PITI is normally < 36% of gross for lowest rate conforming mortgage. Is this what you’re talking about?
The difference between gross and net goes up with income, but so does the ability to itemize deductions. If the income is above the limit for itemizing, then there should be enough left over for a comfortable life anyway. So I think it works out almost linearly across all income levels. This math will shift somewhat if they get rid of the mortgage interest or property tax deduction.
Funny enough, the mortgage agent told me he could get the same rate he quoted me with up to 40% back end ratio.
speaking of HELOCs
i’m all for having a HELOC open for emergency situations.
in fact when i bought a house in NJ, i asked the mortgage guy to also open a HELOC at the same time. was super simple, didn’t cost anything extra and they already had all my info from applying for the mortgage. lived there 10 yrs, never used the line.
moved back to NY recently, wanted to do the same thing. it was same bank as last time (Chase), but this time they wanted to charge me a fee. i was like wtf? they said it was a NY mortgage tax, no way around it. and they charge the tax on the entire line, not on the amount u draw.
i couldn’t believe this until i looked it up. only a handful of states charge this tax, cannot believe the greed. tax was like 2%, so on my proposed HELOC of 200k thats over $4k for a line i wasn’t planning to use.
just wanted to mention this cuz i noticed jaytrader is from NY and in case others wanted to open a HELOC for emergencies like i was about to. especially if u open it at the same time as ur 1st mortgage, the fees might get lost in all the other closing costs at the time of closing.
The real estate market has seen interest rates fall for 30 years. When interest rates rise the overheated markets will revert to the mean. The two main metrics I would look at are the income to median house price and the price to rent ratio.
The real estate markets where the median housing price is more than 5 times the median income have a long way to fall in order to come back to reality.
Housing markets in much of my area (Portland/Or, Vancouver/Wa) are right around or just under 5x median house price to household income. Ideally, where should they be to fall back to ‘reality’? I think much of the West Coast is priced around this same amount.
Nobody is building on the West Coast due to NIMBYism (if you believe some), high cost of regulation (if you believe others). The exurbs are always the last to rise and first to fall, I still find half million dollar homes in Tracy and Temecula unsustainable, but there they are.
Ideally 3x, but that’s just a pipe dream on my part, even in a recession I don’t think they will fall that low. The markets will be opened up to foreign investors so housing prices can be propped up.
I think most of America will fall to 2.5 or 3x, but it could overshoot, you never know. Perhaps the coasts will be able to sustain 4-5. It all depends on how much money the Federal Reserve decides to throw at the problem.
Either the price of houses will fall(deflation) or the cost of everything else relative to houses will have to rise (inflation). It is simply impossible for baby boomers to sell their properties to millennials at these inflated prices given the wages of today.
i don’t have a mortgage anymore, 5 years ago i inherited a townhouse in a very good suburb in l.a. and sold the home i was paying for. i was paying $2000 a month for the mortgage, $5000/year in property taxes, which burned about 1/2 my cashflow.
i don’t think there is an optimal mortgage/income rate. depends how important a home is to you. for me, it’s everything: i’m always home, have a home office, heck i’ll get homesick even on weekend trips. so for me, the answer would be whatever it takes. but fortunately, this home is paid for and i just handle the utilities (~$250/month).
real estate has always been a stable, reliable investment. no matter the market conditions, you still have a house and the dirt. you can use it, live in it, rent it out. it should be your top asset/investment. it’s very area-specific so i won’t make any blanket predictions. but if it’s a good one, it’s worth it.
There’s a difference between “place to live” and “stable, reliable investment.” You seem to be conflating the two.
If you have a paid for house, that’s a place to live. But it doesn’t mean it’s always a stable, reliable investment. There were broad declines in real estate in 2008-2010 and some markets have not recovered to their pre-2008 state. There have been market-specific declines in real estate during many periods. Your use of the term “always” is not correct. That said, the volatility of the (non-leveraged) real estate market in the US has typically been much lower than equity markets.
Hey thanks for that. I appreciate it. Are you talking about the BS tax stamps, or whatever it is? Isn’t it like .004% of the total purchase price? I was unaware this had anything to do with HELOC though… maybe it’s something else?
I’d started a thread on FW before we bought our first house. There were some good inputs received from the thread, but a majority of the folks had advised against buying the house as our ratio was quite high (just over 48%). We are in Northern VA, where real estate is quite high and I am the only bread earner in the family. However, we just had our first kid then and I new we did not want to move from a starter house to a bigger place in a couple of years, so we bit the line. That was four years ago.
We have been extremely happy with our choice. Both kids love the neighborhood, near zero crime rate, proximity to the city center and the highly rated schools that come with it. We continue to lead an extremely frugal lifestyle, while maxing out my 401k and IRAs for everyone else.
I did lose my initial job and it was a little stressful for a couple of months but we do have a 3-month rainy day fund (and access to an unused HELOC if we need to). As kids are growing, their expenses are also increasing but I do not see much issues for another 4-5 years. Till then my wife may also start working and bringing in some money.
Would it have been better to buy a smaller place initially and then rent it out while moving into a bigger home? Maybe… it just never appealed to us.
I’m in that boat, where I have the smaller home and am ready for bigger, and not sure if I should rent or sell. I wish I was in your shoes, and we just bit the bullet and went big initially. But, we also had no plans for a kid back then, nor a dog. My, how the American dream is a self manifestation.
We did the smaller house route and wound up selling although I thought for years we would turn it into a rental when we moved. When we were making the decision, I felt that while the house would have been a good candidate for a rental (though it barely just missed the 1% rule used by many here) but that it wasn’t the reason we bought it in the first place and we was a little on the fence about being a landlords. That combined with knowing we was going to get hit with a couple of larger deferred maintenance issues and the amount of equity we had in the house, we decided to just sell and save/invest while keeping an eye out for another home to purchase (and maybe fix up) to rent in a few years once our children get a little bigger.
Also, moving sucks and I don’t want to have to do that for again for a long time.
Ncely done! To get the house you want, while saving plenty for retirement despite a layoff and just income is impressive.
I think the key in a situation like yours is having a reserve–in your case, both liquid funds and an untapped HELOC.
So glad you’ve been pleased with your choice.
A new report just came out for Seattle and WA state, indicating the lowest incomes different family sizes could live on. It concludes that a single person earning the minimum feasible income would spend > 50% on rent of > $1,200:
For a single person in Seattle, the minimum income needed to stay afloat is $12.90 per hour, or about $27,000 per year. On those earnings, a little more than half of the monthly budget goes toward rent, estimated at $1,236.
From what I seen, if you live a FW type of life-style you can easily go over the commonly suggested housing/income ratio. I bought at a decent (not great) location near Seattle but my regret is not going for “bigger” which in Seattle means closer to working center…
One of the main driver I feel is the terrible state of commute traffic here which may not apply elsewhere.
So true. And the Seattle commute is only slated to get worse, suggesting a growing premium for close-in locations.
if you can do it, it’s all about working from home. no commute, save gas, save on insurance (low mileage rate), save clothes/cleaning, save eating out for lunch, no longer location locked, save office rent (if you own it). bottom line it’s expensive out there.
theoretically i could live anywhere as long as i have cable tv and broadband internet.