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

By: Gman

Gman — Sat, 16 May 2009 16:26:11 +0000

A History of Home Values (graph 1890 to 2006)

http://www.investingintelligently.com/wp-content/uploads/2006/08/a_history_of_home_values.png

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).

By: Marcia R.

Marcia R. — Mon, 09 Feb 2009 21:01:59 +0000

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.

By: ThirdNormal

ThirdNormal — Wed, 24 Dec 2008 18:17:12 +0000

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.

By: george

george — Thu, 30 Oct 2008 16:41:40 +0000

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.

By: alistair

alistair — Wed, 29 Oct 2008 16:25:26 +0000

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.

By: Kevin

Kevin — Wed, 29 Oct 2008 16:11:45 +0000

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.

By: name

name — Wed, 29 Oct 2008 13:55:06 +0000

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.

By: Dave

Dave — Wed, 29 Oct 2008 11:47:18 +0000

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…

By: Mick

Mick — Wed, 29 Oct 2008 05:39:03 +0000

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

By: Jan

Jan — Wed, 29 Oct 2008 03:53:26 +0000

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).