elsewhere.

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Re: Housing affordability - what is your take?

Post by rgs92 » Mon Aug 13, 2018 11:40 am

I don't know how the poster above is paying $1300/month for even a smaller apartment. In even the outlying moderate cost areas of the NYC metro area, apartments that size are around $2000 for anything decently livable.

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Re: Housing affordability - what is your take?

Post by tainted-meat » Mon Aug 13, 2018 11:56 am

stocknoob4111 wrote:
Sun Aug 12, 2018 6:43 pm
thanks. I've considered moving to Texas or Georgia but my salary would drop and i'm not sure if I should do it just to get into a home. I've been asking myself if owning a home is even important in my case. I am single, no kids, 44 years old and don't intend to get married or have kids.

So here is my situation, sorry if this sounds like long winded rambling! I actually earn a bit more than the above, around $143k/yr including bonuses.. I have no debts - no credit card payments, car loans, student loans etc. no contractual liabilities at all, my investment portfolio between taxable and tax deferred is just over half a million. In addition I have around $20k in cash (emergency fund).

I rent a small 750 sqft, 1 bed with 1 car garage which works nicely for myself. It's in a superb location close to hiking etc. which I like (I am into the outdoors) and I pay only $1,300/mo. (increasing to $1,350 starting October 1). Rent has been increasing 3-4% every 18 months which is reasonable - the management here has stated that they want to keep turnover low, been living here last 5 years. Homes in this neighborhood start around $1.2M since it's 2 miles from the beach.

As you can see I have a pretty good deal going which also makes substantially increasing my housing costs questionable - I would have to move to a worse neighborhood, have more expenses etc. At least if I get something substantially more than I am currently getting I am fine but what inventory is available does not make any sense.. why would I increase my housing from $1,300/mo. to $3,500-4,000/mo. to upgrade from 750sqft to 1100 sqft, then move to a less desirable location, do my own maintenance, take market fluctuation risk, lock myself into a contract etc. for not much of an upgrade? Makes virtually no sense to me.

Besides, right now I am saving a boatload of money for retirement. I contribute the max to my 401k, I contribute to a tIRA that I intend to do a backdoor Roth on, I save an additional $2,500/month to my taxable and I also am contributing max to my HSA. My monthly budget is around $2,800 with rent + all my expenses including $4,000/yr that I allocated to travel which is one of my vices.

Life is good and stress free. Is it a good idea to introduce a $700,000 mortgage into the picture and start stressing about it? On one hand it would be nice to own a home - yes, perhaps because it's what you are told all your life.. the American dream etc. you have not made it until you own your home etc. but perhaps it's time to rethink that. Owning still is a great concept but not at the expense of future financial security. And to me a home purchase does not substitute as a retirement savings plan like many seem to be using it.
In my opinion the American Dream is not having to rely on a job to live the life you want. You are doing a great job of achieving it. Keep doing what you're doing, and retire in 10-12 years.

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Re: Housing affordability - what is your take?

Post by randomguy » Mon Aug 13, 2018 12:09 pm

T4REngineer wrote:
Sun Aug 12, 2018 7:45 pm
stocknoob4111 wrote:
Sun Aug 12, 2018 12:09 pm
the asking price was $825,000 :shock: No, I don't live by the beach and I don't live in a ritzy area, I would classify my area as squarely middle class.
Middle class? HUH?
These 800k house are bought by couples (say an engineer and school teacher) that most of us think of as middle class at best. In the midwest, they would have an income of say 120k. in a HCOL they make 180k and stretch to buy that house. Now a lot of people would say they are making 2x the median US income and should be consider upper middle class or rich. We can debate the exact definition forever.

But lets look at how much cheaper buying is than renting
a) Rent = 1300*12= 15600/year
b) Buying = 4000*12-40k (4% appreciation)= 8000
use a more realistic 5 or 6% appreciation like we have had for the past 30 years and the appeal of buying is even clearer. How can you not buy?:) Renting is a bet that the appreciation trend will stop. That will happen someday but who knows when.

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Re: Housing affordability - what is your take?

Post by GT99 » Mon Aug 13, 2018 12:56 pm

slayed wrote:
Mon Aug 13, 2018 11:38 am
Prices are high because people are willing to spend a huge (and in my opinion unwise) percentage of their income on housing. Your choice is to either compete with them (and make the same poor decision) or move elsewhere.
That's the demand side answer. On the supply side, the primary issue in California is highly restrictive land use laws and housing regulation. California's housing prices weren't much out of line with the rest of the country until the mid-70s (https://goo.gl/images/bH2RN9), when they started instituting restrictive land use policies.

The obvious other supply side issue is simply geographical land availability - bodies of water and mountains restrict expansion. The combination of geography and laws make the Bay area the most expensive in the country. Seattle and NY obviously have this issue as well.

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Re: Housing affordability - what is your take?

Post by GT99 » Mon Aug 13, 2018 1:05 pm

randomguy wrote:
Mon Aug 13, 2018 12:09 pm

These 800k house are bought by couples (say an engineer and school teacher) that most of us think of as middle class at best. In the midwest, they would have an income of say 120k.
Interesting definition of "middle class at best." The average starting salary of an engineer right out of college is above the median US household income. $120k puts you on the edge of the top 20% of household income nationally, and most engineer/teacher couples will be passed the $120k combined mark by their late 20s.

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Re: Housing affordability - what is your take?

Post by gotester2000 » Mon Aug 13, 2018 1:09 pm

You can retire in a LCOL with lot of money - do you even need a house?

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Re: Housing affordability - what is your take?

Post by boglerdude » Tue Aug 14, 2018 3:21 am

rgs92 wrote:
Mon Aug 13, 2018 11:29 am
What is causing this steep price rise in CA housing in the major coastal metro areas
Trade deficits (US buys stuff, other countries get dollars, they buy US assets)
"Easy" jobs get sent to countries where labor is less expensive. The remaining tech jobs are on the west coast
Zoning makes building up illegal

SDLinguist
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Re: Housing affordability - what is your take?

Post by SDLinguist » Tue Aug 14, 2018 7:58 am

slayed wrote:
Mon Aug 13, 2018 11:38 am
Prices are high because people are willing to spend a huge (and in my opinion unwise) percentage of their income on housing. Your choice is to either compete with them (and make the same poor decision) or move elsewhere.
I think this has a huge part to play. I made an off hand comment at work one day about how maxing out a 401k is a great tax savings and the response was something along the lines of: that's impossible to do given the cost of living in San Diego. Mind you this was in a group of people who have family incomes hovering around 175k and all at or under 30.

I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?

aristotelian
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Re: Housing affordability - what is your take?

Post by aristotelian » Tue Aug 14, 2018 8:37 am

Whatever the rent is for the cheapest place that meets your needs. Be careful about using guidelines for the average person.

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jadd806
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Re: Housing affordability - what is your take?

Post by jadd806 » Tue Aug 14, 2018 8:57 am

SDLinguist wrote:
Tue Aug 14, 2018 7:58 am
slayed wrote:
Mon Aug 13, 2018 11:38 am
Prices are high because people are willing to spend a huge (and in my opinion unwise) percentage of their income on housing. Your choice is to either compete with them (and make the same poor decision) or move elsewhere.
I think this has a huge part to play. I made an off hand comment at work one day about how maxing out a 401k is a great tax savings and the response was something along the lines of: that's impossible to do given the cost of living in San Diego. Mind you this was in a group of people who have family incomes hovering around 175k and all at or under 30.

I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?
Yup, seems like most Americans in coastal areas are taking out the maximum mortgage that the 28/36 rule will allow, which probably comes to 50% of their net income once you factor in maintenance. Another 25% goes towards their SUV or low-end luxury car, and then they simply figure out how to live on whatever is left.

On the other coast here in Boston, median price to household income ratios have hit 5.0 in any decent town within 30 miles of the city. Most commonly this translates to a $500k median home price in a town with a $100k median HHI. Even once you factor out that renters tend to have lower incomes I doubt that would get you below 4.0.

I know people taking out 0% down, 6% interest 30 year mortgages right now due to FOMO. Something has to give eventually, and it isn't going to be my savings rate.

One "trick" I've seen people use to buy more house than they can afford is to work a ton of overtime (like 20+ hours per week) for as many paychecks as the lender requires for income verification. These juiced paychecks are then extrapolated over the rest of the year and it looks like their income is way higher than it actually is. I've seen multiple coworkers buy $400k+ houses on an $80k income with almost no down payment using this method.

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DanMahowny
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Re: Housing affordability - what is your take?

Post by DanMahowny » Tue Aug 14, 2018 9:14 am

Mortgage 2x gross annual income.

-The Millionaire Next Door
Funding secured

runner540
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Re: Housing affordability - what is your take?

Post by runner540 » Tue Aug 14, 2018 9:26 am

jadd806 wrote:
Tue Aug 14, 2018 8:57 am
SDLinguist wrote:
Tue Aug 14, 2018 7:58 am
slayed wrote:
Mon Aug 13, 2018 11:38 am
Prices are high because people are willing to spend a huge (and in my opinion unwise) percentage of their income on housing. Your choice is to either compete with them (and make the same poor decision) or move elsewhere.
I think this has a huge part to play. I made an off hand comment at work one day about how maxing out a 401k is a great tax savings and the response was something along the lines of: that's impossible to do given the cost of living in San Diego. Mind you this was in a group of people who have family incomes hovering around 175k and all at or under 30.

I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?
Yup, seems like most Americans in coastal areas are taking out the maximum mortgage that the 28/36 rule will allow, which probably comes to 50% of their net income once you factor in maintenance. Another 25% goes towards their SUV or low-end luxury car, and then they simply figure out how to live on whatever is left.

On the other coast here in Boston, median price to household income ratios have hit 5.0 in any decent town within 30 miles of the city. Most commonly this translates to a $500k median home price in a town with a $100k median HHI. Even once you factor out that renters tend to have lower incomes I doubt that would get you below 4.0.

I know people taking out 0% down, 6% interest 30 year mortgages right now due to FOMO. Something has to give eventually, and it isn't going to be my savings rate.

One "trick" I've seen people use to buy more house than they can afford is to work a ton of overtime (like 20+ hours per week) for as many paychecks as the lender requires for income verification. These juiced paychecks are then extrapolated over the rest of the year and it looks like their income is way higher than it actually is. I've seen multiple coworkers buy $400k+ houses on an $80k income with almost no down payment using this method.
Jadd806, What is the quaint 28/36 rule? If you mean DTI debt to income, that's not the rule anymore: you might want to read about what's been happening the last few years: FHA, Fannie and Freddie are offering to 50%. And you can put 0-3% down depending on the lender and program. Slide 53 (link below) shows MEDIAN downpayment for first time buyers is 3%. It's only 5% for ALL buyers.
Lots of good data here http://www.aei.org/publication/mortgage ... 2018-data/

stoptothink
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Re: Housing affordability - what is your take?

Post by stoptothink » Tue Aug 14, 2018 9:43 am

jadd806 wrote:
Tue Aug 14, 2018 8:57 am
SDLinguist wrote:
Tue Aug 14, 2018 7:58 am
slayed wrote:
Mon Aug 13, 2018 11:38 am
Prices are high because people are willing to spend a huge (and in my opinion unwise) percentage of their income on housing. Your choice is to either compete with them (and make the same poor decision) or move elsewhere.
I think this has a huge part to play. I made an off hand comment at work one day about how maxing out a 401k is a great tax savings and the response was something along the lines of: that's impossible to do given the cost of living in San Diego. Mind you this was in a group of people who have family incomes hovering around 175k and all at or under 30.

I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?
Yup, seems like most Americans in coastal areas are taking out the maximum mortgage that the 28/36 rule will allow, which probably comes to 50% of their net income once you factor in maintenance. Another 25% goes towards their SUV or low-end luxury car, and then they simply figure out how to live on whatever is left.

On the other coast here in Boston, median price to household income ratios have hit 5.0 in any decent town within 30 miles of the city. Most commonly this translates to a $500k median home price in a town with a $100k median HHI. Even once you factor out that renters tend to have lower incomes I doubt that would get you below 4.0.

I know people taking out 0% down, 6% interest 30 year mortgages right now due to FOMO. Something has to give eventually, and it isn't going to be my savings rate.

One "trick" I've seen people use to buy more house than they can afford is to work a ton of overtime (like 20+ hours per week) for as many paychecks as the lender requires for income verification. These juiced paychecks are then extrapolated over the rest of the year and it looks like their income is way higher than it actually is. I've seen multiple coworkers buy $400k+ houses on an $80k income with almost no down payment using this method.
This isn't just a coastal city phenomenon, my townhome neighborhood in Utah has turned into "starter home alley". We bought less than 3yrs ago and have seen several of our neighboring units sold twice in that time period. My most recent neighbor to leave was a high school history teacher, early 30's with 5 kids and a SAHW; don't ask me how they just bought a ~$400k home on his ~50k/yr income. I also recently had two young employees, with stay-at-home spouses (one has a SAHW and infant twins, the other has a husband who is still in school) and ~40k household income purchase $300k homes. IMO home-buying is a lot like higher education, people get emotionally invested in an idea (a specific school, having to buy "right now") that they don't consider the long-term financial ramifications or possible alternatives. With the "Silicon Slopes" tech boom here, we are seeing most of our peers attempting to buy because of the delusion that they will soon be priced out of the market.

getthatmarshmallow
Posts: 204
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Re: Housing affordability - what is your take?

Post by getthatmarshmallow » Tue Aug 14, 2018 9:51 am

stoptothink wrote:
Tue Aug 14, 2018 9:43 am
jadd806 wrote:
Tue Aug 14, 2018 8:57 am
SDLinguist wrote:
Tue Aug 14, 2018 7:58 am
slayed wrote:
Mon Aug 13, 2018 11:38 am
Prices are high because people are willing to spend a huge (and in my opinion unwise) percentage of their income on housing. Your choice is to either compete with them (and make the same poor decision) or move elsewhere.
I think this has a huge part to play. I made an off hand comment at work one day about how maxing out a 401k is a great tax savings and the response was something along the lines of: that's impossible to do given the cost of living in San Diego. Mind you this was in a group of people who have family incomes hovering around 175k and all at or under 30.

I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?
Yup, seems like most Americans in coastal areas are taking out the maximum mortgage that the 28/36 rule will allow, which probably comes to 50% of their net income once you factor in maintenance. Another 25% goes towards their SUV or low-end luxury car, and then they simply figure out how to live on whatever is left.

On the other coast here in Boston, median price to household income ratios have hit 5.0 in any decent town within 30 miles of the city. Most commonly this translates to a $500k median home price in a town with a $100k median HHI. Even once you factor out that renters tend to have lower incomes I doubt that would get you below 4.0.

I know people taking out 0% down, 6% interest 30 year mortgages right now due to FOMO. Something has to give eventually, and it isn't going to be my savings rate.

One "trick" I've seen people use to buy more house than they can afford is to work a ton of overtime (like 20+ hours per week) for as many paychecks as the lender requires for income verification. These juiced paychecks are then extrapolated over the rest of the year and it looks like their income is way higher than it actually is. I've seen multiple coworkers buy $400k+ houses on an $80k income with almost no down payment using this method.
This isn't just a coastal city phenomenon, my townhome neighborhood in Utah has turned into "starter home alley". We bought less than 3yrs ago and have seen several of our neighboring units sold twice in that time period. My most recent neighbor to leave was a high school history teacher, early 30's with 5 kids and a SAHW; don't ask me how they just bought a ~$400k home on his ~50k/yr income. I also recently had two young employees, with stay-at-home spouses (one has a SAHW and infant twins, the other has a husband who is still in school) and ~40k household income purchase $300k homes. IMO home-buying is a lot like higher education, people get emotionally invested in an idea (a specific school, having to buy "right now") that they don't consider the long-term financial ramifications or possible alternatives. With the "Silicon Slopes" tech boom here, we are seeing most of our peers attempting to buy because of the delusion that they will soon be priced out of the market.
Ditto. Too bad we won't be able to pick up houses on KSL in a few years during the next crash. More seriously, I worry about the next bust cycle. I'm getting mailers daily to buy what I guess is now a starter home?

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jadd806
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Location: New England

Re: Housing affordability - what is your take?

Post by jadd806 » Tue Aug 14, 2018 10:26 am

runner540 wrote:
Tue Aug 14, 2018 9:26 am
Jadd806, What is the quaint 28/36 rule? If you mean DTI debt to income, that's not the rule anymore: you might want to read about what's been happening the last few years: FHA, Fannie and Freddie are offering to 50%. And you can put 0-3% down depending on the lender and program. Slide 53 (link below) shows MEDIAN downpayment for first time buyers is 3%. It's only 5% for ALL buyers.
Lots of good data here http://www.aei.org/publication/mortgage ... 2018-data/
Wow, that's even worse than I thought! Thanks for the link.

stocknoob4111
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Tue Aug 14, 2018 4:08 pm

Thanks for all the great feedback on this thread. When everyone is rushing to buy homes you stop and wonder if one is missing something here!
SDLinguist wrote:
Tue Aug 14, 2018 7:58 am
I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?
I think people are brainwashed into thinking that having a home is the primary way to build wealth when the reality is that the stock market has significantly outperformed personal investment in a home. I do like home ownership but only as a small part of one's portfolio, 2X annual for low cost areas and 3X annual for high cost is reasonable in my view. However, like it has been stated in these posts I think a lot of people are viewing homes as their sole retirement plan which I think could be a really dangerous plan. I know several people who took 401k loans or entirely liquidated their 401ks to pay for the downpayment, to me that is just insanity. 401k loans are outright dangerous since you incur severe penalties if you lose your job and can't repay it and liquidating is just crazy losing precious tax deferred space forever.

Altough many may not agree with all he says I do like this particular Dave Ramsey video:
https://www.youtube.com/watch?v=MjzM5WpWk4E

SDLinguist
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Re: Housing affordability - what is your take?

Post by SDLinguist » Tue Aug 14, 2018 5:22 pm

stocknoob4111 wrote:
Tue Aug 14, 2018 4:08 pm
Thanks for all the great feedback on this thread. When everyone is rushing to buy homes you stop and wonder if one is missing something here!
SDLinguist wrote:
Tue Aug 14, 2018 7:58 am
I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?
I think people are brainwashed into thinking that having a home is the primary way to build wealth when the reality is that the stock market has significantly outperformed personal investment in a home. I do like home ownership but only as a small part of one's portfolio, 2X annual for low cost areas and 3X annual for high cost is reasonable in my view. However, like it has been stated in these posts I think a lot of people are viewing homes as their sole retirement plan which I think could be a really dangerous plan. I know several people who took 401k loans or entirely liquidated their 401ks to pay for the downpayment, to me that is just insanity. 401k loans are outright dangerous since you incur severe penalties if you lose your job and can't repay it and liquidating is just crazy losing precious tax deferred space forever.

Altough many may not agree with all he says I do like this particular Dave Ramsey video:
https://www.youtube.com/watch?v=MjzM5WpWk4E
The 401k loans are crazy. A co-worker was so excited to buy a condo in inland SD county for 350k. She and her husband combine north of 200k a year almost guaranteed. She was telling us how great a 401k loan is because otherwise they would not have had the money for the 5% down they did and how great it is to only pay 5% down because you have to save less.

This was a year ago. Now they are looking to buy another condo to rent out, doing the same thing a second time. Then they would be doubly leveraged.

Rent income will be less than the mortgage she says but that's ok because appreciation makes up for it. Idk how appreciation pays the bills other than a HELOC...

stocknoob4111
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Tue Aug 14, 2018 7:39 pm

SDLinguist wrote:
Tue Aug 14, 2018 5:22 pm
This was a year ago. Now they are looking to buy another condo to rent out, doing the same thing a second time. Then they would be doubly leveraged.
This reminds me of what was happening in 2008 where people were getting greedy because prices were going up, they thought they could make a few bucks. What if a recession hits and they lose their jobs, these people have so much leverage they will just go bust in a second. Oh! but they will probably do a strategic default, that was popular in 2008 :oops:

2015
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Re: Housing affordability - what is your take?

Post by 2015 » Tue Aug 14, 2018 8:19 pm

AlphaLess wrote:
Sun Aug 12, 2018 7:04 pm
HEDGEFUNDIE wrote:
Sun Aug 12, 2018 11:50 am
Look on the bright side, if you lived in the Bay Area a 1500sqft 3bd would cost $1.5M
3MM in NYC.
I have been told the "compound" (only in LA, and what is a "compound", anyway?) one street over from me is being listed for $12MM. Regular 2BR/2BA condos are going for $700-upper $900K, while a newly completed uber upscale architecturally designed whatintheworldisthat? building down the street contains 1300sf 2BR/2BA condos going for $1.5M.

I've been told by realtors sales have softened this year and everyone in LA can thank me for that as I am just about to list.

randomguy
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Re: Housing affordability - what is your take?

Post by randomguy » Tue Aug 14, 2018 8:28 pm

DanMahowny wrote:
Tue Aug 14, 2018 9:14 am
Mortgage 2x gross annual income.

-The Millionaire Next Door
what an insanely stupid rule.

In 1996 a person making 100k and buying a 200k (20% down) house had a 1200 mortgage payment.
In 2018 a person making 100k and bying 200k house (20% down) had a 763/month mortgage payment
And the rule thinks both of those houses are equally affordable.

bstewie
Posts: 53
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Re: Housing affordability - what is your take?

Post by bstewie » Tue Aug 14, 2018 8:58 pm

We purchased a home recently in SoCal at 2x our annual gross income. We have mixed income, one high earner, one low earner. We both intend to continue working for the long haul. In the past three months the prices here have gone up 5%. Fortunately for us, we had one unexpected job transition and one unexpected raise. On an adjusted basis our home purchase price is now 1.25x our annual gross income. We do not expect this to last forever so we are stashing away as much money as we can interim. Friends of ours who are responsible for themselves in the same general vicinity of SoCal are commuting ~2h each way to make ends meet and are definitely not saving for retirement. Other friends of ours are heavily supplemented by their parents and are definitely not saving for retirement.

AlphaLess
Posts: 551
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Re: Housing affordability - what is your take?

Post by AlphaLess » Tue Aug 14, 2018 10:42 pm

2015 wrote:
Tue Aug 14, 2018 8:19 pm
AlphaLess wrote:
Sun Aug 12, 2018 7:04 pm
HEDGEFUNDIE wrote:
Sun Aug 12, 2018 11:50 am
Look on the bright side, if you lived in the Bay Area a 1500sqft 3bd would cost $1.5M
3MM in NYC.
I have been told the "compound" (only in LA, and what is a "compound", anyway?) one street over from me is being listed for $12MM. Regular 2BR/2BA condos are going for $700-upper $900K, while a newly completed uber upscale architecturally designed whatintheworldisthat? building down the street contains 1300sf 2BR/2BA condos going for $1.5M.

I've been told by realtors sales have softened this year and everyone in LA can thank me for that as I am just about to list.
Compound sounds like the place where Osama Bin Laden is hiding.

Seems like a bad marketing tactic to me.

FoolMeOnce
Posts: 246
Joined: Mon Apr 24, 2017 11:16 am

Re: Housing affordability - what is your take?

Post by FoolMeOnce » Wed Aug 15, 2018 7:10 am

Single, no kids, good apartment in a good neighborhood with surprisingly low rent and good management, why bother even considering buying something?

Some thoughts: https://jlcollinsnh.com/2013/05/29/why- ... nvestment/
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
That isn't a great reason to buy. That price appreciation has roughly kept pace with the SP500.

KlangFool
Posts: 9925
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Re: Housing affordability - what is your take?

Post by KlangFool » Wed Aug 15, 2018 7:45 am

randomguy wrote:
Tue Aug 14, 2018 8:28 pm
DanMahowny wrote:
Tue Aug 14, 2018 9:14 am
Mortgage 2x gross annual income.

-The Millionaire Next Door
what an insanely stupid rule.

In 1996 a person making 100k and buying a 200k (20% down) house had a 1200 mortgage payment.
In 2018 a person making 100k and bying 200k house (20% down) had a 763/month mortgage payment
And the rule thinks both of those houses are equally affordable.
randomguy,

I agreed. Millionaire is crazy. They do not behave like normal people. Actually, the ratio is 1.49 and it only applies to the first house.

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

Valuethinker
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Re: Housing affordability - what is your take?

Post by Valuethinker » Wed Aug 15, 2018 8:17 am

EHEngineer wrote:
Sun Aug 12, 2018 11:58 am
Couple things.

Seems like you are buying a family house as a single person.

You are buying in a ritzy area. $500/sqft is ritzy.
;-). The poorest, cheapest area of London (London Borough of Barking and Dagenham) is c. £500 psf (say USD 650-700). I could show you what USD 500 would buy you here, think a really grotty property on a Council Estate (public housing Project).
Dave ramsey is trying to give you guidelines to put you on a comfortable/stable financial path. Buying a house that's 6X your income is not comfortable. 6X is a recipe for running on a financial treadmill for the next 30 years.

120k is a very nice income in 90% of america. But you are looking in the other 10%. It sounds like where my sibling lives. Try driving inland about 5-10 more miles.
I am not sure in greater LA that the property gradients are so steep? If 5-10 miles is only another 10-20 minutes of driving ...

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