Living comfortably with "unaffordable" housing costs

Conventional wisdom–and many formulae used by government agencies 't, non-profits, and financial advisors–measures housing “affordability” by taking the housing payment, dividing it by income, and looking for a number below x% (often 35-40%).

SIS’s thread on the CA mortgage discount at The $100,000 mortgage discount for California homeowners is one example of this, but there are many others.

This seems a very crude way to measure affordability. The following variables are all important:

-How high is the income to begin with? A high income individual can afford to spend a larger % of that on housing costs, all else equal, as they don’t need as much income for non-housing necessities.

-How much of the housing payment is equity? When interest rates are often 2-4%, even the earlier payments on a 30-year mortgage can include as much principle as interest. That equity can be often be borrowed against in the event of future financial hardship. Alternatively, it makes selling the house at a gain a much easier prospect.

-What do appreciation prospects look like? We were reminded by the post-2007 housing crisis that values drop as well as rise, and planning on a given level of appreciation is not prudent. Having said that, one can make an educated guess about the likely prospects of housing prices change in a given market segment. If they are promising the risks of devoting a larger share of income to housing drop.

How much does a pricier house payment contribute to quality of life? For many, a decent house in a peaceful neighborhood can bring enormous satisfaction. And getting that kind of lodging in a place like Seattle, an Francisco, or New York is going to require a higher share of average income than in most other places. Such a person may reasonably decide to keep transportation costs low, not dine out much, buy few clothes or toys, et cetera-- in exchange for the digs they love. Is such a person in 'unaffordable" housing if they devote 50% or more of their income to it? Often,no. And unlike some of the above reasons, this one is largely applicable to renting as well as buying.

Here in Seattle I see examples of this all around me. Routinely, friends and neighbors purchase “unaffordable” housing, and some rent “unaffordably” also. More often than not, this has seemed an entirely reasonable decision on financial grounds. Now if only we Seattlites had access to that CA program… ::wink:

Do you or someone close to you pay over 40% of their income towards housing costs?
If so, how comfortable do _you_feel about that?

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Agree that for higher income folks or folks with significant assets, the percentage can certainly be higher. With two incomes, our percentage is much lower than 40%, but if one of us stops working, it goes over 40%. Because we have a bunch of equity in the home (>40%), the absolute value of that equity is high, and we have assets in the bank, we have lots of options and flexibility.

We thought that it was worth delaying FI to live in exactly the house and location we wanted. That said, the decision probably only delayed FI (assuming all goes to plan) by 2 to 4 years.

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Before my wife stopped working last year, our housing payment was about 14% of gross income. Fortunately, she had the lower salary of the both of us, and it hasn’t increased too much since we lost her salary. However, the increased (relative to income) housing cost is easily set aside (in my worrisome mind) because she gets to stay home with our 9 month old. Invaluable, IMO.

However, I view 35-40% of income being spent on housing as kind of high. For NYC, SF, etc. sure. However, for the rest of the country/world? That seems uncomfortable to me, whether it’s gross or net income we’re talking about. I think the 20-25% range is more reasonable. However, I also live near NYC, and ALL of our other expenses are higher than most other areas, so perhaps that’s where my more conservative approach comes from.

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Thanks BostonOne and jaytrader,

FWIW that perspective seems eminently reasonable to me. equity and/or assets = flexibilty = much less worry if housing costs are high, especially if a chunk of those housing costs are building equity.

[quote=“jaytrader, post:3, topic:78”]
However, I view 35-40% of income being spent on housing as kind of high. For NYC, SF, etc. sure. However, for the rest of the country/world? That seems uncomfortable to me, whether it’s gross or net income we’re talking about. I think the 20-25% range is more reasonable. However, I also live near NYC, and ALL of our other expenses are higher than most other areas, so perhaps that’s where my more conservative approach comes from.[/quote]

jay, let’s assume that pushing into the 35-45% range is done thoughtfully, with a mind to needed tradeoffs (and ideally, while leveraging those housing costs by building equity.) What would accounts for your discomfort in that scenario?

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Say you lost an income: let’s assume both incomes were reasonably similar (call it the 100k gross range for both, for example’s sake). All of the sudden, that $5800 (35%) payment becomes a huge burden. More realistic: Let’s assume “net” is 65% of salary. That means a $100k x2 income home is bringing home about $130k per year. 35% of that is $3800-ish. That’s a huge payment if one income was lost. Or am I missing something in my math?

I’m more cash flow-centric than most. Not because we live paycheck to paycheck (thankfully), but because I do not subscribe to the emergency fund mindset, so I look at things in terms of cash flow for short/medium term. Long term is investments, which means cash is tied up and is fairly painful to extract.

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Thanks for clarifying, jaytrader

This is helpful. Your point about equity being potentially painful to extract is well taken. Doubly so in the scenario you describe of losing an income–that makes a couple less underwritable for a competitive loan product at precisely the time they need one.

This one major reason, among others, why I’m a big fan of getting a no-fee HELOC placed on a residence before trouble hits. Then, should there be cash-flow interruption, addressing the immediate need is as simple as drawing on the line.

For families with relatively large house payments and limited liquid, non-retirement assets this would be an especially prudent step

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I hear you on the HELOC thing. But you’re basically saying you can supplement cash flow needs with going into debt. I view a HELOC balance as “debt” against your equity, but for all intents and purposes, it’s simply debt. I’d rather go into credit card (unsecured) debt than secured debt. But that’s just me. I have a large portfolio of unsecured credit available to me, and my wife is in a similar boat. I’ve vowed that if push came to shove and we were really bad off, we’d go into unsecured debt before we put our home on the line. Even more so now that we have a kid.

Granted! The above doesn’t have to be all doom and gloom, as I painted it. Using debt in non-dire situations is an excellent tool. But it has to be done methodically and not haphazardly. Unfortunately, for the majority of folks, that’s easier said than done.

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HELOCs are great except when the worst case scenario happens, banks can shut them down for essentially any reason. That’s what happened to me in 2009/2010. My HELOC was shut down and I couldn’t draw from it though it technically remained “open.” So at the time you may need them the most, they may not be there for you.

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LBYM.

Easier said than done. My housing is 19% of gross salary. I live in townhouse in a HCOL - worst house in the best school district. My kids consider themselves the poor ones at school (mind you, I’ve seen a Bentley doing a carpool dropoff)

The hedonic treadmill is real, and you don’t even realize until it becomes too late. The best thing someone can do for themselves is a living situation one level below your actual socio-economic status.

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[quote=“jaytrader, post:7, topic:78”]
But you’re basically saying you can supplement cash flow needs with going into debt.[/quote]

Actually no. I’m saying that if there is an unforseen emergency–a suprise layoff, a medical disaster, et cetera–a readily available HELOC can give enough runway to regroup, even if is only to sell the property I’m NOT saying a heloc should be counted on as a way to cover bills in normal times, or as a piggy bank.

[quote=“jaytrader, post:7, topic:78”]
I’d rather go into credit card (unsecured) debt than secured debt. But that’s just me. I have a large portfolio of unsecured credit available to me, and my wife is in a similar boat.[/quote]

No doubt. But better to have both kinds of tools in the kit than just one. Have the HELOC there, and then draw on credit cards at promo rates before the heloc when/where practical.

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[quote=“BostonOne, post:8, topic:78”]
HELOCs are great except when the worst case scenario happens, banks can shut them down for essentially any reason. That’s what happened to me in 2009/2010. My HELOC was shut down and I couldn’t draw from it though it technically remained “open.”[/quote]

What bank, and what reason did they give you?

It’s certainly a possibility, but it’s generally rare. If I were about to be laid off, or suspicious that a massive depression were about to begin, I’d draw the line up immediately to protect against just such a possibility. A litlte extra interest is a small price to pay for the piece of mind.

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FWIW I completely agree with all of that, therivler1. Keep in mind that while not common, it’s possible to both LBYM and have an “unaffordable” housing payment. Several folks I know in Seattle do just this…they love where they live, and save essentially everything beyond other essentials and their house payment (which is largely principle anyway)

This is an even more attractive play should one have access to something like the CA program SIS posted about.

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It was Countrywide and they gave a bogus reason like "Our model shows prices in your area have declined."
Of course, the contract said that they could only freeze the line if the value of my property declined. But they refused to tell me what criteria they used to value my property and refused to tell me the LTV that would reopen the line. Because they had an arbitration clause, the only thing I could do was try and fight them in arbitration, but without any actual losses, what would I gain?

So, basically, it was just them reducing their risk and screwing their customers because they could, even though it violated the contract.

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Right. Notorious countrywide:bankrupcy filer and target of many suites (google “countrywide lawsuit” for plenty of info).

They acted illegally for sure. I do think that was an exceptionally (bad) bank, exceptionally exposed, at an exceptional time in history. I think the likelihood of a similar recurrence is very low…but again if things look like they’re headed south fast, drawing out the money preemptively is another option.

Dave , It sure feels like old times at FWF where we disagreed (but did it oh so civilly ) !!!

In my experience Banks routinely froze or reduced HELOC lines during the recession , and I could name a bunch that did it to me - chase , national city , wamu, BofA etc . They all used a similar excuse as mentioned above about “values declining in the area” and the only way to reinstate was to pay for your own appraisal that didn’t just show you had plenty of equity - but showed that the property value was the same or higher as when they appraised it !!

On some of my paid off properties I had zero balance helocs in place , so my ltv was 0 and they still suspended the credit lines .

Regarding the main point of this thread, here in the SF Bay Area I know multiple people whose mortgage is 100-% of their salary and they have to have a side hustle or other income source like assistance from relatives just to make ends meet . It’s insane but it’s the world we live in here .

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Totally agree on it feeling like old times, in a good way. :slight_smile:

I’m not sure how much we’re disagreeing…this was all during the housing meltdown and all in CA. My main point is just that this is atypical, and it’s no reason not to get a HELOC. If it looks like we have another uncommon climate and freezes are in the offing, just draw them before they all drop, if possible.

Do you infer a different plan of action from that experience?

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a heloc , when used responsibly , is an awesome financial tool and (as long as it’s someone who won’t be tempted to spend it ) it can be a great addition to ones financial toolkit .

I agree that if we ever see a crazy market situation In the future , the best play is to fully draw out the funds and keep Them stashed at another bank.

As for how atypical heloc credit line freezes are , they are atypical when used "conventionally " or sitting Idle in today’s environment - but freezes were very typical during the RE meltdown , and we still do see occasional freezes unrelated to market value today , such as when a heloc is deemed not "used as intended " with multiple draws and payments .

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@DaveHanson when you are referring to these ratios, as a % of income, are you referring to gross or net income?

A bit of an international perspective here. I have been living abroad for 2.5 years now, 18 months in the UK and a little over a year in Switzerland.

In the UK, I lived alone, and my 1 bedroom apartment represented about 20.5% of my gross income excluding bonus or 17.5% of my gross income including the bonus, though I never received 100% of this.

Since moving to Switzerland, I share a studio apartment with my gf, which is inadequately small for us. At the present time, this represents just 8% of our gross income. We had the opportunity to move literally across the hall into a much bigger apartment, but we turned it down due to the uncertainty in our mid-to-long term plans.

There is a 50/50 chance of us moving back to the US in the next 12 months. This is mostly dependent on my gf’s career prospects. As I see it, here are the two possibilities:

Option 1. We remain here in Switzerland and we buy an apartment. While I would love a stand-alone home with a garage, that is simple out of our price range (2MM+). However, we could afford a decent two-bedroom apartment in a good part of town, which would cost 1-1.2MM. Using the 1MM cost for a nice round figure, this purchase will require a minimum 20% down payment. However, the 800k can be financed at ~1.3% for 10 years, and during these 10 years only additional 100k will need to be paid towards the principal. Monthly costs would look like this:

Interest: 867
Principal: 741
Maintenance and running costs: 833 (includes HOA cost for the building)
Total: 2441/month.

If we went with this option, my gf’s income would increase, and this would represent about 13.3% of our gross income.

This option isn’t necessarily all rainbows and butterflies. For example, I wouldn’t really be able to pursue my hobbies. I wouldn’t be able to buy an old car and tinker with it in the garage, wash and wax it in the driveway. This is a concern of mine when making long-term plans.

Option 2. We move back to the US, and likely end up in a VHCOL area. Let’s say we buy a house for $800k, and we have a combined gross income of $200k/year. The house would come with annual property taxes of $14k/year. Here is the run-down on monthly costs, assuming 20% down payment:

Interest: $2016
Principal: $959
Taxes: $1,166.67
Insurance: $200
Total: $4341.67/month, which represents 26% of the gross income.

However, when looking at net income, the picture changes. That $200k/year works out to just $9,000/month after taxes and retirement savings. This isn’t taking into considering the federal income tax deduction for the interest payment on the mortgage and the property taxes, so maybe it would be a bit higher. Housing would now represent nearly 50% of take-home pay. Granted, $4,500/month is enough to comfortably live off of, even if we had to hypothetically pay for daycare (no kids yet), but it is nowhere near as cushy as option #1.

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what in the shit?! i’m in awe.

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@nasheedb we bring in over $200k a year and I would NOT be comfortable with a $4500/month housing payment (PITI). That is ludicrous on $200k a year.

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