Comment by nemonemo | Hacker News Reader

Comment by nemonemo | Hacker News Reader

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US median household income is about $60k, which is stagnant for about 15 years despite GDP growth [1]. The median listed housing price has increased by ~50% for the same time[2]. What could a good financial management education teach with these trends in mind?

For a newly-minted median-income household, what is a good financial decision between buying a house or renting? Buying a house with much debt and mortgage payment is risky (remember 2008?) but maybe it is a good investment until that time. Or, not buying a house and continue to pay the rent and helping someone else paying their mortgage may be the safest bet. In either case, there seems growing housing cost anyways that no financial education could help.

Maybe moving to an area where no job exists but house or rent is cheap could be an alternative that no education suggests?

IMO, financial education without considering external environment is easy. It's always like, save more and keep some cash for the risk. But what it doesn't tell people is that the risk is getting higher for the same return and more and more people deplete their income paying the premium.

[1] https://en.wikipedia.org/wiki/Household_income_in_the_United... [2] https://fred.stlouisfed.org/series/MSPUS

There are two problems with your analysis:

1) You’re comparing inflation adjusted income figures to housing prices that are not inflation adjusted.

2) You’re ignoring interest rates. Low interest rates allow people to buy more expensive houses without paying any more money per month.

Mortgage payments as a percentage of income have been quite flat across all income levels over the past 15 years: http://www.pewtrusts.org/-/media/data-visualizations/infogra...

Am I reading that chart right that the average person with a mortgage pays around 15% of their income for housing? That seems implausibly low.

It might be a hair more than 15% by eyeball, but remember that’s going to include in the average a lot of people who are paying property taxes only or who bought a place 15-20+ years ago and whose PIT payments are much lower than their current income would suggest they could qualify for. I bought in 2007 and my percent of income spent on housing would now fall in-line with the charted figures.

Do you live in Silicon Valley? That might skew your perception a bit. Median income is around $60k, and median house price is $220k. With a couple assumptions that comes out to around 20%

I do not. 20% is more plausible. The gap between 15% and 20% is high.

Note that most people currently paying a mortgage has not bought at current prices.

And with the reasonable assumption that high-income households are more likely than low-income households to buy a house in any given year, we can expect the buyer of the median house to have better-than-median income.

It makes more sense when you put it like that. The average mortgage holder has a 2019 salary but probably only a 2010 mortgage. (Or whatever bygone year is correct.)

Houses are fairly cheap in the US and incomes are fairly high: https://www.nytimes.com/2017/04/21/realestate/first-time-hom....

> Of those who did manage to buy, the median age was 32; median salary, $72,000; and median home price, $182,500. (Among all buyers, the median age was 44; median income was $88,500; and median home price was $227,700.)

Assuming no down payment, a mortgage of 182,000 at 4.5% is $920 per month, which is just about 15% of $72,000 (before tax). It’s about 19% after tax. Still quite affordable.

The first set of numbers are of first-time buyers who managed to buy. That doesn't really speak to housing being affordable, it speaks to what circumstances people must be in before they feel comfortable buying. Median personal income is about half that [1].

[1]: https://fred.stlouisfed.org/series/MEPAINUSA672N

I don’t think the median individual income is the right reference point for mortgage affordability. Do we think that single people who just graduated high school should be able to buy a house in order for housing to be considered “affordable?” If not, it might be appropriate to compare median housing prices to median incomes of groups we expect to be able to buy houses. Median income for family households was $77,000 in 2016: https://www.census.gov/library/publications/2018/demo/p60-26.... Median income for married couples with both spouses working is $111,000: http://www.aei.org/wp-content/uploads/2018/09/census3.png.

Single people that just graduated high school used to be able to afford to buy a house. In some parts of the US they still can.

Part of the change is we stopped building cheap houses. Building a good 600sf house for 20-25k is very possible. Land costs are also an issue in some areas, but much like the car market people build based on who’s buying not the low end of the market. The profit margin is vastly better if you aim upscale.

They did? When did that happen? My parents --- upper-middle class, college-educated --- started their family in a series of small apartments, and certainly never owned houses when they were single.

Most famously post WWII GI bill provided mortgages to a lot of people without a collage degree. It helped them get a mortgage but they still has to pay the bills. It even still only ~5% of the population had a collage degree yet home ownership was common.

Prior to this people would often live with their parents or other other family members, before buying or building a home. Though this was far less common around cities.

I wouldn't say US median income is stagnant, more like volatile. It climbed from 50k to 60k between 1985 and 2008, collapsed back to 55k during the recession and slow recovery in 2012, then climbed back to an all time high of 61k by 2017. But that actually supports your point: it is very difficult to predict a "safe" time to take on debt.

Is that adjusted for inflation?

It's real income, so yes.

“Real” income is adjusted for inflation (by definition). The contra would be nominal income (or typically unqualified is also nominal).

This comment makes the classic mistake of citing flat real (inflation adjusted) income and increasing nominal (so not inflation adjusted) housing prices. If you take the Q1 2019 vs 2004 median house prices, they are 44.6% higher 15 years later. Said differently, the median house price has gone up by 2.5% annually. Basically by inflation.

My financial advisor says that poor people should start buying more houses so they can keep up with rising prices.

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