Home Purchase Price vs. Gross Income

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Topic Author
il0kin
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Joined: Mon Feb 26, 2018 8:19 pm

Home Purchase Price vs. Gross Income

Post by il0kin »

Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
Last edited by il0kin on Sun Dec 02, 2018 8:31 pm, edited 1 time in total.
annielouise
Posts: 382
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Re: Home Purchase Price vs. Gross Income

Post by annielouise »

In 2015 when purchased about 230% off our gross yearly income. Now it is worth about 300% of our gross income, but that has more to do with lower income rather than increase in value.
desiderium
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Joined: Sat Jan 04, 2014 11:08 am

Re: Home Purchase Price vs. Gross Income

Post by desiderium »

I think the relevant metric is all in costs (mortgage, taxes, insurance, maintenance and repairs) vs net income.

The purchase price multiple will be highly dependent on interest rates and on close analysis of the particular property you are considering.
TheHouse7
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Location: Washington State

Re: Home Purchase Price vs. Gross Income

Post by TheHouse7 »

annielouise wrote: Sun Dec 02, 2018 2:49 pm In 2015 when purchased about 230% off our gross yearly income. Now it is worth about 300% of our gross income, but that has more to do with lower income rather than increase in value.
Almost same experience here, bit ours is now 400% with wife stay at home, and market raising faster than my income
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
Startled Cat
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Re: Home Purchase Price vs. Gross Income

Post by Startled Cat »

il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93% at time of purchase and is currently about 1.79%.
Did you mean 1.93x?
Topic Author
il0kin
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Re: Home Purchase Price vs. Gross Income

Post by il0kin »

Startled Cat wrote: Sun Dec 02, 2018 6:28 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93% at time of purchase and is currently about 1.79%.
Did you mean 1.93x?
I suppose either 193% and 179% or 1.93x and 1.79x would have been better!
KlangFool
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Re: Home Purchase Price vs. Gross Income

Post by KlangFool »

il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
masonstone
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Re: Home Purchase Price vs. Gross Income

Post by masonstone »

0.43 of annual income. Still think bought too much house.
IowaFarmBoy
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Re: Home Purchase Price vs. Gross Income

Post by IowaFarmBoy »

When we bought in 1995 early in my career, our house was a little over 2x our income in LCOL midwest city. Today, the same house with 23 years of salary growth is about 1.25 times salary. Keeping this number low has been one of our keys to financial success and setting us up well for retirement.

I think the ratios are going to vary widely between LCOL and HCOL cities. We've got a daughter living in the NYC area and the numbers are very different. Housing is much higher and salaries are quite a bit higher but I don't think other expenses like food, car purchase, etc are proportional so a higher percentage can go toward housing.
student
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Re: Home Purchase Price vs. Gross Income

Post by student »

Just a data point. When I bought mine 18 years ago, it was about 2.6x my annual salary, excluding summer teaching income. With summer teaching, it was about 2.2x.
Traveler
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Re: Home Purchase Price vs. Gross Income

Post by Traveler »

At the time I bought my townhouse in 2011, it was 0.4 times my gross income. The value of it now is right about 1 time gross income and it has been paid off for over a year.
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mmmodem
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Re: Home Purchase Price vs. Gross Income

Post by mmmodem »

Our first home in an HCOL area was 1.5x. It was the smallest home in a desirable neighborhood with good schools. Our second home was 2.5x. Our third was 3.3x. Our current is 3.6x. At first glance it may seem lifestyle creep is spiraling out of control.

However, accounting for the equity sale of the previous homes, our current home mortgage is only 0.8x which is the same multiplier as the mortgage on our first home. Moving 3x wasn't fun but affording a large home in a nice neighborhood and a stay at home spouse was worth it.
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unclescrooge
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Re: Home Purchase Price vs. Gross Income

Post by unclescrooge »

My 20th real estate purchase, but 1st home with wife was 4.6x income in VHCOL.

The next home was 4.8, but we have over 50% equity in the house. Mortgage is under 2.5x current incomes.
28fe6
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Re: Home Purchase Price vs. Gross Income

Post by 28fe6 »

First house ever, with dual income, was 1.6 at $170k. 15 year mortgage; all per Dave Ramsey.

Second house we lost one income, needed space for kids, streched to 2.65 at $225k at purchase; sorry Dave; no regrets. Still 15 year mortgage though. Oddly, both salary and house have gone up a lot so the number has not come down...by this metric, home appreciation is a "bad"" thing.

Looking at 3rd house in a new state; would like to stay at about 2 but the market wants us to pay closer to 2.7-3 again. For the first time I'm considering a 30yr mortgage not because of the cash-flow but because I now have a better appreciation for investing and I would like to ensure I can always keep my tax deferred space maxed and also make a small amount of taxable savings.
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corn18
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Re: Home Purchase Price vs. Gross Income

Post by corn18 »

Closing on a new house tomorrow in a MCOL area. 1x gross income. But I will likely pay it off in June when my RSUs vest.
Don't do something, just stand there!
BogleWogle
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Re: Home Purchase Price vs. Gross Income

Post by BogleWogle »

4.1X at time of purchase (5.5 years ago) - MCOL

Current market price & earnings at time of purchase = 6.40X

Current market price & current earnings = 2.25X

Purchase price & current earnings would be 1.4X due to an increase in earnings.

If I had this sort of metric in mind, I likely would not have purchased the same property. But take it as 1 example of being a house poor for a relatively short period of time working out favorably (housing appreciation & career). Obviously, there’s many more examples that went the other way in the not so distant past.
OKC
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Re: Home Purchase Price vs. Gross Income

Post by OKC »

1.6x at time of purchase. LCOL. It feels very expensive compared to our old house which was 0.5x
averagedude
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Re: Home Purchase Price vs. Gross Income

Post by averagedude »

We bought our house at 1.25 times of our combined gross income 20 years ago. Today it is worth 1.25 times our income. We live in a fairly low cost of living area. I think a person should buy a house that they can afford to pay off in 15 years while also saving at least 10% of their pay for retirement. Most people that do this will have a bright financial future.
moneywise3
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Re: Home Purchase Price vs. Gross Income

Post by moneywise3 »

4x has worked fine for me in med to med-high COL areas.
Admiral
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Re: Home Purchase Price vs. Gross Income

Post by Admiral »

I honestly don't recall what our incomes were 15 years ago when we bought. All I know is we put down 30% on a $560k house.

Today, we owe less than 1x annual income and the house value is more than 2x annual income. Seem like reasonable ratios :sharebeer
Pioneer
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Re: Home Purchase Price vs. Gross Income

Post by Pioneer »

My SO bought a house that was 7.5x their income in a MCOL city... ( :confused ) We are in the process of selling and downsizing to a house that's around 1.8x our combined HH income. (In SO's defense, they could have liquidated some investments to completely pay for the house, but decided to do the mortgage route instead). Of course, we're going to be getting all these comments from SO's family this Christmas, "Why are you selling that big beautiful house?" :oops:
quantAndHold
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Re: Home Purchase Price vs. Gross Income

Post by quantAndHold »

When I bought my first place it was 2x, and it nearly killed me. Interest rates were over 10%, and I had a minimalistic down payment.

When we bought our second house, it was 2x, and it was a small stretch. Interest rates were at 8%, and we had a 10% down payment.

When we bought our third house, it was 3.5x, and it was easy. Interest rates were <4%. And by that time we had a 30% down payment.

The metric you seek is useless. Look at mortgage/tax/insurance/maintenance/utilities vs income.
Yes, I’m really that pedantic.
Admiral
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Re: Home Purchase Price vs. Gross Income

Post by Admiral »

quantAndHold wrote: Mon Dec 03, 2018 10:47 am When I bought my first place it was 2x, and it nearly killed me. Interest rates were over 10%, and I had a minimalistic down payment.

When we bought our second house, it was 2x, and it was a small stretch. Interest rates were at 8%, and we had a 10% down payment.

When we bought our third house, it was 3.5x, and it was easy. Interest rates were <4%. And by that time we had a 30% down payment.

The metric you seek is useless. Look at mortgage/tax/insurance/maintenance/utilities vs income.
+1. So, so much depends on mortgage rates. Our first loan had an 8.25% rate. Our current rate is 2.25%.
daheld
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Re: Home Purchase Price vs. Gross Income

Post by daheld »

LCOL/MCOL metro area in the midwest. Sold our small starter home for $30,000 more than my wife paid after 3 years of ownership. Purchased a home in February of this year with three times the amount of livable space at 2.02x our gross yearly income. After down payment and a large lump sum cash payment after closing on the previous house, we are at 1.3x gross yearly salary. Loan is a 30 year term; plan is to pay off in 20 years.
ebrasmus21
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Re: Home Purchase Price vs. Gross Income

Post by ebrasmus21 »

KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
I live in one of the cheaper areas of California. I need to seriously increase my income if I'm going to achieve this number of 1.49.
KlangFool
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Re: Home Purchase Price vs. Gross Income

Post by KlangFool »

ebrasmus21 wrote: Mon Dec 03, 2018 12:14 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
I live in one of the cheaper areas of California. I need to seriously increase my income if I'm going to achieve this number of 1.49.
ebrasmus21,

Or, the easier approach, do not buy a house.

KlangFool
onourway
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Re: Home Purchase Price vs. Gross Income

Post by onourway »

0.5x income in a MCOL area. Now worth about 1.5x income.
LiterallyIronic
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Re: Home Purchase Price vs. Gross Income

Post by LiterallyIronic »

KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Meh. Probably a function of having a high income. A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.

OP, for us it was a $209,000 house on an income of $63,500, so 3.3x. Can't really get a house cheaper than that in our area. We did put $60,000 down, so the mortgage itself was $149,000, so that's a ratio of 2.3x. PITI was $808 on a gross of $5,291.67 or 15.2% of gross.

One year later, we have the outstanding balance down to $142,000 (and Zillow estimates its now worth $241,000, but that's got to be taken with a grain of salt). House prices are through the roof here. Property taxes have taken our PITI to $825, but changing jobs has taken my gross income to $6,250/month, so now the PITI is 13.2%.
KlangFool
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Re: Home Purchase Price vs. Gross Income

Post by KlangFool »

LiterallyIronic wrote: Mon Dec 03, 2018 1:51 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Meh. Probably a function of having a high income. A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.

OP, for us it was a $209,000 house on an income of $63,500, so 3.3x. Can't really get a house cheaper than that in our area. We did put $60,000 down, so the mortgage itself was $149,000, so that's a ratio of 2.3x. PITI was $808 on a gross of $5,291.67 or 15.2% of gross.

One year later, we have the outstanding balance down to $142,000 (and Zillow estimates its now worth $241,000, but that's got to be taken with a grain of salt). House prices are through the roof here. Property taxes have taken our PITI to $825, but changing jobs has taken my gross income to $6,250/month, so now the PITI is 13.2%.
LiterallyIronic,

<<Meh. Probably a function of having a high income. >>

Did you read the book, "The Millionaire Next Door"?

<<A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.>>

If that is true, then, lawyers and doctors would be the profession with the highest percentage with millions in net worth. But, it is not.

KlangFool
randomguy
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Re: Home Purchase Price vs. Gross Income

Post by randomguy »

KlangFool wrote: Mon Dec 03, 2018 12:34 pm
ebrasmus21 wrote: Mon Dec 03, 2018 12:14 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
I live in one of the cheaper areas of California. I need to seriously increase my income if I'm going to achieve this number of 1.49.
ebrasmus21,

Or, the easier approach, do not buy a house.

KlangFool
Yeah nothing like paying 4k in rent instead of 2k in mortgage payments for building wealth. And that is actually a better outcome than reality for the person looking to buy a house in parts of CA over the past 20 years:)

But yeah most of the people had a low ratio cause they make a ton of money. Millionaire next dollar mixes up results with causation all the time. What percentage of people that bought houses at 1.49 becaome millionaires. More or less than the ones buying at 1.3 or 2.6? Not to mention he seems to think people with 2 or 3 million should be living the lifestyles of the rich and famous. Even in the late 80s/early90s that wasn't true.

Lets think about how stupid of a number this is
a) Taxes on a 500k house go from about 3k to 15k. Think house affordibility change with 12k more in taxes?
b) payment on a 420k mortgage have been in the 1800 to 3000 range in the past 20 years. Think house affordability changes when your payment is almost 2x?
c) alternative costs matter. If your choice is to pay 3k in rent or 2500 buy buying does it matter if the house to income ratio is 2x or 4x?
d) Finally life situations matter. A 25 year who expects to see their salary go up 50% over the next decade is not in the same boat as a 50 year old who is in peak earning.
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Edie
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Re: Home Purchase Price vs. Gross Income

Post by Edie »

When we bought in 2010, I was in my second to last semester of college (went back after 10 years SAHPing), the purchase price (PP) was 2.57x my to-be-spouse's then income. 9 months after we bought, PP went down to 1.22x combined salaries due to my new job. My now-spouse is since disabled/retired, but my income has risen to the point that the PP is 1.08x my salary and less than 1x if we consider spouse's disability payments.

The "Zestimate" of the house is still between 2x and 3x our current income (depending on which definition of income I use for the denominator). But since we don't ever intend to sell, that multiple isn't really important (also includes an implicit assumption that the "Zestimate" is valid, not a debate I care about). The only obstacle to our aging in place is a single step up and down at the entry way, and our 80 year old neighbors don't seem to be having any trouble with theirs :happy. Actually, now that I think about it, they enter their house through the garage, so maybe there is an issue, but as long as we clean out our garage at some point, we should be fine :oops:
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Mlm
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Re: Home Purchase Price vs. Gross Income

Post by Mlm »

Twenty years ago I bought my last house with cash for 1.35X income. I made sure it was a layout that could work for me into my old age. I think it was one of the smarter move I made since selling and moving can be expensive.
pdavi21
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Re: Home Purchase Price vs. Gross Income

Post by pdavi21 »

Mine was 363%, but I bought it with cash...
EDIT: 280% counting asset appreciation during the year towards "gross income".

It's a useless metric because it depends on how much down payment cash you have.

LCOL
Last edited by pdavi21 on Mon Dec 03, 2018 2:47 pm, edited 2 times in total.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Home Purchase Price vs. Gross Income

Post by KlangFool »

randomguy wrote: Mon Dec 03, 2018 2:28 pm
KlangFool wrote: Mon Dec 03, 2018 12:34 pm
ebrasmus21 wrote: Mon Dec 03, 2018 12:14 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
I live in one of the cheaper areas of California. I need to seriously increase my income if I'm going to achieve this number of 1.49.
ebrasmus21,

Or, the easier approach, do not buy a house.

KlangFool
Yeah nothing like paying 4k in rent instead of 2k in mortgage payments for building wealth. And that is actually a better outcome than reality for the person looking to buy a house in parts of CA over the past 20 years:)

But yeah most of the people had a low ratio cause they make a ton of money. Millionaire next dollar mixes up results with causation all the time. What percentage of people that bought houses at 1.49 becaome millionaires. More or less than the ones buying at 1.3 or 2.6? Not to mention he seems to think people with 2 or 3 million should be living the lifestyles of the rich and famous. Even in the late 80s/early90s that wasn't true.

Lets think about how stupid of a number this is
a) Taxes on a 500k house go from about 3k to 15k. Think house affordibility change with 12k more in taxes?
b) payment on a 420k mortgage have been in the 1800 to 3000 range in the past 20 years. Think house affordability changes when your payment is almost 2x?
c) alternative costs matter. If your choice is to pay 3k in rent or 2500 buy buying does it matter if the house to income ratio is 2x or 4x?
d) Finally life situations matter. A 25 year who expects to see their salary go up 50% over the next decade is not in the same boat as a 50 year old who is in peak earning.
randomguy,

The 1.49 ratio applied to the first house purchase.

KlangFool
Bacchus01
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Re: Home Purchase Price vs. Gross Income

Post by Bacchus01 »

This house when bought was around 2.8X and I would have gladly gone higher had we not also had another house trying to sell.

Now it’s worth .85X of gross, but that’s because gross ha grown way faster than house value. That’s over 8 years.
international001
Posts: 1752
Joined: Thu Feb 15, 2018 7:31 pm

Re: Home Purchase Price vs. Gross Income

Post by international001 »

If this ratio, was meaningful, then you would have to downsize if your house price goes from let's say x2 to x4
I rather prefer the 30% gross income dedicated to housing (mortgage or renting)
Bacchus01
Posts: 3182
Joined: Mon Dec 24, 2012 9:35 pm

Re: Home Purchase Price vs. Gross Income

Post by Bacchus01 »

KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Interesting, but I’m not sure how useful it is. The number is such a point in time as others have noted and is hugely dependent on area, life cycle or career cycle, and alternatives available.

Here is our rough ratio when we bought and when we sold each house:

House 1, LCOL 1998 1.66 bought, 2004 1.0 value when sold
House 2, HCOL 2004 5.46 bought, 2006 4.6 value when sold
House 3, LCOL 2006 4.24 bought, 2010 2.43 value when sold
House 4, MCOL 2010 2.8 bought, 2018 .9 value today if I sold it

Ironically, at no time did I feel that we overreached. In House 2, in hindsight, I think we did but we had a housing allowance (not calculated in the gross) that made it okay. What’s not shown here is tax rates. Annual taxes on house , about $2,500 yr. House 2, $5600/yr. House 3, $2,400/yr. House 4, $9,200/yr. House 4 was cheaper to buy than either House 2 or House 3. House 2 was bought on an interest-only loan as well :).

If we were to go buy today, our number happens to be a target of 1.5.
Gadget
Posts: 457
Joined: Fri Mar 17, 2017 1:38 pm

Re: Home Purchase Price vs. Gross Income

Post by Gadget »

We bought our first and current home ten years ago at 2.4x of gross. Assuming the same home value from then even though it's probably slightly higher, we are now at. . 65x of gross.
KlangFool
Posts: 18945
Joined: Sat Oct 11, 2008 12:35 pm

Re: Home Purchase Price vs. Gross Income

Post by KlangFool »

Bacchus01 wrote: Mon Dec 03, 2018 3:01 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Interesting, but I’m not sure how useful it is. The number is such a point in time as others have noted and is hugely dependent on area, life cycle or career cycle, and alternatives available.

Here is our rough ratio when we bought and when we sold each house:

House 1, LCOL 1998 1.66 bought, 2004 1.0 value when sold
House 2, HCOL 2004 5.46 bought, 2006 4.6 value when sold
House 3, LCOL 2006 4.24 bought, 2010 2.43 value when sold
House 4, MCOL 2010 2.8 bought, 2018 .9 value today if I sold it
Bacchus01,

1) It only applies to the first house purchase.

<<House 1, LCOL 1998 1.66 bought>>

2) The median is 1.49. Your number is close to TMND ratio.

<<The number is such a point in time as others have noted and is hugely dependent on area, life cycle or career cycle, and alternatives available.>>

3) It does not for many TMND. If they cannot buy the first house close to that ratio, they do not buy.

<<others have noted and is hugely dependent on area, life cycle or career cycle, and alternatives available.>>

4) This is how normal people behave. TMND does not behave the same way.

KlangFool
brianH
Posts: 451
Joined: Wed Aug 12, 2009 12:21 pm

Re: Home Purchase Price vs. Gross Income

Post by brianH »

First house (age 23), a townhouse, was about 3x salary, but I did have enough saved for a 20% down payment. Second, and hopefully forever (until downsizing at least) is also about 3-4x salary, but I did have another 20% DP and the proceeds from the townhouse sale (paid off mortgage) that made it more like 1.5x.

There's definitely lifestyle creep, but this is a fairly HCOL area (median home price 425K), and I realized that I was saving enough since I started early and aggressively. I wanted to loosen my boglehead belt just a notch or two, because I'm still on track for having 'enough'.
supalong52
Posts: 356
Joined: Tue Feb 09, 2010 1:51 pm

Re: Home Purchase Price vs. Gross Income

Post by supalong52 »

KlangFool wrote: Mon Dec 03, 2018 3:12 pm Bacchus01,

1) It only applies to the first house purchase.

<<House 1, LCOL 1998 1.66 bought>>

2) The median is 1.49. Your number is close to TMND ratio.

<<The number is such a point in time as others have noted and is hugely dependent on area, life cycle or career cycle, and alternatives available.>>

3) It does not for many TMND. If they cannot buy the first house close to that ratio, they do not buy.

<<others have noted and is hugely dependent on area, life cycle or career cycle, and alternatives available.>>

4) This is how normal people behave. TMND does not behave the same way.

KlangFool
The TMND ratios have never worked well for us. Real estate is pretty location dependent so while it may be easy for someone in the midwest to keep it under 1.5, it's much more difficult for someone on the coasts to do so. Instead of buying, we just kept renting until we reached a reasonable level of FIRE. We both switched to part time work in our early to mid thirties. Instead of having a high six figure income, we now have a low six figure income.

We are looking to buy in the next year as we are expecting our first child. We're looking to spend about $900k in our HCOL area. So this is 4.5x our part time income, and just over a third of our total NW and a half of our taxable NW. Does that seem reasonable to you? Or should we try to stay under 3.5x or even less? I'm not inclined to work much more than I am now (~15 hrs a week), but I do have some flexibility.
LiterallyIronic
Posts: 1477
Joined: Sat Dec 05, 2015 10:36 am

Re: Home Purchase Price vs. Gross Income

Post by LiterallyIronic »

KlangFool wrote: Mon Dec 03, 2018 2:27 pm
LiterallyIronic wrote: Mon Dec 03, 2018 1:51 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Meh. Probably a function of having a high income. A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.

OP, for us it was a $209,000 house on an income of $63,500, so 3.3x. Can't really get a house cheaper than that in our area. We did put $60,000 down, so the mortgage itself was $149,000, so that's a ratio of 2.3x. PITI was $808 on a gross of $5,291.67 or 15.2% of gross.

One year later, we have the outstanding balance down to $142,000 (and Zillow estimates its now worth $241,000, but that's got to be taken with a grain of salt). House prices are through the roof here. Property taxes have taken our PITI to $825, but changing jobs has taken my gross income to $6,250/month, so now the PITI is 13.2%.
LiterallyIronic,

<<Meh. Probably a function of having a high income. >>

Did you read the book, "The Millionaire Next Door"?

<<A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.>>

If that is true, then, lawyers and doctors would be the profession with the highest percentage with millions in net worth. But, it is not.

KlangFool
Yes, I read The Millionaire Next Door. And then threw it away. It says things like, "75% of millionaires never spend more than $600 on a suit or $200 on shoes." Yeah, well I buy $150 ill-fitting suits off the rack and $30 dress shoes from Payless Shoes. I'll let you know when that makes me a millionaire. $600 is closer to my budget for a car than for a suit. That book is unbelievably out of touch with the real world.

Secondly, I'll need to see a source regarding your million net worth percentage claim.
Bacchus01
Posts: 3182
Joined: Mon Dec 24, 2012 9:35 pm

Re: Home Purchase Price vs. Gross Income

Post by Bacchus01 »

LiterallyIronic wrote: Mon Dec 03, 2018 3:57 pm
KlangFool wrote: Mon Dec 03, 2018 2:27 pm
LiterallyIronic wrote: Mon Dec 03, 2018 1:51 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Meh. Probably a function of having a high income. A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.

OP, for us it was a $209,000 house on an income of $63,500, so 3.3x. Can't really get a house cheaper than that in our area. We did put $60,000 down, so the mortgage itself was $149,000, so that's a ratio of 2.3x. PITI was $808 on a gross of $5,291.67 or 15.2% of gross.

One year later, we have the outstanding balance down to $142,000 (and Zillow estimates its now worth $241,000, but that's got to be taken with a grain of salt). House prices are through the roof here. Property taxes have taken our PITI to $825, but changing jobs has taken my gross income to $6,250/month, so now the PITI is 13.2%.
LiterallyIronic,

<<Meh. Probably a function of having a high income. >>

Did you read the book, "The Millionaire Next Door"?

<<A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.>>

If that is true, then, lawyers and doctors would be the profession with the highest percentage with millions in net worth. But, it is not.

KlangFool
Yes, I read The Millionaire Next Door. And then threw it away. It says things like, "75% of millionaires never spend more than $600 on a suit or $200 on shoes." Yeah, well I buy $150 ill-fitting suits off the rack and $30 dress shoes from Payless Shoes. I'll let you know when that makes me a millionaire. $600 is closer to my budget for a car than for a suit. That book is unbelievably out of touch with the real world.

Secondly, I'll need to see a source regarding your million net worth percentage claim.
Interesting. The point about TMND is not about absolute amounts, but about general lifestyle choices. They won’t necessarily make you a millionaire, but they will likely keep you one.
KlangFool
Posts: 18945
Joined: Sat Oct 11, 2008 12:35 pm

Re: Home Purchase Price vs. Gross Income

Post by KlangFool »

LiterallyIronic wrote: Mon Dec 03, 2018 3:57 pm
KlangFool wrote: Mon Dec 03, 2018 2:27 pm
LiterallyIronic wrote: Mon Dec 03, 2018 1:51 pm
KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Meh. Probably a function of having a high income. A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.

OP, for us it was a $209,000 house on an income of $63,500, so 3.3x. Can't really get a house cheaper than that in our area. We did put $60,000 down, so the mortgage itself was $149,000, so that's a ratio of 2.3x. PITI was $808 on a gross of $5,291.67 or 15.2% of gross.

One year later, we have the outstanding balance down to $142,000 (and Zillow estimates its now worth $241,000, but that's got to be taken with a grain of salt). House prices are through the roof here. Property taxes have taken our PITI to $825, but changing jobs has taken my gross income to $6,250/month, so now the PITI is 13.2%.
LiterallyIronic,

<<Meh. Probably a function of having a high income. >>

Did you read the book, "The Millionaire Next Door"?

<<A high income increases the odds of becoming a millionaire and increases the odds of a low ratio of house price to income.>>

If that is true, then, lawyers and doctors would be the profession with the highest percentage with millions in net worth. But, it is not.

KlangFool
Yes, I read The Millionaire Next Door. And then threw it away. It says things like, "75% of millionaires never spend more than $600 on a suit or $200 on shoes." Yeah, well I buy $150 ill-fitting suits off the rack and $30 dress shoes from Payless Shoes. I'll let you know when that makes me a millionaire. $600 is closer to my budget for a car than for a suit. That book is unbelievably out of touch with the real world.

Secondly, I'll need to see a source regarding your million net worth percentage claim.
LiterallyIronic,

1) As far as I can remembered from your previous posts, you are not interested in becoming a millionaire.

<<Secondly, I'll need to see a source regarding your million net worth percentage claim.>>

2) It is in the book.

<<I'll let you know when that makes me a millionaire. $600 is closer to my budget for a car than for a suit. That book is unbelievably out of touch with the real world.>>

3) There are many millionaires in my family across the world. And, the income ranges widely. As far as I can tell, the book is consistent with the experience of many millionaires in my family.

KlangFool
Last edited by KlangFool on Mon Dec 03, 2018 4:25 pm, edited 1 time in total.
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willthrill81
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Re: Home Purchase Price vs. Gross Income

Post by willthrill81 »

Of our three home purchases, the most spent was 210% of our gross income. Our last purchase was 187% of our gross income. For us, smaller was definitely better. We hope to have it paid off by the time I'm 39.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
KlangFool
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Re: Home Purchase Price vs. Gross Income

Post by KlangFool »

supalong52 wrote: Mon Dec 03, 2018 3:48 pm
The TMND ratios have never worked well for us. Real estate is pretty location dependent so while it may be easy for someone in the midwest to keep it under 1.5, it's much more difficult for someone on the coasts to do so. Instead of buying, we just kept renting until we reached a reasonable level of FIRE. We both switched to part time work in our early to mid thirties. Instead of having a high six figure income, we now have a low six figure income.

We are looking to buy in the next year as we are expecting our first child. We're looking to spend about $900k in our HCOL area. So this is 4.5x our part time income, and just over a third of our total NW and a half of our taxable NW. Does that seem reasonable to you? Or should we try to stay under 3.5x or even less? I'm not inclined to work much more than I am now (~15 hrs a week), but I do have some flexibility.
supalong52,

<<Does that seem reasonable to you?>>

You know the answer to your own question. It is a tradeoff between the 900K house and working hours. Only you can tell what is worth more to you.

I only live once. When I reach a certain level of wealth, time is more precious than things.

KlangFool
baseball2horse
Posts: 43
Joined: Wed May 09, 2018 1:38 pm

Re: Home Purchase Price vs. Gross Income

Post by baseball2horse »

I recently bought a house and the purchase price was just over 6 times my gross income with a mortgage of about 3.2x.

I live in a HCOL area that's been appreciating and I'm able rent out of the rooms, and could rent out another if needed. And (counting my companys 401k contributions) I save more than a years expenses every year. (50% following KlangFool's money rules). So while its a lot of house, its what I've chosen to spend my money on, and a tiny one bedroom apartment would have cost me nearly as much a month as my nice house with a yard. Housing decisions really come to down to trade offs.
Topic Author
il0kin
Posts: 326
Joined: Mon Feb 26, 2018 8:19 pm

Re: Home Purchase Price vs. Gross Income

Post by il0kin »

KlangFool wrote: Sun Dec 02, 2018 8:36 pm
il0kin wrote: Sun Dec 02, 2018 2:40 pm Reading threads with conversations about setting yourself/family up for financial success even through hard times, I’m curious what other Boglegeads ratio of home purchase price is vs. gross income and whether you live in a LCOL, MCOL or HCOL.

For my family, it was about 1.93x at time of purchase and is currently about 1.79x. We are in a L/MCOL Midwest city (depends on what part of the city you live in, very cheap options available in crummy parts of town or 20 miles outside the metro but for good schools it’s functionally MCOL). I had not yet discovered Bogleheada when we bought our first or current home but had heard of the 25% of net income towards housing rule of thumb and used that as a guideline.
il0kin,

Do you want to be a millionaire?

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
Interesting to see 1.49x. Our first house was 1.4x (plus or minus a few hundredths, would have to dig out a tax return to be sure). We should hit $1M net worth somewhere around 40-45 depending on markets. Currently, with our 1.79x housing costs and two kids in daycare, we are still able to sock away 16% + 3% employer match plus an extra 3% to build the emergency fund, so a total of 22% and have aggressively paid off all student loan and consumer debt prior to our 30th birthdays. Should be all good, just have to let compounding do its magic from here on out :)
stormswami
Posts: 72
Joined: Tue Sep 17, 2013 4:48 am

Re: Home Purchase Price vs. Gross Income

Post by stormswami »

For the past 15 years, we have been in a house that was initially 2x of gross income but would now be 1x (of original) as income has increased. Our previously refinanced 10-year mortgage is easily less than 25% of monthly net income, which is a great feeling. That said, we are finalizing a deal for a new and larger house that will be about 2.8x of our gross income (should still be able to do a 15-year note given no other debt). We are in the middle of the country with a relatively low cost of living.
JGoneRiding
Posts: 1973
Joined: Tue Jul 15, 2014 3:26 pm

Re: Home Purchase Price vs. Gross Income

Post by JGoneRiding »

averagedude wrote: Sun Dec 02, 2018 11:14 pm We bought our house at 1.25 times of our combined gross income 20 years ago. Today it is worth 1.25 times our income. We live in a fairly low cost of living area. I think a person should buy a house that they can afford to pay off in 15 years while also saving at least 10% of their pay for retirement. Most people that do this will have a bright financial future.
While probably true it's not very realistic in most areas.

We save >10% but bought at about 3.2x since I took a larger than planned cut after having child we are now 4x but still save 13% but 30 yr. We wouldn't have even qualified for 15 yr
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