[andrewmcwatters]

People have different definitions of "affordable." To me, a gross $65,000 household income, less after taxes, is not enough to be able to afford a home within that price range. It's probably closer to below $275,000.

I do agree with you regarding location, though.

[DavidPeiffer]

Completely agree. A lender in Iowa told us they approve up to 35% of gross income. Not certain if that was total servicing all debts, or their limit on the mortgage percentage payment. 65k could buy a ~300k house at a 3.25% interest rate.

I talked with an attorney from San Francisco on a plane once. When they bought their first house, 70% of their income was going towards the house. Raises helped that become a more reasonable percentage over the year.

Fast forward a few years, their family grew and they wanted to be further towards the edge of the city. They sold the house at a huge profit and put that money towards a bigger house further out. Different perspective in different markets.

[mlac]

That works until the bubble pops, and then really only for for families with high incomes. In your example, let's assume its 70% of take-home (it has to be after tax, or they would literally have nothing left). Taking home 300K, it's easy to live off of 90K. Taking home 100K, it's harder to live on 30K a year. Taking home 65 and doing that, it's not going to happen.

The cost of most household consumables is largely fixed, even as income scales. One can have expensive taste and increase that, but you can only spend so much on toilet paper and laundry detergent.

[busterarm]

You should never buy a home that costs more than 2x your yearly income.

So yeah, you should make at least $137,500 if you want to buy a $275k house.

[ineedasername]

You can easily spend more than the equivalent of 2x your annual income by renting, in terms of higher monthly cost, than by purchasing a home.

Take for example a $300,000 house w/ 4% mortgage. That works out to roughly $1,400/month. Even if you only make $75,000/year, it makes perfect sense to buy that house even if rents are a little lower than $1,400/month. (and current 30yr average rates bring that down to about $1225/month)

In my area, a small 2 bedroom house in a reasonably nice area will cost about $300,000, so the $1225 to $1,400/month rate applies. Renting a 2 bedroom apartment with less sqft for common spaces, in a similar area, will cost about $1800 to $2000. This is significantly more than is required to make up for property taxes levied on top of the mortgage when actually purchasing.

So I'm really not sure where you're getting your 2x figure. That's the sort of statement, absent context & explanation, that really doesn't add much to the conversation.

(On top of this, apartment complexes in my area have been nominally keeping monthly rates the same, but disaggregating utility costs from the rent, charging separately for heating, water, sewage, and garbage collection... at least for a year or two. After people get used to those additional fees, the complexes begin raising rents again too. I don't blame them too much, there's plenty of rental demand, but it changes the balance between renting & purchasing even more)

[busterarm]

Home ownership is more than just the cost of your mortgage.

And in many markets, especially in big expensive cities like NY & SF, it costs more money to buy than to rent.

[ineedasername]

Precisely, which is why the "don't buy a home more than 2x annual salary" doesn't seem like a good rule: there are too many variables. Where I am, total cost of ownership for a small two bedroom house is generally slightly less than the cost of 2 bedroom apartment that is also smaller, and comes with the benefit of building equity. A clear advantage (in my mind) if you're going to stay there for a few years because you'll build at least a little equity and average property values will increase at least a little bit. In my case I have a moderate sized home and pay about than 70% of the rent rates for anything nearby with the same # of bedrooms & about 500sqft smaller, even after property taxes, utilities, and average monthly maintenance costs.

On the other hand I have family that live in an area where apartment rents are much cheaper than the monthly TCO for buying, and even if you can afford to buy renting makes more sense (unless you need 3-4 bedrooms for a family) because rents are so much cheaper & it is better to put the difference between monthly costs into an index fund and build equity that way.

[busterarm]

It's not even my rule. The 2x rule is older than shit...Just as time has gone up people are stretching it to 2.5x and 3x.

Another rule you can go with is the Rule of 28 if you prefer. These guidelines exist for a reason. Ignore at your own peril.

Lenders look at these things when considering giving you money. Using more leverage usually gives the bank a better deal than you.

[dragonwriter]

> These guidelines exist for a reason.

They exist because of the economic context at the time and place that they were generated, which may not have been valid for much more than that immediate context.

If you can find and examine the mathematical assumptions about cost and risk that justify the rule of thumb against current conditions, then you can make an informed evaluation of whether or not it applies to the current situation. If you can’t, like folk remedies, the advice is as likely to harmful as helpful in your actual concrete circumstances.

[ineedasername]

There is no one size fits all, there is no inherent peril in ignoring these general rules. The age of the rules are irrelevant, whether you use expletives to describe them or not.

There is peril in ignoring the specifics of your own individual economic circumstances. If you make $300,000/year and aren't carrying significant other debt then you can afford 4x salary for a $1.2 million house because the ratio of your non-housing expenses do not have to scale upwards with your salary. At 4% interest that's $72k/year, leaving ample room for spending on a comfortable life style while still saving 20% of your salary. In fact that is actually less than your Rule of 28. Alternatively, if you make $300k/year but have $80k in credit card debt and additional business debt made on a personal guarantee then even a 2x house may be too expensive.

Situations vary based on much more complex factors than the salary:$home ratio. Simplistic rules are a greater peril than individual analysis.

[smabie]

I mean that feels pretty simplistic. Like most things, it depends.

There are many things that I could know or believe that affect the calculus. For example I might get promoted next year and make more money or whatever.

[isbvhodnvemrwvn]

Or laid off, or get into an accident.

[ineedasername]

In which case the equity you've built up in a house can help serve as a cushion, either by obtaining a home equity loan or if circumstances don't allow that because you don't have a paycheck you can cash out the equity by selling the home. Absent on economic downturn, even if you sell within the first 1-2 years you should be able to roughly break even and then downsize to a cheaper apartment.

The only times I see renting as a better economic option is when the monthly mortgage + property & utility costs are significantly more expensive than renting, AND there's an excellent chance of needing to relocate within the next 3-5 years before much equity is built up.

At earlier stages in a career, somewhat frequent relocations are common. But for a large part of the population who, especially as they age into their 30's+, want to stabilize such things in the interest of staying close to family, or make their own family, a greater level of geographic stability is very desirable and can be achieved without much if any career sacrifice if the location is strategically chosen, and buying a house at that stage almost always makes economic sense in the long term.

Of course there are some people who will always want to periodically uproot themselves every few years to new locales, and there's nothing wrong with that either, but I guess my point is that these differences in lifestyle choices significantly change where the economic balance falls.

[Ancalagon]

by this logic like 99% of people would be priced out of purchasing houses in most of california...

[busterarm]

Yes, exactly.

California has the 10th highest foreclosure rate out of 50 states and Los Angeles is 5th for cities with a population over 1 million. NYC is in first.