May 7, 2007
Just Quotes: Old School Advice (And A Calculator)
“As a general guideline, it's best not to spend more than 2-1/2 times your income on a home. Your total housing payments should not exceed 28% of your gross income. Total debt payments, meanwhile, should come in under 36%. That means payments on all loans, including your mortgage loan, school loans, auto loans and credit card debt.”
∙ 7 Net-worth killers [CNNMoney]
First Published: May 7, 2007 3:30 AM
Comments from "Plugged In" Readers
That is such a stupid article and obviously does not apply to california, especially the bay area and SF. If I spent a mere 2 1/2 times my income on a home, that would only afford a bathroom in a crack house (sorry, "crack home") in Hunter's Point. Instead I much prefer to have bought a new condo in south beach, thanks very much.
Posted by: AC at May 7, 2007 11:05 AM
AC raises a good point. It would be nice to see some rules of thumb that are applicable to the California real estate market, and more specifically, real estate in the Bay Area (or even more specifically, real estate in SF), because these general buying guidelines that you always hear about might as well apply to buying home on Mars relative to the SF/Bay Area real estate market.
Posted by: RinconHill_Res at May 7, 2007 11:55 AM
According to the article linked below, SF's median % of income used to pay mortgage debt is 54%.
Posted by: Teresa Harbin at May 7, 2007 12:48 PM
A more realistic rule that has seemed more applicable in recent years is that housing expenses (PITI) shouldn't be much more than 1/3 of gross income. But even that isn't hard-and-fast... it's perfectly possible to make a sensible decision to spend a higher percentage of your income on housing by tightening your belt in other areas (for example, if you don't own a car and your transportation expenses are low, who says you can't apply that money toward housing?)
The 2 1/2 times your income thing makes no sense. First of all, it has absolutely zero relation to monthly housing expense (what price represents an affordable home is far more related to prevailing interest rates!) I'm guessing that most readers here are too young to remember the early 80's -- when the Prime Rate was over 20% for a while, and mortgages were even higher. Clearly a house at any price is far more affordable when interest rates are low. So a blanket statement like "don't spend more than 2.5 times your income on a house" doesn't make sense ANYWHERE -- including California. (It also doesn't take into account how much downpayment you might be making.)
I think the 1/3 rule works, more or less, but you need to make allowances for your individual situation, up to a point. But if you're spending 50% of your gross income on housing, plus a car payment and living expenses (not to mention taxes), you're gonna be in a very challenging situation. Not necessarily impossible, but one requiring more sacrifice than most people are probably willing to make.
Posted by: Dave at May 7, 2007 12:55 PM
An added thought: I think that family status probably plays a big role, too. A double-income, no-kids family can often afford to spend a larger percentage of their income on housing than a family with kids could afford. It's all about choices and trade-offs.
I'm not intending to imply that sacrificing kids for a better house is a good thing to do! That's certainly an individual decision. But we have lots of kid-less households in SF especially, which could help skew the mortgage payment to income ratio a bit higher.
Posted by: Dave at May 7, 2007 12:59 PM
Don't know where the 2 1/2 times income comes from. It's not a part of the calculator. I punched in a bunch of different figures and it kept coming back with house values approx 4 times the income I entered.
Which is roughly right for a 6% mortgage:
.06 X Mortgage = .28 X Income
Mortgage = .28/.06 X Income = 4.67 X Income
If you figure in the principal component of the monthly payment (which I don't know how to do here) you end up with a somewhat lower figure.
Maybe it's a typo and they meant to write 4 1/2 times income?
Posted by: Salarywoman at May 7, 2007 1:11 PM
Let's see, what a quick google search comes up with ...
According to the census data on wikipedia "The San Francisco median household income, at $57,496 in 2005"
Accorind to the Wall Street Journal Online in the 4th quarter of 2005
San Francisco County rose ... to $820,482
So the median home price was over 14 times the median household income in SF in 2005.
I suspect these numbers aren't spot on (I actually thoght the household income was around 80k and the median home price around 720k only 9x).
But it still points out the ridiculous level home prices have hit in SF and the risky mortgages people MUST use to bring the monthly payment down to some amount approaching reasonable.
The 2.5x/30% gross is sooooooo far off for SF I don't understand how people, in the last few years, qualified.
Anybody got better numbers for SF?
Posted by: badlydrawnbear at May 7, 2007 2:38 PM
Those numbers seem close to what I've read in different sources. Median per capita income of around $75K and median home price around $750K, so around 10x.
What's funny is that many people still don't realize how out of whack things are. Common justification: "Because it's San Francisco."
Unrelated, but even David Lereah is now joining the "disconnected from fundamentals" camp following his separation from the NAR. He went on record in Chicago predicting national home prices in '07 would for the first time since the Great Depression.
Posted by: Dude at May 7, 2007 2:56 PM
Rentals house 2/3 of San Francisco's population, so the median income San Francisco resident is likely a renter. There are some low income homeowners here, but most own homes that have been in their families for decades.
People who are buying a median priced house in San Francisco are not people with the median income for San Francisco.
Posted by: Dan at May 7, 2007 3:20 PM
The guidelines used in other areas also have a HUGE amount allocated for transportation. Several of the people that I know here who bought may spend 50% of their income on housing, but living here enabled them to sell their car and spend nearly nothing on transportation (usually a combo of Muni Fastpass/Carshare). I know that many people who buy in SF probably do spend a huge amount on transportation, but this is one city where you don't have to - and can still live a comfortable middle class life.
Not something you can do in Atlanta very easily.
Posted by: Toaster at May 7, 2007 4:08 PM
Yes, this article is ridiculous. As pointed out earlier, what you can afford is definitely based on interest rates. Also, the article is definitely aimed at the stupid: who forgets to factor in property tax when figuring out how much a house should cost?
C'mon, I know socketsite is big on the "housing prices in the Bay Area are overheated" tip, but do the socketsite bloggers honestly think housing prices are going to fall to 2.5X, or even 5X the median income any time soon? Give me a break. The housing market in SF is for the wealthy and will remain so no matter how much people whine. Wealthy people by definition have more disposable income-- if they choose to spend that disposable income on housing no one is going to stop them.
Posted by: jeccat at May 7, 2007 4:30 PM
What people getting confused is that "median household income" is not "median house buyer's household income".
I bet if you get the "median house buyer's household income" / "mediam housing price", it won't be 14x, 10x or close to that. It will probably be around 4x to 6x. Still high but not as crazy as some people thinks.
Posted by: John at May 7, 2007 7:37 PM
That chart on CNN from Teresa Harbin's post reminds me of the Sesame Street song, "One of these is not like the other." How can half of the list have a median house price in the $100k range and, then, there is San Francisco...
Btw, the 54% figure is probably from the last FEW years together, because I know that in 2005, more than half of new buyers in SF were spending over 70% on their mortgage. Boy, do I feel sorry for them.
Posted by: anony at May 7, 2007 8:38 PM
I wish we could go back to the days when you needed to have the ability to put 20% down to qualify, and many of us would put more than 20% down to keep payments affordable. I think this would keep the market much more part of the "reality based community" instead of the "realty based community".
Posted by: Morgan at May 8, 2007 6:31 AM
I thought this property shark map might help with this discussion about prices and median household incomes.
Posted by: badlydrawnbear at May 8, 2007 6:43 AM
Sorry, John, but NO DUH. If you're a "home buyer" or even potential home buyer in SF, of course you have a higher income than the average (it's the people who THOUGHT they were able to buy in the last years who are screwed). But, SF census data still has shown that only 12% of SF residents make a salary that could afford the median home price (I'm pretty sure that this is using the 30% salary rule). That's an incredibly low number. National average is over 80%.
Think of it, the median resident makes $80k/yr (I thought it was $93k, so maybe it's going down). What size mortgage can that afford, even if you use 50% of income towards housing? About $3,000 payment per month = house worth $400k? Have any of you seen a house in SF selling for $400k? Oh, yeh, there was a house on Mangels Street selling for that. Wonder what happened to it?
Posted by: rg at May 8, 2007 4:27 PM
If there are two of you, you make $160,000. Most people buy with a life partner.
Posted by: jeccat at May 9, 2007 5:11 PM
Is the 80k for an individual or for a household? Does anyone know how it is calculated? I have many friends whose families stay together in one house even after children are married. Everyone is responsible for a portion so they can afford more than my wife and I could with just the two of us.
Posted by: kw at May 11, 2007 5:41 AM