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Message
House affordability conundrum
Posted on 4/28/15 at 1:47 pm
Posted on 4/28/15 at 1:47 pm
I know this topic gets discussed ad nauseam but I'd like the opinion of any loan experts before I begin the first time home buying process late this year/early next year. Conventional wisdom and smart financial decisions say to buy a house a little under the affordability ceiling for obvious reasons of problems, job loss, etc.
Currently, I believe the wife and I can afford a $200K house and I would set my ceiling around $220-225 if the house is EXACTLY what we want. This is based on our income, etc. We want to live in the Metairie area so I understand the pool of houses decreases based on the location we are looking with the range we want to spend.
My problem, after chatting with my parents, is when they bought a house in the early 90's, it was 65K and a nice starter home, which they sold for 100k. That does not exist in 2015. A decent starter home with some renovation, which I can do, is still 150-165K on the low end. With that in mind, I am finding it difficult to buy that starter home, do renovations, then potentially have to unload it. I almost rather buy a mid level house, closer to my ceiling price of 225k or so, with the intention of making it a 15 - 20 year house at least.
I don't care to stretch to the ceiling of my affordability range but there just doesn't seem to be a large incentive to buy a 165k starter home needing renovations when I can't foresee at least 10 years in it.
Currently, I believe the wife and I can afford a $200K house and I would set my ceiling around $220-225 if the house is EXACTLY what we want. This is based on our income, etc. We want to live in the Metairie area so I understand the pool of houses decreases based on the location we are looking with the range we want to spend.
My problem, after chatting with my parents, is when they bought a house in the early 90's, it was 65K and a nice starter home, which they sold for 100k. That does not exist in 2015. A decent starter home with some renovation, which I can do, is still 150-165K on the low end. With that in mind, I am finding it difficult to buy that starter home, do renovations, then potentially have to unload it. I almost rather buy a mid level house, closer to my ceiling price of 225k or so, with the intention of making it a 15 - 20 year house at least.
I don't care to stretch to the ceiling of my affordability range but there just doesn't seem to be a large incentive to buy a 165k starter home needing renovations when I can't foresee at least 10 years in it.
4
Posted on 4/28/15 at 1:54 pm to cberni1
You are discussing just the pure dollars of the matter, and that makes it all a bit too theoretical. Location is everything: any house can be renovated/improved in condition, but you can never change the location. Find a house you can afford in the 'best' neighborhood you can...because you can change your house, but you can't change the neighborhood, transportation routes, schools, access to shopping, crime rates, etc. I'd pay a little more and accept slightly fewer amenities in order to get into a better area...and I'd always rather be in the smaller, cheaper house in a nicer area rather than think I'm getting a "deal" by buying an overbuilt house that's difficult to sell b/c it's too expensive/large/fancy for the neighborhood.
Posted on 4/28/15 at 1:58 pm to hungryone
Makes sense and exactly where my mind has been going through all of this. I agree that I think I keep putting too much weight on the monetary factors, overlooking the intangible pieces.
Even more, I have the family around me to do every renovation I need to do so that is the least of my concerns.
Even more, I have the family around me to do every renovation I need to do so that is the least of my concerns.
Posted on 4/28/15 at 2:00 pm to cberni1
Seeing many people having to sell houses at the downturn of the housing market made a mark on me.
Is there a particular reason you are limiting yourself to Metairie? Prices there are high, and personally I don't understand why. How much higher can they go? I don't know.
Our house we just bought, has a monthly PITI of about 11 percent of our gross income. It needs some work which will be ongoing, all of the work though is cosmetic.
Is there a particular reason you are limiting yourself to Metairie? Prices there are high, and personally I don't understand why. How much higher can they go? I don't know.
Our house we just bought, has a monthly PITI of about 11 percent of our gross income. It needs some work which will be ongoing, all of the work though is cosmetic.
Posted on 4/28/15 at 2:07 pm to LSUFanHouston
quote:Mostly convenience, as is with any house/location and likely why Metairie is high. Our families are here, her job is here, and I travel regularly which being near the airport is a factor.
Is there a particular reason you are limiting yourself to Metairie?
Regardless, I understand your thought process and even if we weren't to look in Metairie, I fully understand what you mean. Her and I both like renovating, for the most part so I am leaning more toward the cheaper house, better location and making the house into something I enjoy.
Posted on 4/28/15 at 3:04 pm to cberni1
my only advice is to buy a house that doesn't push your financial limits.
The mortgage people, realtors and friends/family will try to get you into a house you cannot afford. Do not trust the guidelines they suggest. 30% of your gross salary for housing is going to leave you feeling very poor.
The mortgage people, realtors and friends/family will try to get you into a house you cannot afford. Do not trust the guidelines they suggest. 30% of your gross salary for housing is going to leave you feeling very poor.
Posted on 4/28/15 at 3:09 pm to cberni1
First lets talk about the difference a 65k house in the early 90's and a 200k house in 2015 is...
First off, a 65k house in the early 90's is similar to a 115k house today just based off inflation. However that isn't the only number to look at when comparing affordability of homes.
Mortgages in the early 90's were still in the 9% range while now we have a 3%-4% Mortgage range. That in itself makes buying now much more affordable.
Let's compare:
A $115,000 mortgage (65k after inflation) at a 9% interest rate would leave you paying $333,000 (218k worth of interest over the term of the loan)
A $200,000 mortgage at 3.5% interest rate would leave you paying $323,312 (123k of interest over the term of the loan)
Interestingly enough, the price of a 200k loan at 3.5% interest and a 115k loan at 9% over the length of the loan is nearly equal. Monthly payments are lower for the 200k home than the 115k home by nearly $50 a month using these two examples.
There are certainly two schools of thought when it comes to these decisions on buying to fix over time (and spread out costs) or buying the home you think you cacn stay in for a longer time at a higher price. That is a decision up to you and your family, but honestly today's market gives us more options than our parents had in buying our first homes. Good luck!
I bought my first home a couple years ago at the 190k price point which made payments about 35% of my take home pay just on mortgage, home insurance, and property tax. I added a roommate and that drastically helped cover costs, and I still was able to spend a ton of money and felt comfortable. I plan on not having a roommate after this summer and will still feel very comfortable with the payments and I just refi'ed to a 15 year loan.
First off, a 65k house in the early 90's is similar to a 115k house today just based off inflation. However that isn't the only number to look at when comparing affordability of homes.
Mortgages in the early 90's were still in the 9% range while now we have a 3%-4% Mortgage range. That in itself makes buying now much more affordable.
Let's compare:
A $115,000 mortgage (65k after inflation) at a 9% interest rate would leave you paying $333,000 (218k worth of interest over the term of the loan)
A $200,000 mortgage at 3.5% interest rate would leave you paying $323,312 (123k of interest over the term of the loan)
Interestingly enough, the price of a 200k loan at 3.5% interest and a 115k loan at 9% over the length of the loan is nearly equal. Monthly payments are lower for the 200k home than the 115k home by nearly $50 a month using these two examples.
quote:
I don't care to stretch to the ceiling of my affordability range but there just doesn't seem to be a large incentive to buy a 165k starter home needing renovations when I can't foresee at least 10 years in it.
There are certainly two schools of thought when it comes to these decisions on buying to fix over time (and spread out costs) or buying the home you think you cacn stay in for a longer time at a higher price. That is a decision up to you and your family, but honestly today's market gives us more options than our parents had in buying our first homes. Good luck!
I bought my first home a couple years ago at the 190k price point which made payments about 35% of my take home pay just on mortgage, home insurance, and property tax. I added a roommate and that drastically helped cover costs, and I still was able to spend a ton of money and felt comfortable. I plan on not having a roommate after this summer and will still feel very comfortable with the payments and I just refi'ed to a 15 year loan.
This post was edited on 4/28/15 at 3:16 pm
Posted on 4/28/15 at 3:29 pm to Hawkeye95
quote:
my only advice is to buy a house that doesn't push your financial limits. The mortgage people, realtors and friends/family will try to get you into a house you cannot afford. Do not trust the guidelines they suggest. 30% of your gross salary for housing is going to leave you feeling very poor.
someone making 150k a year is gonna feel broke buying a 450k house over 30 years at 3.5%? Make 300k and a 900k house will do the same?
Edit - I up voted poster above me for having the patience to spell out what is brutally obvious to anyone who should be considering buying a house.
This post was edited on 4/28/15 at 3:32 pm
Posted on 4/28/15 at 3:38 pm to ItNeverRains
quote:
someone making 150k a year is gonna feel broke buying a 450k house over 30 years at 3.5%? Make 300k and a 900k house will do the same?
Dude, based off normal guidelines, the mortgage people will say you can afford a $550k house. And yes, you would feel poor if you were to buy that much of a home. Maybe if you dont want to take vacations or eat out, it wold be ok. But spending 28% on housing really hurts, and hell there are mortgage professionals that will go higher than that.
But for someone making $55k, a mortgage of $220k is going to hurt.
Now if you are making $300k, a 900k house won't be that bad. The ratios start to fall apart at higher incomes.
You have to remember that everyone but you has a vested interest in getting you into a more expensive house.
Posted on 4/28/15 at 4:55 pm to Hawkeye95
quote:
But for someone making $55k, a mortgage of $220k is going to hurt.
A mortgage payment of around $1,040 is required for a 220k house if that the amount owed (3.92% rate). How much do you think he is spending on rent? cause if he has a couple bedrooms, I'm sure he's paying that. Not to mention a portion of that payment is basically a forced savings in equity.
This post was edited on 4/28/15 at 4:56 pm
Posted on 4/28/15 at 5:30 pm to SouthOfSouth
quote:
A mortgage payment of around $1,040 is required for a 220k house if that the amount owed (3.92% rate). How much do you think he is spending on rent? cause if he has a couple bedrooms, I'm sure he's paying that. Not to mention a portion of that payment is basically a forced savings in equity.
I have no idea on how much he is spending on rent. I am betting if he is spending a $1000 a month on rent, he is feeling a bit pinched (assuming he makes around $55k).
Spending it on a house is not going to make that pinch go away, if anything its going to make it worse since there are ancillary expenditures associated with buying a house (furniture/yard/etc) that you may not incur if renting. Yes you are saving but there is the whole cash out the door thing that you have to deal with.
Furthermore, I am not telling him to not buy a house, just don't buy the most expensive house the mortgage broker/real estate says you can afford. They will tell you a much larger amount than what is optimal for most people.
Its good advice for most people especially on the first home.
eta: this isn't always the right advice, there are times when it makes sense to buy a more expensive house. if you know your income is going to go up. We bought our first house at the max ratios but my wife didn't have a job and we knew she was going to get one. She did and it dropped our ratio back down to the 20% mark.
But for the OP, he is young. Is he having a kid soon? That could really impact the decision. what does he do? what does his wife do?
This post was edited on 4/28/15 at 5:37 pm
Posted on 4/28/15 at 7:58 pm to Hawkeye95
I pay $900 for a 2 bedroom house right now for the wife and I which I well within our budget. We gross about 105k (me 67k, her 37k) as a household and take home about 5600 per month. Kids in the next 2-3 years. I'm 29, she's 26.
I only have so much room to grow with my company because I work remote and travel. Much of the growth requires me to relocate back to headquarters which I won't do. So I don't see getting a job based in NO and making what I do now, right away. Wife has just about hit her ceiling without moving careers.
With that said, I think many sources would suggest we can afford more than 225 but I am budgeting on the lower end because I see myself taking a job back home where I don't travel once I have kids and I don't know that I will make around 70k with that move.
I only have so much room to grow with my company because I work remote and travel. Much of the growth requires me to relocate back to headquarters which I won't do. So I don't see getting a job based in NO and making what I do now, right away. Wife has just about hit her ceiling without moving careers.
With that said, I think many sources would suggest we can afford more than 225 but I am budgeting on the lower end because I see myself taking a job back home where I don't travel once I have kids and I don't know that I will make around 70k with that move.
Posted on 4/28/15 at 8:22 pm to cberni1
Not to hijack, but I'm in this conundrum myself. I can pay to have a house in a one of the better neighborhoods for sure. I also see where I can get in a neighborhood that is good but has bad schools. It will be a lot less and I am not expecting kids. I'm thinking of it as a possible rental when shitty houses pully $1000+ for rent around here.
Posted on 4/29/15 at 6:26 am to Hawkeye95
quote:
Now if you are making $300k, a 900k house won't be that bad. The ratios start to fall apart at higher incomes.
Absolutely agree, which is why blanket statements are ridiculous. I simply used your 30% words regarding the 150k on a 450k home, which we will have to agree to disagree. Around the time we were making 150k we bought a 430k home with a 1600k/yr HOA and still had no budget issues.
As far as feeling pinch on 1k rent making 55k, I'm assuming you've never lived in a major or secondary metropolitan area? Moved to Atlanta out of college in 99' and made 50k combined had a 1k apartment and it was no big deal.
Posted on 4/29/15 at 7:58 am to cberni1
quote:
I pay $900 for a 2 bedroom house right now for the wife and I which I well within our budget. We gross about 105k (me 67k, her 37k) as a household and take home about 5600 per month. Kids in the next 2-3 years. I'm 29, she's 26.
To me it seems like 220k is reasonable at that income point. Especially if you are putting money down.
Posted on 4/29/15 at 9:59 am to ItNeverRains
quote:
Absolutely agree, which is why blanket statements are ridiculous. I simply used your 30% words regarding the 150k on a 450k home, which we will have to agree to disagree. Around the time we were making 150k we bought a 430k home with a 1600k/yr HOA and still had no budget issues.
As far as feeling pinch on 1k rent making 55k, I'm assuming you've never lived in a major or secondary metropolitan area? Moved to Atlanta out of college in 99' and made 50k combined had a 1k apartment and it was no big deal.
I have lived in major metro areas for most of my life, outside of college. When I went to GA Tech, we made $35k combined, and we paid $700/month in rent (98). And it hurt. But some people are fine being house poor, but it should be a conscious decision.
To the OP, thanks for clarifying! Yes, you could afford a much nicer home and you aren't.
Posted on 4/29/15 at 10:26 am to cberni1
Hawk, we simply agree to disagree.
OP, i think you could swing 300k with 20% down or 250k with 10% and be far from house poor. Best to have a lender run numbers and based on lifestyle make your decision. Good luck!
OP, i think you could swing 300k with 20% down or 250k with 10% and be far from house poor. Best to have a lender run numbers and based on lifestyle make your decision. Good luck!
Posted on 4/29/15 at 10:29 am to ItNeverRains
Well I probably spend a lot more on travel than other people. And eating out. 
Posted on 4/29/15 at 10:59 am to Hawkeye95
All-encompassing mortgage payment of 25% of net income works well for us, and that is with 2 kids in daycare. Our total other debt load (cars and student loans) is 13% of net income. We can't go nuts, but we can don't stress out about day to day expenses either.
ETA: Honestly, I wouldn't hate going down to 20% and saving a little more for college and retirement, but we're ok.
ETA: Honestly, I wouldn't hate going down to 20% and saving a little more for college and retirement, but we're ok.
This post was edited on 4/29/15 at 11:01 am
Posted on 4/29/15 at 11:26 am to AUjim
What if your gross monthly income combined is $6500-7000? How much house could you afford? Is 350k too much?
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