5 ms·

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

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My gut reaction was also “what kind of outdated rule is this?”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.
- dalyons 4y ago
  I should have provided these in my first comment: Median-income-to-house price by state : https://constructioncoverage.com/research/cities-with-highest-home-price-to-income-ratios-2021 https://constructioncoverage.com/research/cities-with-highes... As you can see California is at a whopping 8.9x US overall: https://www.longtermtrends.net/home-price-median-annual-income-ratio/ https://www.longtermtrends.net/home-price-median-annual-inco... Pushing 7x.
  - silisili 4y ago
    Damn, I completely misunderstood what you were saying, sorry! For some reason I was reading the comment that the average homebuyer is paying 8x their salary for a house. What you've been comparing are median incomes to sales prices. A useful indicator, but not capturing what people are actually paying - it is entirely possible the 'medians' are priced out, especially with such constrained supply. That makes me feel way less crazy now... apologies again.
    - dalyons 4y ago
      no worries at all. Even though as you said it's "not capturing what people are actually paying" it's related, and still horrifying to me, as a measure of overall housing affordability. Esp when you look at places like vancouver, sydney, melbourne.... At 10x I cant understand how the market keeps going - how do home ownership rates stay so high? how are people affording these multiples? It just doesnt make sense to me how it can keep going. To your point this measure includes the people who cant afford to buy at all , but theres still enough ownership % overall that it doesnt add up to me.
- jcadam 4y ago
  I'm at 2.8x and no sir, I don't like it. At least I got 2.75% on my mortgage. Though I have a feeling we're heading back to 2008ish levels of job insecurity so maybe I'll end up homeless after all.
- danachow 4y ago
  Maybe you miscrunched? A 5x mortgage over gross pay should be just over 30% of monthly gross take home. Maybe too much for some, but not absolutely irresponsible - especially if you choose to stay in a stable housing market. 2.5x is completely ridiculous to expect - that’s going to be far below rental payments in most places that anybody would want to live. Its definitely not the norm. It’s obtainable in some areas of the northeast like Pittsburgh and the Midwest. But usually the catch is property taxes are outrageous.
  - Beached 4y ago
    but total cost of home ownership is supposed to be 33% of take home. how do you pay electric, gas, internet, trash, water, sewer, umbrella insurance, AND routine maintenance on just 3%?
    - javagram 4y ago
      Utilities normally wouldn’t be included in the 33% of take home rule - the 33% rule applies to renting an apartment too, where most of the items you listed except trash are also separate costs not included in the 33%. (Also the 1/3 rule is of gross income not take home.)
  - inetknght 4y ago
    > 2.5x is completely ridiculous to expect - that’s going to be far below rental payments in most places that anybody would want to live. That's because rental prices are ridiculous.
  - silisili 4y ago
    It's really hard to compare because of how rates doubled in a period of 2 months. At today's rates, which I'll enter at 5.2%, A person making 200k at 8x is buying a house worth 1.6 million dollars. Assuming a 320k down payment(ha), 20k in taxes, and 5k in insurance, the monthly payment comes out to over 9000 a month. I don't think anyone in CA at 200k is taking home that much monthly, but maybe my math is off. I think 2.5x is also probably not the norm, but I'm extremely conservative with money and what I went with. 4 or 5 I can believe, but in today's market with today's rates, I can't see how 8x is even possible.
- mijowi 4y ago
  Prior to a recent promotion I was at ~6.7x. I still had some frivolous spending on going out and such, but I’m a bachelor. This was also before the recent inflation rise. Now I’m at 5x. Do I feel comfortable? Mostly… I work for the government so I’m not worried about losing my job, but rising inflation has eroded away the safety buffer I hoped to have with the increased salary. I’m concerned about how an expensive emergency situation could affect me.
- slyall 4y ago
  Ratio is usually calculated on household income. So it assumes closer to two incomes per household. Where I live (Auckland, New Zealand) the average household income is just over $NZ 140k, while the average house price is around $NZ 1.4m.[1] https://www.stuff.co.nz/life-style/homed/real-estate/127803109/drastic-fall-in-nz-housing-affordability-takes-it-to-worst-level-on-record https://www.stuff.co.nz/life-style/homed/real-estate/1278031...
closeparen 4y ago
Take, like 30 cash-rich buyers chasing 25 available homes in a given year. That sets the value of hundreds of thousands of homes in the metro area. All those homeowners now have a ton of equity that they throw around in their subsequent purchases. That doesn't mean "everyone" is spending huge multiples of their salary in cash, it just means a handful of people did. The rest rode the wave of equity.
refurb 4y ago
When interest rates were at historical norms (5-7%), 3x income was a good rule of thumb to estimate a housing payment of 1/3rd your after tax salary. $100,000/yr = $8,300/month pre-tax = $6,000 after tax $300,000 home minus $60,000 down @6% = $2,000/month for mortgage + tax + insurance But I recall right before the 2007 crash my manager was shopping for a mortgage and they were willing to lend him $800,000 on a $120,000/yr salary.

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.
dalyons 4y ago
I should have provided these in my first comment: Median-income-to-house price by state : https://constructioncoverage.com/research/cities-with-highest-home-price-to-income-ratios-2021 https://constructioncoverage.com/research/cities-with-highes... As you can see California is at a whopping 8.9x US overall: https://www.longtermtrends.net/home-price-median-annual-income-ratio/ https://www.longtermtrends.net/home-price-median-annual-inco... Pushing 7x.
- silisili 4y ago
  Damn, I completely misunderstood what you were saying, sorry! For some reason I was reading the comment that the average homebuyer is paying 8x their salary for a house. What you've been comparing are median incomes to sales prices. A useful indicator, but not capturing what people are actually paying - it is entirely possible the 'medians' are priced out, especially with such constrained supply. That makes me feel way less crazy now... apologies again.
  - dalyons 4y ago
    no worries at all. Even though as you said it's "not capturing what people are actually paying" it's related, and still horrifying to me, as a measure of overall housing affordability. Esp when you look at places like vancouver, sydney, melbourne.... At 10x I cant understand how the market keeps going - how do home ownership rates stay so high? how are people affording these multiples? It just doesnt make sense to me how it can keep going. To your point this measure includes the people who cant afford to buy at all , but theres still enough ownership % overall that it doesnt add up to me.
jcadam 4y ago
I'm at 2.8x and no sir, I don't like it. At least I got 2.75% on my mortgage. Though I have a feeling we're heading back to 2008ish levels of job insecurity so maybe I'll end up homeless after all.
danachow 4y ago
Maybe you miscrunched? A 5x mortgage over gross pay should be just over 30% of monthly gross take home. Maybe too much for some, but not absolutely irresponsible - especially if you choose to stay in a stable housing market. 2.5x is completely ridiculous to expect - that’s going to be far below rental payments in most places that anybody would want to live. Its definitely not the norm. It’s obtainable in some areas of the northeast like Pittsburgh and the Midwest. But usually the catch is property taxes are outrageous.
- Beached 4y ago
  but total cost of home ownership is supposed to be 33% of take home. how do you pay electric, gas, internet, trash, water, sewer, umbrella insurance, AND routine maintenance on just 3%?
  - javagram 4y ago
    Utilities normally wouldn’t be included in the 33% of take home rule - the 33% rule applies to renting an apartment too, where most of the items you listed except trash are also separate costs not included in the 33%. (Also the 1/3 rule is of gross income not take home.)
- inetknght 4y ago
  > 2.5x is completely ridiculous to expect - that’s going to be far below rental payments in most places that anybody would want to live. That's because rental prices are ridiculous.
- silisili 4y ago
  It's really hard to compare because of how rates doubled in a period of 2 months. At today's rates, which I'll enter at 5.2%, A person making 200k at 8x is buying a house worth 1.6 million dollars. Assuming a 320k down payment(ha), 20k in taxes, and 5k in insurance, the monthly payment comes out to over 9000 a month. I don't think anyone in CA at 200k is taking home that much monthly, but maybe my math is off. I think 2.5x is also probably not the norm, but I'm extremely conservative with money and what I went with. 4 or 5 I can believe, but in today's market with today's rates, I can't see how 8x is even possible.
mijowi 4y ago
Prior to a recent promotion I was at ~6.7x. I still had some frivolous spending on going out and such, but I’m a bachelor. This was also before the recent inflation rise. Now I’m at 5x. Do I feel comfortable? Mostly… I work for the government so I’m not worried about losing my job, but rising inflation has eroded away the safety buffer I hoped to have with the increased salary. I’m concerned about how an expensive emergency situation could affect me.
slyall 4y ago
Ratio is usually calculated on household income. So it assumes closer to two incomes per household. Where I live (Auckland, New Zealand) the average household income is just over $NZ 140k, while the average house price is around $NZ 1.4m.[1] https://www.stuff.co.nz/life-style/homed/real-estate/127803109/drastic-fall-in-nz-housing-affordability-takes-it-to-worst-level-on-record https://www.stuff.co.nz/life-style/homed/real-estate/1278031...

closeparen 4y ago

Take, like 30 cash-rich buyers chasing 25 available homes in a given year. That sets the value of hundreds of thousands of homes in the metro area. All those homeowners now have a ton of equity that they throw around in their subsequent purchases. That doesn't mean "everyone" is spending huge multiples of their salary in cash, it just means a handful of people did. The rest rode the wave of equity.

refurb 4y ago

When interest rates were at historical norms (5-7%), 3x income was a good rule of thumb to estimate a housing payment of 1/3rd your after tax salary. $100,000/yr = $8,300/month pre-tax = $6,000 after tax $300,000 home minus $60,000 down @6% = $2,000/month for mortgage + tax + insurance But I recall right before the 2007 crash my manager was shopping for a mortgage and they were willing to lend him $800,000 on a $120,000/yr salary.