Talking about six figure salaries as if they are unquestionably upper-middle class should take housing prices into account.
Median household incomes to home price ratios have risen to ~8x across the US as a whole , not just crazy house price areas like SF/NYC. Canada and Australia are far worse again, pushing 15x in some cities.
3x, if it ever was a rule, has been dead for a long long time.
Just crunched the numbers, and an 8x mortgage would exceed my monthly take home.
I felt pretty uncomfortable at 2.5x. I feel a lot of people are probably extending out to 4 or even 5, but 8 would be irresponsible and I doubt you could even find a lender for that.
A 5x mortgage over gross pay should be just over 30% of monthly gross take home. Maybe too much for some, but not absolutely irresponsible - especially if you choose to stay in a stable housing market.
2.5x is completely ridiculous to expect - that’s going to be far below rental payments in most places that anybody would want to live. Its definitely not the norm. It’s obtainable in some areas of the northeast like Pittsburgh and the Midwest. But usually the catch is property taxes are outrageous.
At today's rates, which I'll enter at 5.2%,
A person making 200k at 8x is buying a house worth 1.6 million dollars.
Assuming a 320k down payment(ha), 20k in taxes, and 5k in insurance, the monthly payment comes out to over 9000 a month. I don't think anyone in CA at 200k is taking home that much monthly, but maybe my math is off.
I think 2.5x is also probably not the norm, but I'm extremely conservative with money and what I went with.
4 or 5 I can believe, but in today's market with today's rates, I can't see how 8x is even possible.
The funny thing is: you just explained why property taxes are basically 'free'. (They are basically the best tax. Tweaking them to include only the value of the land, and not the house makes them even better.)
Basically, supply and demand in the housing market determine the sum of property taxes plus mortgage payments. If property taxes fall, real estate prices increase until the sum is the same as before.
If property taxes increase, real estate prices decrease accordingly.
Of course, existing property owners will feel the changes in price. But for someone young or from outside the area, who doesn't already own property, areas with high and low property taxes cost the same amount to live in.
The area with high property taxes can either spend more on public infrastructure or lower other taxes.
In the long run, all of society is made up of people who don't live yet today.
In the short run, votes are mostly cast by people alive now, many of them owning property.
Thanks for explaining!
Though to be clear, most of what I explained still applies: if you are looking to buy real estate, the expected burden of property taxes will already be baked into the market price. Almost no matter how the taxes are set.
My observation is that the system is neither regressive nor progressive for people who don't already own a home.
Renters basically don't see this tax at all, and people who are considering buying a home see the same total burden of tax plus mortgage payments.
(Or for people who buy outright with spare cash instead of a mortgage, the constant burden is tax plus opportunity cost of capital.
A mortgage is just a way to rent some capital from a bank in return for compensating them for the opportunity cost.)
That's because rental prices are ridiculous.
Where I live (Auckland, New Zealand) the average household income is just over $NZ 140k, while the average house price is around $NZ 1.4m.[1]
https://www.stuff.co.nz/life-style/homed/real-estate/1278031...
Median-income-to-house price by state : https://constructioncoverage.com/research/cities-with-highes...
As you can see California is at a whopping 8.9x
US overall: https://www.longtermtrends.net/home-price-median-annual-inco...
Pushing 7x.
For some reason I was reading the comment that the average homebuyer is paying 8x their salary for a house. What you've been comparing are median incomes to sales prices. A useful indicator, but not capturing what people are actually paying - it is entirely possible the 'medians' are priced out, especially with such constrained supply.
That makes me feel way less crazy now... apologies again.
Even though as you said it's "not capturing what people are actually paying" it's related, and still horrifying to me, as a measure of overall housing affordability. Esp when you look at places like vancouver, sydney, melbourne.... At 10x I cant understand how the market keeps going - how do home ownership rates stay so high? how are people affording these multiples? It just doesnt make sense to me how it can keep going. To your point this measure includes the people who cant afford to buy at all , but theres still enough ownership % overall that it doesnt add up to me.
That doesn't mean "everyone" is spending huge multiples of their salary in cash, it just means a handful of people did. The rest rode the wave of equity.
$100,000/yr = $8,300/month pre-tax = $6,000 after tax
$300,000 home minus $60,000 down @6% = $2,000/month for mortgage + tax + insurance
But I recall right before the 2007 crash my manager was shopping for a mortgage and they were willing to lend him $800,000 on a $120,000/yr salary.
The one where you were paying 20% interest on your mortgage.
This city is actively hostile to new home owners and I am moving away this year to start a family.
At today's interest rates, which are still historically low even though they increased last year, 3x is unusually conservative.
The better rule of thumb is to keep housing expenses under a certain percentage of gross income. 28% and 30% are common number that get mentioned in that context.
Why gross income and not net income? Because two people with the same gross income might have very different tax situations and their net income could be very different. So, of course you also need to consider what percent of your net income your housing costs represent -- these are all just rules of thumb.
Choosing to live somewhere for the "lifestyle" is in itself a form of expenditure for which your employer should neither be subsidizing nor penalizing.
However with a traditional mortgage, as long as you keep making payments you cannot be forced to sell. (In fact it's even better, you can always re-finance when rates improve, whereas the bank cannot raise rates on you when they worsen.) Therefore all you care about is the return to the asset over the long-run. And absent maybe a once-in-a-century depression, there's no way a single family home will decline in price over 20+ years.
Which is starting now - it's been almost 100 years since the last one.
For example, people who rent in major cities have seen their rents increase by 30% or more over the past few years. Housing prices have also gone up by that much.
On the other hand, someone who bought a home a few years ago has not seen their monthly payment change -- and it will not change for 30 years if they got a fixed-rate mortgage! In the next few decades, their mortgage payment will be increasingly smaller in real terms due to inflation and will eventually be substantially lower than the rent for a similar home.
2 people earning $120k each have a monthly pre-tax income of $20k. They can easily afford a million-dollar home, and the property tax (~11-12k per year), in the San Francisco area. The problem is, a home that cost a million dollars 2 years ago now costs $1.3 million.
Most responses on an assumption that, inflation adjusted, housing prices only rise. For many areas this is not true, the bay might not be one of them, it is probably even more localized for the areas that are more protected from downturns.
From your example, a house would be around $5.5k/month before maintenance / capital costs on take home of ?12-14k?. Seems rough, especially if one of those salaries is lost or degrades.
It is all perspective though, we're used to lots of space and size. My normal is other people's insane.
Unfortunately I sold said home at the beginning of 2019 and have watched it essentially double in value over the last two years.
1. A single person likes to have guests stay over and wants to offer them a room and also have a home office for working from home
2. There are no "starter" homes available in their area. This is what my spouse and I hit in Los Angeles. We tried a condo and ended up suing the person who sold it to us because it was so noisy as to be unlivable. (And it turns out most of the condos in the area are like that.) But there were no small homes available on the market to purchase. When one did show up, they were usually purchased immediately for cash for more than asking price, torn down, and a new home built lot-line to lot-line put in its place and sold for 3x the cost. Eventually, I got some bonuses that allowed us to purchase a larger home so we did that. Now we have a guest room and an office which has worked out great during the pandemic. I'm really glad we did it.
If you give someone 100 dollars a day they have to buy food, clothes, rent, education, transportation. You give them 1000 dollars a day they still have to buy the same things. They can then use this leftover to buy nicer food or nicer house. This is why values of homes can get so high in areas. For the people getting 1000 they chose where ti spend this extra money. For people with 100 a day they don’t have extras to reallocate towards rent.
I assume the US has roughly the same now.
The old mortgage multiplers have gone for now.
And indeed my house, but not the mortgage, was well over 10 times my salary when I bought it. The mortgage was around 8 times my (entry level UK) salary, but about half that if you counted both of us.
Which is one route to how people end up in serious trouble: get a mortgage as newlyweds with 8 times one person's salary, then one person stops working for The standard post-marriage activity: kids, and now you have a house you could never have passed the affordability checks for, as well as a very expensive baby. Then interest rates rise. Game over. Luckily for lots of people, interest rates have been miniscule for a while, but I get the feeling that there's a lot of people on the edge.
https://www.moneysavingexpert.com/news/2021/03/habito-to-lau...
Fixed rate mortgages are popular with people that don't want to take on the risk of payment fluctuation as well as in economic environments such as today.
People used to be be able to easily afford houses on a single income. My old boss, for example, bought a house alone when he was 25 and rented out a room. And that was back when tech salaries were low, especially in the UK where it was viewed as a perfectly normal job and no better paid than, say, a teacher.
That's just not really possible these days, a 25-year old teacher could never buy a half decent 3 bed house alone.
My partner and I earn dissimilar amounts (I earn more than double what she does) so we are borrowing only what can be covered on her wages which is about a third of what the bank will actually lend us (a frankly eye watering amount).
We don't want to be in a situation where I have to earn what I do now forever to cover the mortgage and doing the above would allow me to take a 50% paycut and still comfortably pay all the bills.
The houses we are looking at decent size in a nice area with good sized gardens, what the hell more do we need, there are only 3 of us, a 3 or 4 bed is just fine.
We are effectively borrowing about x2 our household income not the 5.whatever the bank would lend.
So typical of American imperialism.
Only second to the Brits.
;)
It has no economic foundations whatsoever.
Yet, banking institutions use(d?) this rule to reject whatever application they were not comfortable with.
I've heard that monthly housing shouldn't be more than 1/3 monthly take home. Is that what you're thinking?
Or investing on margin.
Unless tax deductions work very different in the US than they do in Denmark, that is pretty bad advice.
Here, sitting on a 60% mortgage loan that is many times higher than your annual income is genuinely a good idea for most people because of tax law. It’s not until you have assets that are worth more than your house that it becomes a good idea to pay off the entire loan.
Meanwhile having even a small “quickloan” that is 0.1% of your annual income is a very stupid idea.
I mean, if you don’t know finance at all then maybe it’s a good rule of thumb as you’ll never bury yourself in debt, but loans aren’t just loans.
Or are you saying payments on debt (mortgage payments)?