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Comment by mikeyouse | Hacker News Reader

Pretty crazy correction if you run the math on mortgage payments. I bought a place 1 year ago with a 2.75% rate. Say you're somewhere outside a major metro buying a $500k house. With a $100k down payment, a 2.75% rate equates to $1,633/month. A 6.5% rate equates to $2,500/month.

With $600/month in taxes/insurance, the "don't spend more than 40% of your income on housing" rule means the necessary income to comfortably afford that property increases from $65k to $93k. That'll create some waves in the market.

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Here's my real life example:

I bought a house in 2009 @ 3.75% for 480k fixer-upper 1922 craftsman home in East Los Angeles area. My monthly payment was about $3200 because I could only afford ~4% down so we had to get PMI. At the time I made $110,000 and wife made $60,000. We put in about 50k into the house using my dad who is a general contractor (basically only paid for materials).

In Dec of 2021, we refinanced for 2.75% and our fixer-upper was valued at 750k which meant we could get rid of PMI and now our monthly payment is $2500 (including taxes). It's a massive drop for us now that we have a baby.

Literally none of this is possible right now. It feels like we've won the lottery. On top of that, we had a ton of help making this place a home because of my dad. For most families in the major metro areas, this is just totally out of reach now.

The market does not work that way. You're implying that the cause and effect are backwards. It is local wages that set the price! The prices, while they do adjust slowly due to high friction in the housing market, are not exogenous.

The <100% pay differential between California and somewhere in the Midwest does not explain the >500% difference in housing prices. You are leaving out numerous factors including demand, supply, and local regulations.

> <100% pay differential between California and somewhere in the Midwest does not explain the >500% difference in housing prices

Curiously, 20% down implies 5x leverage. Not saying that's what's causing the difference. But in the weird way leveraged finance works, a <100% income difference can absolutely fuel a 5x asset price gap.

Imagine two people. One person makes 50k the other makes 100k. Both have expenses for food, tech, schools etc at 40k. This leaves 10k vs 60k to spend on housing. >500% difference.

That was true before the pandemic. Part of the reason demand surged in "second cities" around the country was because remote work allowed higher paid workers to migrate somewhere cheaper and not only take advantage of low rates but lower housing prices.

It remains to be seen if now that the wave of remote workers is (probably) largely over now that employers are more likely to offer hybrid than fully remote work if these housing markets more severely correct compared to coastal cities (SF, LA, NYC) that have always been expensive.

That 40% rule seems nuts. Who is making $65k that can truly afford a $500k house?

Like most rules-of-thumb, they're 'fuzzy' and it's not about the total home value but the actual monthly cost of ownership.

Pick a state though, say Missouri. A married couple earning $65k will bring home $50k after tax. In the first example, with a mortgage + tax + insurance house cost of $2,200/month, their home costs will be about $25k/year leaving them about $25k for other spending. Not lavish, but likely doable.

The real comparison though, is what they could rent an apartment for as the alternative to buying that house. In most places, they'd be paying nearly that same total in rent so it's basically a wash (assuming they can come up with the down payment).

No one.

I've always heard 2.5x-3x your gross annual salary. Which makes sense, but us also would price people out of the big markets.

Right, and it ignores interest rates which is the whole point of comparing actual mortgage costs instead of home prices.

Same example, $65k salary x 3x to get a home value would be a $200k house. That's a total annual home cost of $11,750 with 2.75% interest rates and $16,200 with 6.5% rates.

If they can afford the $16,200 today based on the 3x rule, then surely they could have afforded a $285k house (4.4x gross) last year considering the monthly cost would be identical?

Maybe, maybe not. The monthly cost wouldn't be identical due to taxes, difference in down payment (if also following best practices there), insurance, and that ignores potential future repairs (more expensive houses tend to be larger and/or fancier).

Actually I should have shared the link I was using - my figures included proportionally higher taxes and insurance per the Smartasset calculator to get to the same monthly payment. Though yes, the down payment would be higher since I assumed 20% down for both.

https://smartasset.com/mortgage/mortgage-calculator

Same house should net same taxes even after a value increase, cities/counties have a levy and back calculate the necessary tax to raise it. If your home increased in value, so did your neighbors.

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