You Cannot Afford a $350,000 Home with a $75,000 Household Income!

You would think that before people make the largest financial decision in their lives, they would do a monthly budget first.  Yet during this past decade budgets were hardly brought to the forefront and were pushed to the back of any financial decisions.  The new definition of housing affordability should include the idea of maintaining a sustainable long-term budget.  Of course many can afford a two year teaser rate but what happens when the payment jumps up?  How secure is your employment?  Do you have enough to save for retirement after you pay for your home each month?  These are all factors that need to be considered to purchase a home.I’ve gotten a few e-mails about buying a home in California.  Of course many people that have been sitting on the fence are now thinking seriously about purchasing a home in the state.

Let us take a look at some numbers first:

California Median Home Price

April 2007:      $597,640

July 2008:        $350,760

Decline:          $246,880

Price decline from peak:         41.3%

*Source:  California Association of Realtors

A 41.3% year over year decline is stunning for a state that is so large.  A year ago 341,130 homes were sold in the entire state.  That works out to a monthly average of 28,427 homes sold per month.  Last month 39,507 homes sold in the state.  Keep in mind that this is a jump but data for the summer is always high.  You can expect this number to decrease.  In addition, most of the sales were foreclosure properties which are pushing prices even lower.  We are going to hypothetically see if you can afford that $350,706 median priced home.

The budget below is for a married couple with a $75,000 household income:


The first thing we need to figure out is the monthly net income.  The monthly gross income is $6,250 but after taxes it will be $4,870.  A rule of thumb that is very generous by most bankers and lenders is your home payment should not be more than one-third of your gross take home pay.  So let us first find out our threshold:

$6,250 / 3 = $2,083 per month

Above, the family will be purchasing the median priced California home with a 5 percent down payment ($17,535).  As you can see in the budget, the monthly home payment will workout to $2,470 which is higher than our threshold figure.  We’ll go ahead and assume that this couple goes ahead with this move.

You need to realize that it costs money to upkeep your home.  That is lawn care, roof, plumbing, and other things come up throughout the year.  I am simply setting aside $100 a month for this but this can jump radically if you need major service like a roof replacement.  In the budget we also have only one car payment at $300 per month and we’ll also assume that this car is highly fuel efficient.  Maybe a Honda Civic or Toyota Corolla.

So to a certain extent, this family is living modestly and not extravagantly.  We are also setting aside 10% into a Roth IRA for retirement and putting away $300 a month into an emergency fund.

For a married couple $500 a month in groceries is doable.  I know some will argue that this is too low/high but this can be done.  We are also assuming this couple isn’t eating out during the work week and brown bagging their lunch.

So can this couple afford the home?  The answer is no at least if we follow our initial definition.  Yes, a lender may give you a loan especially it they use a home to income ratio (HTI) and don’t look at a debt to income ratio which will include the car and any other credit cards they may have.

At this level, your monthly home payment is consuming 50% of your monthly net take home pay.  I would argue that you should use your net monthly pay to calculate what you can safely afford.  That is for this couple, they can afford a home with a monthly payment no larger than:

$4,870 / 3 = $1,623 per month

This works out to a home priced around $250,000.

This may seem like a boring figure but keep in mind the median household income for California is $55,734.  In inflation adjusted terms, Californians are actually poorer than in 2000 when the median income was $56,638.  In fact there are very few counties that have a median household income that comes close to $75,000.  Orange County which is viewed as a more affluent Southern California county has a median household income of approximately $70,000.  The current median home price in Orange County is $461,000.

The trend in California is unmistakable.  Prices are still coming down and if you really dig deep in to a budget like the above, which I imagine is on the conservative side you can understand why so few families can afford homes in the state even after a stunning 41.3% drop.

Hopefully this article allows you to plug in your own numbers to determine whether you can afford a home.  If you cannot, there really isn’t a rush to do so.  Prices are still trending lower.

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31 Comments on this post


  1. Ann said:

    I don’t question your logic, but I do question your median incomes. I live in the SF Bay Area, and I personally know of a great many people who make money under the table in one way or another. The classic examples are nannies, housecleaners, etc. Not highly paid jobs, no, but given that skilled, reputable grown-up babysitters in my area are known to make $20 per hour tax-free, and independent housecleaners charge at least $120 per couple-hour job (again tax-free), these jobs can add substantially to household income and can easily be paired with other jobs and quite possibly with government perks based upon low reported income.

    All of which makes buying a home more affordable than you might imagine for people who could not necessarily afford a house on paper. Particularly for people who are married or include siblings and older children in informal economy family businesses and even in homeownership–a tightly knit family can become a pretty good income center.

    So…how to get good data, then?

    September 1st, 2008 at 10:48 pm
  2. Francis said:

    California housing has been one big Ponzi scheme, where everyone depended on making money, by selling their house to the next sucker. These always fail, and the market will HAVE to return to affordable, and sustainable prices, or 3x average household salary. IN Cali, that works out to an average of 165,000 – a far cry from 550,000.

    September 2nd, 2008 at 6:26 am
  3. NISMOTT said:

    I make slightly more than 75K and I was recently approved for 270K wit 6% down. I have almost no debt and credit score of 750. I live in San Diego so finding a “nice” home for 270K is not going to be easy. I am planning on waiting at least another 4 months to see if prices come down a little more.

    September 2nd, 2008 at 7:42 am
  4. Richard said:

    A few flaws:

    1) You assume nobody can do better than putting 5% down.

    2) You don’t factor in reduced taxes via the mortgage deduction.

    3) You assume a constant rate of contribution to the emergency fund. You are essentially assuming a $300/mo emergency above and beyond planned expenses. Is that a bit high?

    4) Your model assumes all homebuyers are working-class. What about retirees or the investor-class?

    Otherwise a nice article.

    September 2nd, 2008 at 8:20 am
  5. helper said:

    need to add property taxes…

    September 2nd, 2008 at 2:38 pm
  6. dan k said:

    Nice blog – I intend to visit frequently. I make 100,000 and I would not spend that much on a house payment (and I’m single too). Camping as a vacation for the next 10, 15, 20 years? Peanut butter sandwiches every day? Furniture lasts forever? I’m a homeowner, but its a pretty modest home, and when I bought my monthly payment was comparable to rent. People spent on houses just like they spent on stocks – thought there was easy money.

    September 3rd, 2008 at 8:15 am
  7. Jason said:

    With the interest deduction from your income taxes, the above budget would actually work

    October 28th, 2008 at 1:09 pm
  8. Blinz said:

    Also 10% into Roth post-tax dollars doesnt make sense. Pre-Tax contributions up till what 14k these days. That is almost the entire loss right there.

    October 28th, 2008 at 3:00 pm
  9. chris said:

    Whoever wrote this is exactly correct. Sure you can split hairs about the side jobs and tax deductions but who out there is really saving in money? Who only spends $500 on food in LA?

    There is no reason (except phony money) why the price of homes should not be close to the median incomes of the area. The age of people going bananas buying,selling, cashing out over and over again, always getting by with another refinance are over. The idea of a home as a nestegg or ATM are over. Anyone getting in LA right now will probably find themselves in another year underwater. WAIT!

    October 28th, 2008 at 4:24 pm
  10. se7en said:

    Ding ding ding – Jason wins. Interest on the loan is tax deductable.

    October 28th, 2008 at 6:34 pm
  11. Emily said:

    You’re forgetting things like maintenance on a house, property taxes, insurance, etc. Lots of miscalleneous expenses when you own a house.

    October 28th, 2008 at 7:05 pm
  12. Amy said:

    We’ve had this debate at length on a mailing list at work… basically, it comes down to where you want to put your discretionary spending. I don’t value having a nice car or eating out and cook most things from scratch, so the car payment goes away and the insurance is cheaper (I just found a 42mpg beater for ~$2700, including initial tune-up), and the food is <$150/mo/person.

    Still, your example is probably true, that you shouldn’t use your $75k annual income to buy a $350k house. But if you’re making, say, $200k, what’s wrong with spending over half your income on house? You have plenty left over to cover other normal expenses. A nice house loses you less money than a nice car.

    Besides which, as many have pointed out, that’s only when you start out. Through inflation and career advancement, your pay should go up, so you won’t be so crunched. Maybe you take camping vacations the first 3 years, but after that, you’re getting ahead, and prices will come back up eventually.

    October 28th, 2008 at 7:09 pm
  13. Jan said:

    It seems like one thing omitted here is how much money has already been paid in to houses. If you are going to argue that only when a median income can afford median house – will the housing prices stabilize – then you need to account for what fraction of the median house has already been paid off. I have to think that some appreciable fraction of homes are fully paid off – and many more have large portions paid off – and in that situation even a well below median income can afford to live in a median cost house. Not buy it – but if one inherited the house, got it in a divorce settlement, or bought it 20 years ago when it was a small fraction of the price – then one can “afford” it even on a small salary. But both the house value and the salary count toward the median statistics – thereby skewing the income needed for a median house upward. Someone out there probably knows how much of existing value has already been paid off – but I suspect that it will significantly reduce the salary needed for the average house (using the argument above).

    October 28th, 2008 at 7:53 pm
  14. Mick said:

    The property taxes will be around $750 a month too.

    October 28th, 2008 at 9:39 pm
  15. Dave said:

    All I can say is the reason that no one can afford houses is because everyone is buying with little or nothing down. Put $50-$100k down (it’s called saving) and then you can own a house without putting yourself under massive stress. Also I’m from Canada but frankly your budget is unrealistic. Monthly gas should be $200/month and electricity and gas should be higher as well. Also there’s nothing in the budget for misc. purchases (ie. birthday presents, sports, broken shovel, etc…). Let’s not forget something like Christmas – how is someone with the above saving for Christmas? you can look at the emergency fund for $300/month and say there it is, but that’s for a roof repair, broken fridge, new a/c unit, etc…

    October 29th, 2008 at 3:47 am
  16. name said:

    Ya its true alot of people do make extra money “under the table” that is very common for people in places that are expensive to live in: San Diego, Los Angeles, Bay Area, Miami, etc.
    I do disagree with your premises of a 30 year mortgage i as a loan officer think they are the worst loan you can get. I think the best option for someone staying put somewhere is a 15 year loan.
    30 year loans are for idiots.

    October 29th, 2008 at 5:55 am
  17. Kevin said:

    The commenters above are right. I see that you used PITI instead of just principal in interest, so that *does* cover property taxes and homeowners insurance, but you completely neglected the tax benefits of deducting mortgage interest paid.

    For the loan you specified, year one would see $21,600 in interest paid on the loan. For a Head of Household earning $75K gross, federal taxes come to $13,813. If that taxable income is reduced by $21,600 (by deducting paid mortgage interest) that tax burden falls to $8,413, a savings of $5,400 per year, or $450 a month.

    After factoring the tax benefits of home ownership, rather than running a household deficit of $173 per month, they have a $277 a month surplus. Further, while their home ownership costs will stay static over the next 30 years, the average income for a given household usually goes up a few percent a year, easing the burden further over time.

    October 29th, 2008 at 8:11 am
  18. alistair said:

    You say you chose a highly efficient car. and whilst i’ll agree that on your side of the pond it’s pretty much a necessity are you sure that the miles travelled is realistic? $133 At say $3.50 per gallon (i cant beleive people moan about this being expensive) is 1330 miles per month, 44 per day (or about 63 per working day). isn’t that a little high?

    plus you seem to have missed out beer…. i guess that probably has it’s own seperate butget.

    October 29th, 2008 at 8:25 am
  19. george said:

    The mortgage interest deduction is a red herring. It goes away over time. The whole point of the article was long term affordability. Once you start to pay down principal you’re getting very little benefit form the interest deduction unless you make huge charity contributions, otherwise you could get the standard deduction while renting for the same benefit.

    October 30th, 2008 at 8:41 am
  20. ThirdNormal said:

    There are a couple of flaws with the logic here.

    First off: “median household income” is not the same as “median homebuyer income”. The median household income is pulled down by college students who have little or no income & rent, and by seniors who have a small retirement income but own their homes free and clear. Neither of these households are in the market to buy a home. The majority of home buyers are people at the peak of their earning potential (say in their 30’s and 40’s) who earn significantly over the median household income.

    Second: any accounting of the benefits of home ownership should take into account the fact that the home will appreciate in value over time. Granted the 20% per year appreciation rates of a few years ago are clearly unsustainable, but moderate appreciation at around the rate of inflation is reasonable to expect over the long term. The $350,000 home in the example appreciating at a modest 3%/year will add about $875/month to the owner’s net worth. This is a very significant amount that is totally ignored in this analysis.

    December 24th, 2008 at 10:17 am
  21. Marcia R. said:

    Nice article! I make about $75K, including an yearly bonus, and was approved for $300K, which I thought was excessive considering that when I check the mortgage calculators I do not see how I could afford a home in the bracket. Even though we are tempted to buy more since we are talking about a “home”, it is best to be conservative and to do the homework prior to getting into more than what we can afford.

    February 9th, 2009 at 1:01 pm
  22. Gman said:

    A History of Home Values (graph 1890 to 2006)

    The Yale economist Robert J. Shiller created an index of American housing prices going back to 1890. It is based on sales prices of standard existing houses, not new construction, to track the value of housing as an investment over time. It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.

    The 1890 benchmark is 100 on the chart. If a standard house sold in 1890 for $100,000 (inflation-adjusted to today’s dollars), an equivalent standard house would have sold for $66,000 in 1920 (66 on the index scale) and $199,000 in 2006 (199 on the index scale, or 99 percent higher than 1890).

    May 16th, 2009 at 8:26 am
  23. nomad said:

    Let’s all be clear about one thing, truth be told, no house is ever worth more than a few hundred dollars. The economy is based on hyped up numbers. Banks are making huge profit off charging you extra to purchase a home, car, etc. A house is only made of wood and stone, cheap wood I might add. We as a society should place things at their true value not what we think someone might pay for it.

    People who pay anything over a few hundred dollars for a car or home are fools. It’s these fools that keep the banks in business.

    November 22nd, 2011 at 2:09 pm
  24. Danny said:

    I make 40k annually with a 730 credit score and about 10% down, how much loan can I qualify for?

    February 16th, 2012 at 12:46 pm
  25. Big V said:

    I can’t believe some of the delusional comments on this article. People, houses are STILL overpriced in San Diego (2012), but they are way lower than they were in 2008. I mean seriously, “under the table babysitters” do not justify any $500,000 median house price. duh.

    March 26th, 2012 at 3:53 pm
  26. Marty said:

    Well I just paid off my house. 37 years old and paid for an $85000 house in 15 years. Let me tell you that the banks said I could afford a 120000 house. I have a good job in az and the house is az. It is not easy didn’t go out to eat. Didnt take many vacations, fixed and repaired things myself. Didnt try to keep up with jones’s. Did buy brand new things including taking stuff out of the trash. It can be done. Having a house is like having a drivers license it’s a privilege not a right. Screw up and both are taking away.

    May 21st, 2012 at 7:19 pm
  27. S' said:

    smart finance company, letting dumb buyers borrow more than they should. the finance company gets the payments and the property back in a few years. moral of the story: if it seems too good to be true, it is.

    November 10th, 2012 at 3:24 am
  28. ranndino said:

    Nomad, YOU are the fool! You have absolutely no idea what you’re taling about. There’s this thing called market price. I dare you to go out and buy a house for a few hundred dollars. You won’t find one even in the crappiest neighborhood of Detroit. Maybe a straw hut in Nicaragua.

    April 25th, 2013 at 7:31 am
  29. michael corey said:

    Most banks would not loan on these figures anyway usually the highest would be 25/38 income to debt ratio.

    May 11th, 2013 at 6:33 am
  30. zeck said:

    How come nobody ever mentions UNFORESEEN cost or situations that will come up over the next 30 years of your life(the life of a home loan).You know that always something happens in your life that you didn’t expect and all of a sudden you have another bill or cost.For example,you just get a speeding ticket,which currently cost $431.And your auto insurance goes up because now you have a speeding ticket on your driving record.Or you get into an accident,and you can’t work.Or you get sick,and you can’t work.Or you get laid off and can’t find another job.The job market is not stable and most likely will never be again in Los Angeles or OC.I could go on with a huge list of UNFORESEEN cost or situations that will ultimately make you end up not being able to sustain/afford your overpriced home.
    The more you pay for a home the more stress,anxiety,pain and problems you will have and most likely you will lose the home due to UNFORESEEN cost and situations.
    Buying a home in LA or OC is over for the average person.And many of the people who do get into a home in these areas will not last long.Most likely,2,5,10 years later they will eventually not be able to afford the home and ultimately will lose their home.

    Answer-try to move to a state where you can buy a house for $100,000-180,000.Assuming your household income is at least $75,000-$100,000.And buy a house that was built within the last 10 years.You’ll have much less move in cost on maintenance.

    May 30th, 2013 at 7:02 pm
  31. Nightvid Cold said:

    Surely you can afford it if you can pay cash for the house?

    May 4th, 2014 at 8:16 am


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