$150k income, $750k mortgage - thoughts?
How long have you lived in the Bay Area? [Burbed.com]islandboy Says:
March 20th, 2008 at 2:07 pmI think a family with 150K income can buy an average house. A family with 100K can buy a small house (think 2bd/1ba) or condo, although they may be better off renting. If tenspeedsf makes 110K, and her husband works, they should make well over 150K.
150K per family is roughly 90K after fed/ca taxes, SS, medicare, or 7500/mo. If you buy a house with a 750K loan at 6.5%, your PITI is roughly 4700 800 property tax = 5500. After tax benefits on interest and property tax, which is roughly a 30% discount, your per month housing expense is roughly $4000. That leaves you 3500/mo to play, eat, shop, save.
With salary increases and inflation, that payment will become more comfortable over time.
I’m not saying that’s exactly what I would do, But it wouldn’t be outrageous or irresponsible as long as that family is planning to stay in the house long term.
What do you Readers think? Good idea? Bad idea? Resonable? Unreasonable?
March 22nd, 2008 at 7:56 am
Annual income twenty pounds, annual expenditure nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
— Charles Dickens, David Copperfield
March 22nd, 2008 at 8:23 am
Sounds high. Assuming you have other costs like retirement savings and car payments. Or utilities. Or kids. You’d also need a big reserve saved up. Your bank account can bleed pretty fast at $5k/month, were you to lose a job.
At this point, I’m not convinced a bank would even let you go to 50% DTI.
I’d think a $500k mortgage is more in line with $150k.
March 22nd, 2008 at 8:29 am
$4000 per month on shelter may be ok if one
1) really, really needs the space.
2) the rent is around the same for a similar size rental.
Otherwise, one is just paying a premium for ownership banking on the hope that prices always go up. Given the extra responsibilities that come with home ownership, I would have thought that one should have to pay less for owning than renting. Also, mobility is reduced and responsibilities increased, not to speak of indentured servitude to mortgage debt. Why take on extra unnecessary stress instead of saving time and energy for leisure filled activities like reading, meeting and making friends or doing whatever expands your mind? There is a lot of peace of mind in not being tied to a huge debt and knowing that one could always move somwhere and subsist in some less expensive part of the country were things to go south. Sometimes suspect that homeownership may also be a appealing if one doesn’t have anything better to do in one’s spare time.
March 22nd, 2008 at 8:32 am
That is a recipe for disaster.
My wife and I make just around 225k. We have a 350k house (15-year fixed) and no other debt. After factoring in heating oil, electricity, registration/taxes/insurance/repairs/gas for three vehicles, food for four people, property taxes, occasional home repairs, clothing, life expenses, ad infinitum, we feel that 3k/mo payment. It’s not hard to make, but I wouldn’t want to be paying too much more.
March 22nd, 2008 at 9:16 am
I love the “tax deduction = 30%” hypnopaedic-realtor-mantra - trying to run a $40K deduction around AMT will lead to an unfortunate shock…
March 22nd, 2008 at 10:38 am
Disagree strongly, if we’re talking about an actual family with children. With salary increases and inflation it gets better, but with unemployment or long-term underemployment, it gets horrid fast. A family illness, a declining parent, a child who is disabled or otherwise needs extra attention, an industry that moves overseas… It’s the job of a parent to be prepared for these things and to have enough financial reserves that they can adjust to changing circumstances while maintaining a stable environment for their kids.
Who are the people getting foreclosed on and moving their families into apartments or into the homes of relatives? People who gambled that things would always get better. Maybe that was a good gamble for the middle class in 1955. It is not one today.
Anyway, 750k will not buy you a SFH in a really good school district, so the point is moot.
March 22nd, 2008 at 11:05 am
There was a quote in an article that was linked either here or in another housing blog: a kid getting evicted from the family home on Christmas Eve, asking the guy who was doing it, “How will Santa find us?” The evicting guy (forget what he was, a sheriff maybe) was still traumatized about it a year later.
As long as I have an ounce of control over my financial future, I’m not putting my kids in danger of being that kid. There’s things that are more valuable than getting to call yourself a homeowner.
March 22nd, 2008 at 1:23 pm
>>Anyway, 750k will not buy you a SFH in a really good school district, so the point is moot.
These days mortgage company will require around $150K down. $900K will get you into a decent shool district.
March 22nd, 2008 at 2:14 pm
Making about $145K, no kids, partner on disability can’t work. No way are we spending a penny over $500K for a house, and it better be nice for HALF A MILLION DOLLARS. You know, the kind you used to be able to get a long time ago, say, 2001.
Hello?! Half a million. That’s a 5 with 5 zeros to the right, before the dot.
RealEstater: For $900K you should be able to own the *entire* school district.
March 22nd, 2008 at 2:57 pm
900k will get me two bedrooms in a “decent” school district, a scrap of yard the size of a postage stamp, and a tottering load of debt that could drag down my family at the first misstep.
Thanks for making my point, RealEstater, but no thanks.
March 22nd, 2008 at 3:59 pm
I don’t think it is reasonable. I don’t think it is reasonable to rely on a salary to buy a million dollar home.
March 22nd, 2008 at 3:59 pm
Sorry- 750k home, I don’t think that is reasonable either.
March 22nd, 2008 at 4:17 pm
Traditional lenders say 20% down and mortgage payment not to exceed 28% of gross income. That would suggest that $150K = $3500/mo mortgage. You are overshooting that $1200 already, which sounds like a recipe for disaster.
March 22nd, 2008 at 6:48 pm
Total rubbish.
March 22nd, 2008 at 7:31 pm
The sad fact is that we’re living in a community where for the last decade people have been taking the word of financial predators as to what they could or should afford. That’s why these numbers are so insane.
I have to say, I am going to be looking for a FSBO deal when the day finally comes. I think realtors have contributed massively to the economic downturn and to the misery of individual families with their greed and their deceptions, particularly in places like CA, and I’m not looking to help a single one of them make a living any time in the future. Outlaw the whole damn profession!
March 22nd, 2008 at 11:00 pm
>>I think realtors have contributed massively to the economic downturn and to the misery of individual families with their greed and their deceptions
Isn’t it the abundance of buyers that contributed to high prices? Realtors are just the facilitators of these transactions. People willingly overbid for houses in the Bay Area; no one forced them to buy the houses.
March 23rd, 2008 at 11:00 am
Keep a PIGGY BANK or something, put the difference between renting and buying in it, DO NOT TOUCH. You’ll be glad you did!
Around here we pay a water bill. We have a well, but the “water bill” is set aside each month so when the pump needs replacing and it will some year, the money’s there.
That’s the kind of thinking to go back to.
March 23rd, 2008 at 11:29 am
>no one forced them to buy the houses
I am aware of a case in which the realtor tried to force an offer through that the purchasing family expressly did NOT want to finish, for extremely good reasons that onset after the offer was initiated. These were well-educated people who were in terrible trouble, and the realtor apparently had no fears or qualms about trying to defraud them. I can only imagine what has been happening to people who were more trusting and less prepared to fight.
March 23rd, 2008 at 12:15 pm
[...] economic rationalizations here are fascinating: think a family with 150K income can buy an average house. A family with 100K can [...]
March 23rd, 2008 at 12:30 pm
Nothing could be dumber than buying a home in the Bay Area right now. Even if you have the money to blow, the millions underneath you who don’t, and can’t afford a property that befits their lot in life, are going to depreciate your property horrifically in the years to come as they turn up their noses at the load of crap on the market.
March 23rd, 2008 at 2:42 pm
Undoubtedly there’s a high barrier to entry for BA real estate. However, ask any one who “made the leap” any time in the past. It’s always tough in the beginning, but things settle down over time, and eventually get easier. If one continues to wait, that barrier will always be there, and keeps getting higher. Think of getting a mortgage as signing up for a forced saving plan. It’s a good habit to get into. Those who rent think they have more money on hand (which is true initially), and frequently end up squandering it. My take on it is, the earlier you start home ownership, the better, just as the earlier you start putting money into a 401K plan, the better. You do not have to carry a $750K mortgage. Start small, and trade up. There isn’t as much risk as some think.
March 23rd, 2008 at 3:37 pm
So would you recommend everyone risk being shot in Oakland or Richmond where they can actually afford the mortgage, then trade up to a starter home in the “real Bay Area” when they have some equity? Ridiculous. I look at those little shitholes in Redwood City and think, damn it, I should at least be able to afford -that- by making the median income. But I can’t! How did we get to the point that a college graduate has to aspire to living in the ghetto?
March 23rd, 2008 at 4:11 pm
A 750k mortgage and a 10% to 20%downpayment gets you into the Cupertino school district of Santa Clara, which is more than decent. $150k can broadly be achieved with two incomes. Regarding cash reserves, you just can’t grow them with that equation, but you can manage not to shrink them either for a few years (and I’m not talking ramen). Property tax will be closer to 8k and tax exemption amounts to 60k-70k with almost no AMT. Inflation will slowly eat up the cash reserves so it’s only a good thing if it pushes your wages up as well.
In short if you have somecash reserve and one of the income earners can secure a higher-paying job for a while if emergency calls, it’s a reasonable endeavor with a manageable level of risk.
March 23rd, 2008 at 5:25 pm
> if …one of the income earners can secure a higher-paying job for a while if emergency calls
Yeah, well, my husband said he’d divorce me if I went back to turning tricks…
March 23rd, 2008 at 8:01 pm
20% down and mortgage payment not to exceed 28% income? when was that, 1965? Those ratios went down the drain with the law of large numbers. The typical DtoI can be 50% without much difficulty. 10% down.
Even though I know these exotic mortgage products caused this economic downturn, reading those old silly ratios makes me realize why these products need to exist. 28% debt to imcome, LOL, so if you make 15K/mo you need spending money of $10,800 per month in order for the banks to feel secure in lending, give me a break.
March 24th, 2008 at 8:23 am
“so if you make 15K/mo you need spending money of $10,800 per month in order for the banks to feel secure in lending, give me a break.”
285 ratio is not for bank to feel secure giving me the loan, it is for me to feel secure giving the bank a mortgage on my house.
March 24th, 2008 at 8:23 am
Error above: 28% ratio.
March 24th, 2008 at 9:34 am
So Real Estater is saying that it’s a better buy to pay $500k for a sub 1000 foot condo with a $300 HOA and a parking permit (as a jump-in) so that families can upgrade to a starter home later?
How about posting a link from redfin, etc. of a proper “starter” place for a family making 150k with 80k in debt and one child. I’d just like to know what your dose of reality is.
March 24th, 2008 at 9:35 am
Assume that we work at Facebook, Google, Yahoo so pick a place in Sunnyvale or Santa Clara. Heck you can go out to Milpitas or Fremont if you want.
March 24th, 2008 at 11:52 am
So Real Estater is saying that it’s a better buy to pay $500k for a sub 1000 foot condo with a $300 HOA and a parking permit (as a jump-in) so that families can upgrade to a starter home later?
—————-
BadAdvice,
Keep in mind that this is the same guy who denied that realtors have any contribution to this housing market mess and said “realtors are just the facilitators of these transactions“. Post #16.
Yes, realtors are only “facilitators of transactions”. Nothing more. Hence, they should abstain from giving any kind of financial/investment advise.
Funny thing is that one mouth he says that realtors are JUST facilitator of transactions, but another mouth he cannot resist himself from giving financial advises (post #21). And both are in this very same thread.
And, unfortunately, many realtors are just like that. Instead of limiting their involvement ONLY in transaction, they spend more time on touting how home is a better investment than stocks.
March 24th, 2008 at 1:24 pm
Renter4 - nice one. I meant for people out there who choose a job that pays less than they could earn, so that they like what they do. i.e. teaching instead of office job, or lower pay career job instead of higher pay elsewhere with less prospects for career advancement. I don’t think greed rules the land, so I believe many people have room to sacrifice job satisfaction for a higher pay if they had to. But feel free to disagree.
March 24th, 2008 at 2:08 pm
It’s an almost moot point, but I realize now that the comment I made on a previous BURBED entry wasn’t clear. And since Islandboy is using my comment for his analysis, I thought I’d try this again.
I had said in a previous comment that I make far below the Bay Area “poverty” line, an amount that had been proposed by another reader to be around $300k/year per household. Islandboy thought this meant that I must pull in around $150k/year. Flattered as I was by this assumption, I chimed in again to clarify that I made $110k LESS than $150k/year.
Here comes the part that confused Islandboy… and no doubt other readers as well: Take $150k. Subtract from that $110k. What do you have left? ($40k) That’s what I make. My husband would probably not wish me to divulge his income in a public forum, but you could safely assume that we’re considering moving to cold and cloudy Portland for reasons that have nothing to do with my love of bicycles and microbrews.
If anyone reading this wants to offer me $150k/year, or even $110k/year, for my mad design skillz, I’m sure the fantastic genius behind this web site will help us connect.
Now back to your regularly scheduled web browsing…
March 24th, 2008 at 2:20 pm
WillowGlenner said: 20% down and mortgage payment not to exceed 28% income? when was that, 1965? Those ratios went down the drain with the law of large numbers. The typical DtoI can be 50% without much difficulty. 10% down.
Not quite 1965. That’s before all of this Subprime/Alt-A/Option ARM crap. Also, note that it’s 28% of GROSS income, which implies a much larger percentage of net income. For a $100K income, 28% of monthly gross income is $2333. That is about 43.5% of gross income. And good luck putting 10% down these days. There’s a reason traditional ratios worked well.
March 24th, 2008 at 2:40 pm
I’m buying a house with a jumbo with 10% down right now, no problemo. But anyway debt to income ratios now for quality jumbo loans are 50% which is about right. Not 28%, and I doubt they go back there - because the law of large numbers pretty much invalidates 28%. A 15k/mo couple can pay more than $4200/mo mortgage, this is obvious. when incomes were 40K, or $3500/mo like in the 80s, well thats a different story. As for the 28% ratios they didn’t protect against all the foreclosures and walk aways we had in the early 90s- the real problem with foreclosures are the zero down and rising rates where owners cannot refi. Those people are trapped, they have no options, it doesn’t have much to do with 28%.
March 24th, 2008 at 3:31 pm
WG,
The thread started with absolute values of income and mortgage. Do you think a family earning 150K can afford a 750K mortgage?
March 24th, 2008 at 5:17 pm
The following is a complete mess and I have no idea how to format it any better:
Can a $150K dual-income family afford a $750K mortgage? My calculations:
$150,000 - gross income
-$500 - Health FSA (just an assumption)
-$31,000 - pre-tax 401k contributions
$118,500 - taxable income
-$22,472.50 - Fed income tax ($8,772.50 plus 25% of the amount over 63,700)
-$8,826 - CA taxes from ftb.ca.gov calculator
-$6,630 - 6.5% Soc Security tax up to $102,000
-$1,718.25 - 1.45% on Medicare
$78,853 Net income
-$10,000 - 2 Roth IRA contributions
-$7,500 - 1% property tax
-$51,781 - Annual payments on 750K, 5.62%, 30-yr fixed mortgage
+$15,128 - Est. annual tax deduction benefit (http://www.dinkytown.net/java/MortgageTaxes.html)
$24,701 - Subtotal
This is $2,058 per month for food, car payments, childcare expenses, private schools, clothes, vacations, insurance, saving for kid’s college, etc. Feel free to second-guess my assumptions.
Honest question: Is this enough to live on for a family?
March 24th, 2008 at 5:32 pm
>>-$31,000 - pre-tax 401k contributions
Fortuantely if it is just 1 income, you can only contribute $15,500.
March 24th, 2008 at 6:07 pm
I think Renter4 had the best answer to whether the hypothetical family should get the mortgage.
Who are the people getting foreclosed on and moving their families into apartments or into the homes of relatives? People who gambled that things would always get better. Maybe that was a good gamble for the middle class in 1955. It is not one today.
Agree. Our present economy is going down the toilet, thanks to cronyism and corruption on a scale bigger than Teapot Dome. I’m surprised the Statue of Liberty and the Golden Gate Bridge weren’t shipped off to Dubai along with the reserves in Fort Knox.
Anyone betting on things continuing to improve is woefully naive. If the numbers don’t work today, don’t ever assume they’re better tomorrow.
Besides, that $750K hypothetical property will be worth $650K next year.
March 24th, 2008 at 8:59 pm
Rudolf, you could take the 10k IRA contribution and put it into college savings, since I think it’s after tax anyway (depending on details of one person making more) and it can reasonably be argued that the house will be worth something down the road when it’s time to move to the nursing home… so that would leave a little more wiggle room, about $800/mo. Otherwise, yes, I agree with your assumptions.
I believe many people have room to sacrifice job satisfaction for a higher pay if they had to. But feel free to disagree.
I actually did sacrifice income for a while to spend time at home with one kid, re-tooled my resume, and came back to a different job for more than twice what I had previously made. So I’m not arguing that no one can do it. But it didn’t happen on my desired schedule, and if I’d been trying to carry a 750k mortgage, I would not have succeeded in doing so.
Also, I think that if we are talking about a family with young children, the cost of good childcare is so very high that it effectively pushes people in two-earner families into the Most Greedy bracket, because otherwise there’s little financial point in dealing with the stress and expense associated with having both people work. I just did the math again: for a kindergartener and a two-year-old, we pay 20k yearly, and that is despite the fact that we’re not paying top dollar, and we’re not now in the highest-expense years (years 0 –2). So I think, yes, if we are talking about two-income families most people (not all, not the gastroenterologists and the tax lawyers, but most) are already earning as much as they possibly can.
March 25th, 2008 at 4:04 pm
>>Our present economy is going down the toilet
But is it affecting you? If you look at the stock market, the DOW and Nasdaq are still at very respectable levels. We just heard Feb home sales is up. There’s is no unemployment issue in the BA, and there’s no housing crash to speak of.
March 25th, 2008 at 4:31 pm
But is it affecting you? If you look at the stock market, the DOW and Nasdaq are still at very respectable levels. We just heard Feb home sales is up. There’s is no unemployment issue in the BA, and there’s no housing crash to speak of.
A big hand for RE! I hope the comedy act continues with an impression of a political incompetent, after your spot-on demonstration of a financial one.
March 26th, 2008 at 9:50 pm
We just heard Feb home sales is up.
———–
Ha ha! Feb sale is up!
One more “USEFUL DATA” for RealEstater - apart from his grandmother.
But if the number was down, it would transform to “USELESS DATA” for RealEstater.