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A solid article, but it should have commented on single family home prices. If you use the 3x salary rule, a $120k a year techie couldn't afford the median home

A solid article, but it should have commented on single family home prices. If you use the 3x salary rule, a $120k a year techie couldn't afford the median home price in America ($374k). A software engineer in San Francisco would have to make $526k a year in cold hard cash to reasonably afford the median single family home ($1.58 million). Talking about six figure salaries as if they are unquestionably upper-middle class should take housing prices into account.

dcolkitt 4y ago
Why would a single person need to buy a 3 bedroom home (the median American home size)? A household with two $120k earners can very comfortably afford a $1 million home at current mortgage rates.
- atwebb 4y ago
  Am I so out of touch that this sounds insane? Mortgages are leverage and that's a whole lot of it.
  - dcolkitt 4y ago
    Mortgages are leverage, but unlike traditional financial leverage not subject to margin calls. Normally high leverage is risky in trading, because small perturbations in price can force liquidations. However with a traditional mortgage, as long as you keep making payments you cannot be forced to sell. (In fact it's even better, you can always re-finance when rates improve, whereas the bank cannot raise rates on you when they worsen.) Therefore all you care about is the return to the asset over the long-run. And absent maybe a once-in-a-century depression, there's no way a single family home will decline in price over 20+ years.
    - jcadam 4y ago
      > And absent maybe a once-in-a-century depression Which is starting now - it's been almost 100 years since the last one.
  - twblalock 4y ago
    Mortgages are not just leverage. They also lock in your cost of housing. For example, people who rent in major cities have seen their rents increase by 30% or more over the past few years. Housing prices have also gone up by that much. On the other hand, someone who bought a home a few years ago has not seen their monthly payment change -- and it will not change for 30 years if they got a fixed-rate mortgage! In the next few decades, their mortgage payment will be increasingly smaller in real terms due to inflation and will eventually be substantially lower than the rent for a similar home. 2 people earning $120k each have a monthly pre-tax income of $20k. They can easily afford a million-dollar home, and the property tax (~11-12k per year), in the San Francisco area. The problem is, a home that cost a million dollars 2 years ago now costs $1.3 million.
    - atwebb 4y ago
      It still sounds insane to me, I've made an assumption anyone with a $1M home (or above) is either carrying much less via down payment or is in the $4-500k / yr range. Most responses on an assumption that, inflation adjusted, housing prices only rise. For many areas this is not true, the bay might not be one of them, it is probably even more localized for the areas that are more protected from downturns. From your example, a house would be around $5.5k/month before maintenance / capital costs on take home of ?12-14k?. Seems rough, especially if one of those salaries is lost or degrades. It is all perspective though, we're used to lots of space and size. My normal is other people's insane.
- coinbasetwwa 4y ago
  In a world where property taxes, apartment maintenance fees, etc didn't exist, sure.
  - gedy 4y ago
    And prices that never go down (when people need to sell or refinance)
- swozey 4y ago
  I'm single and bought a $350k 3 bedroom when I was making around $130k. I bought the home because the city I lived in at the time (Austin) had banned townhouses/duplexes/etc so my only option was to rent in a midrise, rent a home, or buy. I wanted a townhouse downtown, not a SFH in the suburbs. Unfortunately I sold said home at the beginning of 2019 and have watched it essentially double in value over the last two years.
- thewebcount 4y ago
  There are a number of possible reasons: 1. A single person likes to have guests stay over and wants to offer them a room and also have a home office for working from home 2. There are no "starter" homes available in their area. This is what my spouse and I hit in Los Angeles. We tried a condo and ended up suing the person who sold it to us because it was so noisy as to be unlivable. (And it turns out most of the condos in the area are like that.) But there were no small homes available on the market to purchase. When one did show up, they were usually purchased immediately for cash for more than asking price, torn down, and a new home built lot-line to lot-line put in its place and sold for 3x the cost. Eventually, I got some bonuses that allowed us to purchase a larger home so we did that. Now we have a guest room and an office which has worked out great during the pandemic. I'm really glad we did it.
mattmanser 4y ago
in the UK at the moment you can get morgages for 5.25x salary, especially if you have a high income. I assume the US has roughly the same now. The old mortgage multiplers have gone for now.
- adhesive_wombat 4y ago
  5.25 joint salary, though, so that could be as high as 11.5 times one person's salary for one house if you're buying together (they may have a slightly different calculation when combining salary). And indeed my house, but not the mortgage, was well over 10 times my salary when I bought it. The mortgage was around 8 times my (entry level UK) salary, but about half that if you counted both of us. Which is one route to how people end up in serious trouble: get a mortgage as newlyweds with 8 times one person's salary, then one person stops working for The standard post-marriage activity: kids, and now you have a house you could never have passed the affordability checks for, as well as a very expensive baby. Then interest rates rise. Game over. Luckily for lots of people, interest rates have been miniscule for a while, but I get the feeling that there's a lot of people on the edge.
  - Thorrez 4y ago
    What percent of people have fixed vs variable rate mortgages?
    - _Wintermute 4y ago
      In the UK even fixed rate mortgages are only fixed for the first couple of years, which wasn't so bad as rates were decreasing, but obviously things might change in the next couple of years.
      - mattmanser 4y ago
        You can get 5 year fixed, and some lenders have now brought out a lifetime fixed rate: https://www.moneysavingexpert.com/news/2021/03/habito-to-launch--lifetime--fixed-rate-mortgage---how-it-works-/ https://www.moneysavingexpert.com/news/2021/03/habito-to-lau...
maerF0x0 4y ago
Now that value delivered is disconnected from location, live somewhere inexpensive and push for your actual value. The only real requirement is US friendly timezones and 10+Mbps up speed internet. I'm sure there are 100s of cities in America that meet this expectation and would make you "rich" in that locale with a $200k TC . Choosing to live somewhere for the "lifestyle" is in itself a form of expenditure for which your employer should neither be subsidizing nor penalizing.
- lcvw 4y ago
  I hope that is what happens. So far only a few companies are giving up fully on pay being linked to COL. Even so, flexible work (1-2 days in office a week) is currently revitalizing parts of New York as people move twice as far from the office, drastically reducing housing payments, while keeping the same pay and same total commute time.
twblalock 4y ago
A price to salary ratio doesn't make a lot of sense because it ignores interest rates. At today's interest rates, which are still historically low even though they increased last year, 3x is unusually conservative. The better rule of thumb is to keep housing expenses under a certain percentage of gross income. 28% and 30% are common number that get mentioned in that context. Why gross income and not net income? Because two people with the same gross income might have very different tax situations and their net income could be very different. So, of course you also need to consider what percent of your net income your housing costs represent -- these are all just rules of thumb.
bigcat12345678 4y ago
Where does 3X salary rule come from?
- consp 4y ago
  It used to be that the average monthly payment on housing would go up to around 25% of your spendable income, at least that was what the government used as a guideline. These days you need over 40% to even get anywhere and even that is unlikely to be enough. I've also noted around here the required income went from about 3-3.5 to around 5 times the rent rate despite that meaning you need a 6+ figure income for even the most basic apartments (which is rare here) which is just risk reduction for the owner.
- Layke1123 4y ago
  Early America when homes were steady at about that price.
  - orthoxerox 4y ago
    In early America you just built your log cabin with an axe and an adze.
    - xcambar 4y ago
      In early America, you pillaged and ransacked.
      - TecoAndJix 4y ago
        In early America, you string up with your fellow ammino acids in the primordial soup
        xcambar 4y ago
        You won't get me to call Pangaea "early America". So typical of American imperialism. Only second to the Brits. ;)
patrick451 4y ago
Yeah, six figures isn't what it used to be. Same thing with being a millionaire. Inflation has deflated the significance of accomplishing my dreams.
- abnercoimbre 4y ago
  What do you plan to do?
dalyons 4y ago
What 1980s fantasy is this 3x rule? Median household incomes to home price ratios have risen to ~8x across the US as a whole , not just crazy house price areas like SF/NYC. Canada and Australia are far worse again, pushing 15x in some cities. 3x, if it ever was a rule, has been dead for a long long time.
- randomdata 4y ago
  > What 1980s fantasy is this 3x rule? The one where you were paying 20% interest on your mortgage.
- escapedmoose 4y ago
  My gut reaction was also “what kind of outdated rule is this?” until I realized that I accidentally followed the 3x rule almost to the dollar in buying my house. And I have to say, I feel extremely comfortable with the results, so I would recommend it.
- __turbobrew__ 4y ago
  Vancouver has an average household income of ~$96000/yr and an average price of detached home of $2139200. Pushing over a 22x ratio. This city is actively hostile to new home owners and I am moving away this year to start a family.
- silisili 4y ago
  There's no way in hell it's close to 8x. Just crunched the numbers, and an 8x mortgage would exceed my monthly take home. I felt pretty uncomfortable at 2.5x. I feel a lot of people are probably extending out to 4 or even 5, but 8 would be irresponsible and I doubt you could even find a lender for that.
  - gspr 4y ago
    I'm not saying it makes up for the difference in the arguments, but please note that people seem to be talking past each other in this thread by talking about home price to income ratios and mortgage to income ratios without making a distinction.
newobj 4y ago
3x? That's crazy. I bought a $375k house on an $85k tech salary 20 years ago.
- Glyptodon 4y ago
  Funny enough my first and only house was actually very close to 3x income at the time I bought it 10ish years ago and everything real estate seems crazy to me now...
  - gedy 4y ago
    Same here (California as well)
knicknic 4y ago
3x rule is not a rule but a guideline. It applies more to the average person. If you give someone 100 dollars a day they have to buy food, clothes, rent, education, transportation. You give them 1000 dollars a day they still have to buy the same things. They can then use this leftover to buy nicer food or nicer house. This is why values of homes can get so high in areas. For the people getting 1000 they chose where ti spend this extra money. For people with 100 a day they don’t have extras to reallocate towards rent.

dcolkitt 4y ago

Why would a single person need to buy a 3 bedroom home (the median American home size)? A household with two $120k earners can very comfortably afford a $1 million home at current mortgage rates.

atwebb 4y ago
Am I so out of touch that this sounds insane? Mortgages are leverage and that's a whole lot of it.
- dcolkitt 4y ago
  Mortgages are leverage, but unlike traditional financial leverage not subject to margin calls. Normally high leverage is risky in trading, because small perturbations in price can force liquidations. However with a traditional mortgage, as long as you keep making payments you cannot be forced to sell. (In fact it's even better, you can always re-finance when rates improve, whereas the bank cannot raise rates on you when they worsen.) Therefore all you care about is the return to the asset over the long-run. And absent maybe a once-in-a-century depression, there's no way a single family home will decline in price over 20+ years.
  - jcadam 4y ago
    > And absent maybe a once-in-a-century depression Which is starting now - it's been almost 100 years since the last one.
- twblalock 4y ago
  Mortgages are not just leverage. They also lock in your cost of housing. For example, people who rent in major cities have seen their rents increase by 30% or more over the past few years. Housing prices have also gone up by that much. On the other hand, someone who bought a home a few years ago has not seen their monthly payment change -- and it will not change for 30 years if they got a fixed-rate mortgage! In the next few decades, their mortgage payment will be increasingly smaller in real terms due to inflation and will eventually be substantially lower than the rent for a similar home. 2 people earning $120k each have a monthly pre-tax income of $20k. They can easily afford a million-dollar home, and the property tax (~11-12k per year), in the San Francisco area. The problem is, a home that cost a million dollars 2 years ago now costs $1.3 million.
  - atwebb 4y ago
    It still sounds insane to me, I've made an assumption anyone with a $1M home (or above) is either carrying much less via down payment or is in the $4-500k / yr range. Most responses on an assumption that, inflation adjusted, housing prices only rise. For many areas this is not true, the bay might not be one of them, it is probably even more localized for the areas that are more protected from downturns. From your example, a house would be around $5.5k/month before maintenance / capital costs on take home of ?12-14k?. Seems rough, especially if one of those salaries is lost or degrades. It is all perspective though, we're used to lots of space and size. My normal is other people's insane.
coinbasetwwa 4y ago
In a world where property taxes, apartment maintenance fees, etc didn't exist, sure.
- gedy 4y ago
  And prices that never go down (when people need to sell or refinance)
swozey 4y ago
I'm single and bought a $350k 3 bedroom when I was making around $130k. I bought the home because the city I lived in at the time (Austin) had banned townhouses/duplexes/etc so my only option was to rent in a midrise, rent a home, or buy. I wanted a townhouse downtown, not a SFH in the suburbs. Unfortunately I sold said home at the beginning of 2019 and have watched it essentially double in value over the last two years.
thewebcount 4y ago
There are a number of possible reasons: 1. A single person likes to have guests stay over and wants to offer them a room and also have a home office for working from home 2. There are no "starter" homes available in their area. This is what my spouse and I hit in Los Angeles. We tried a condo and ended up suing the person who sold it to us because it was so noisy as to be unlivable. (And it turns out most of the condos in the area are like that.) But there were no small homes available on the market to purchase. When one did show up, they were usually purchased immediately for cash for more than asking price, torn down, and a new home built lot-line to lot-line put in its place and sold for 3x the cost. Eventually, I got some bonuses that allowed us to purchase a larger home so we did that. Now we have a guest room and an office which has worked out great during the pandemic. I'm really glad we did it.

mattmanser 4y ago

in the UK at the moment you can get morgages for 5.25x salary, especially if you have a high income. I assume the US has roughly the same now. The old mortgage multiplers have gone for now.

adhesive_wombat 4y ago
5.25 joint salary, though, so that could be as high as 11.5 times one person's salary for one house if you're buying together (they may have a slightly different calculation when combining salary). And indeed my house, but not the mortgage, was well over 10 times my salary when I bought it. The mortgage was around 8 times my (entry level UK) salary, but about half that if you counted both of us. Which is one route to how people end up in serious trouble: get a mortgage as newlyweds with 8 times one person's salary, then one person stops working for The standard post-marriage activity: kids, and now you have a house you could never have passed the affordability checks for, as well as a very expensive baby. Then interest rates rise. Game over. Luckily for lots of people, interest rates have been miniscule for a while, but I get the feeling that there's a lot of people on the edge.
- Thorrez 4y ago
  What percent of people have fixed vs variable rate mortgages?
  - _Wintermute 4y ago
    In the UK even fixed rate mortgages are only fixed for the first couple of years, which wasn't so bad as rates were decreasing, but obviously things might change in the next couple of years.
    - mattmanser 4y ago
      You can get 5 year fixed, and some lenders have now brought out a lifetime fixed rate: https://www.moneysavingexpert.com/news/2021/03/habito-to-launch--lifetime--fixed-rate-mortgage---how-it-works-/ https://www.moneysavingexpert.com/news/2021/03/habito-to-lau...

maerF0x0 4y ago

Now that value delivered is disconnected from location, live somewhere inexpensive and push for your actual value. The only real requirement is US friendly timezones and 10+Mbps up speed internet. I'm sure there are 100s of cities in America that meet this expectation and would make you "rich" in that locale with a $200k TC . Choosing to live somewhere for the "lifestyle" is in itself a form of expenditure for which your employer should neither be subsidizing nor penalizing.

lcvw 4y ago
I hope that is what happens. So far only a few companies are giving up fully on pay being linked to COL. Even so, flexible work (1-2 days in office a week) is currently revitalizing parts of New York as people move twice as far from the office, drastically reducing housing payments, while keeping the same pay and same total commute time.

twblalock 4y ago

A price to salary ratio doesn't make a lot of sense because it ignores interest rates. At today's interest rates, which are still historically low even though they increased last year, 3x is unusually conservative. The better rule of thumb is to keep housing expenses under a certain percentage of gross income. 28% and 30% are common number that get mentioned in that context. Why gross income and not net income? Because two people with the same gross income might have very different tax situations and their net income could be very different. So, of course you also need to consider what percent of your net income your housing costs represent -- these are all just rules of thumb.

bigcat12345678 4y ago

Where does 3X salary rule come from?

consp 4y ago
It used to be that the average monthly payment on housing would go up to around 25% of your spendable income, at least that was what the government used as a guideline. These days you need over 40% to even get anywhere and even that is unlikely to be enough. I've also noted around here the required income went from about 3-3.5 to around 5 times the rent rate despite that meaning you need a 6+ figure income for even the most basic apartments (which is rare here) which is just risk reduction for the owner.
Layke1123 4y ago
Early America when homes were steady at about that price.
- orthoxerox 4y ago
  In early America you just built your log cabin with an axe and an adze.
  - xcambar 4y ago
    In early America, you pillaged and ransacked.
    - TecoAndJix 4y ago
      In early America, you string up with your fellow ammino acids in the primordial soup
      - xcambar 4y ago
        You won't get me to call Pangaea "early America". So typical of American imperialism. Only second to the Brits. ;)

patrick451 4y ago

Yeah, six figures isn't what it used to be. Same thing with being a millionaire. Inflation has deflated the significance of accomplishing my dreams.

abnercoimbre 4y ago
What do you plan to do?

dalyons 4y ago

What 1980s fantasy is this 3x rule? Median household incomes to home price ratios have risen to ~8x across the US as a whole , not just crazy house price areas like SF/NYC. Canada and Australia are far worse again, pushing 15x in some cities. 3x, if it ever was a rule, has been dead for a long long time.

randomdata 4y ago
> What 1980s fantasy is this 3x rule? The one where you were paying 20% interest on your mortgage.
escapedmoose 4y ago
My gut reaction was also “what kind of outdated rule is this?” until I realized that I accidentally followed the 3x rule almost to the dollar in buying my house. And I have to say, I feel extremely comfortable with the results, so I would recommend it.
__turbobrew__ 4y ago
Vancouver has an average household income of ~$96000/yr and an average price of detached home of $2139200. Pushing over a 22x ratio. This city is actively hostile to new home owners and I am moving away this year to start a family.
silisili 4y ago
There's no way in hell it's close to 8x. Just crunched the numbers, and an 8x mortgage would exceed my monthly take home. I felt pretty uncomfortable at 2.5x. I feel a lot of people are probably extending out to 4 or even 5, but 8 would be irresponsible and I doubt you could even find a lender for that.
- gspr 4y ago
  I'm not saying it makes up for the difference in the arguments, but please note that people seem to be talking past each other in this thread by talking about home price to income ratios and mortgage to income ratios without making a distinction.

newobj 4y ago

3x? That's crazy. I bought a $375k house on an $85k tech salary 20 years ago.

Glyptodon 4y ago
Funny enough my first and only house was actually very close to 3x income at the time I bought it 10ish years ago and everything real estate seems crazy to me now...
- gedy 4y ago
  Same here (California as well)

knicknic 4y ago

3x rule is not a rule but a guideline. It applies more to the average person. If you give someone 100 dollars a day they have to buy food, clothes, rent, education, transportation. You give them 1000 dollars a day they still have to buy the same things. They can then use this leftover to buy nicer food or nicer house. This is why values of homes can get so high in areas. For the people getting 1000 they chose where ti spend this extra money. For people with 100 a day they don’t have extras to reallocate towards rent.