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Years back when we lived in the States it was "max house price was 2.5x aggregate salary" outside of California. In California, it was 4x aggregate salary. Ha

Years back when we lived in the States it was "max house price was 2.5x aggregate salary" outside of California. In California, it was 4x aggregate salary. Has this changed over the last 10 years or so? Are they doing loans with less than 10% down as I thought those kinds of loans exploded in the 00's?

encoderer 4y ago
The sale price doesn’t really matter. There are standards for maximum % of your income spent on monthly housing costs. I think it’s like 25% but don’t quote me.
- Avshalom 4y ago
  35% is what I usually see. That includes taxes and insurance though so what portion of your income can actually get will vary depending on the location. Which works out to about 4x gross.
- tmnvix 4y ago
  It certainly does matter. The size of the deposit is directly related to the price and is the largest hurdle to overcome for many. I would even say that a lower price and therefore deposit together with a higher interest rate can make housing more accessible (even if not necessarily more affordable).
- Kirby64 4y ago
  Sales price definitely does matter though. It was problematic in the 2008 period because housing prices shot up so fast, then crashed, leaving people with houses that were deeply underwater. Although you can 'afford' more sales price with a monthly payment based on a 0% interest loan vs. a 10% loan, it puts you at greater risk. With a higher interest loan, you have more slack to potentially refinance in the future. Also, taxes and insurance are based (roughly) on the price of the house, not based on the monthly payment. The 2.5x-3x annual salary was always a rough rule of thumb, but when I hear people talking about 5-7x their salary... there's very few ways where that house makes sense.
bdcravens 4y ago
FHA loans (3.5% down) are still common.
- j0hnyl 4y ago
  Where are they common? I don't think they're anywhere to be found in any major metropolitan area, but please correct me if I'm wrong.
  - bdcravens 4y ago
    1 in 8 home loans are FHA, and there's no reason why they wouldn't be in major metropolitan area. Are you sure you're not thinking of another loan type, like USDA? https://www.hud.gov/sites/dfiles/Housing/documents/FHA_SF_Market_Share_2022Q2.pdf https://www.hud.gov/sites/dfiles/Housing/documents/FHA_SF_Ma... "In FY 2020, the three most populous states — California, Texas, and Florida — had the greatest counts of FHA-insured mortgage loan endorsements. Together, these states accounted for 28.64 percent of such endorsements." https://www.ncsha.org/blog/fha-2020-annual-report-shows-fhas-impact-on-first-time-and-minority-homeownership/ https://www.ncsha.org/blog/fha-2020-annual-report-shows-fhas...
deleted 4y ago
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parkingrift 4y ago
House price to media income ratio has breached 7x twice in the last 70 years in the US. The first was the 2008 housing bubble. The second is the time period we’re in right now. Make of that what you will. https://www.longtermtrends.net/home-price-median-annual-income-ratio/ https://www.longtermtrends.net/home-price-median-annual-inco...
staticman2 4y ago
Max house price being 3x salary is what I've heard, 2.5 is probably by a more conservative advice giver. But at any rate both are imprecise rules of thumb because they don't account for interest rates. A mortgage at 2.5x salary costs a lot more this year than it did last year.
- hansvm 4y ago
  Salary multipliers are inaccurate to the point of being painfully wrong in almost every context. On top of not offering any room for nuance in a person's financial situation (current savings, cash flow of buying vs renting, net wealth velocity of buying vs renting, ...), even if all of that were appropriately accounted for the range of typical incomes is still too large for the advice to be reasonable: - Suppose somebody is making $40k/yr in a smallish town. They keep $33k after taxes, at most $31k after food for two people, $20k after getting health insurance, maybe $18k after gas, insurance, depreciation, and repairs on a single vehicle (or else on cheaper than normal public transit), and if they're lucky maybe they have $17k left on average after all other expenses living with few adornments. Utilities and repairs are a bit hard to divorce from the home value, but as a rough lower bound you can expect at most $15k/yr left if you take another $1k off for repairs and $1k for electricity and water. Your home purchase needs to come out of that $15k/yr or less budget. - Suppose instead that somebody makes $80k/yr. They keep $60k after taxes and $42k/yr after making the same food, utility, insurance, .... payments. They can afford nearly 3x the home of the first individual, not the 2x a naive salary multiplier would indicate. That effect is even more pronounced with kids or a lot of the other motivating factors (expenses) that lead people to making home purchase decisions sooner, and the totality of the situation is such that for salary multiplier advice to be reasonable you need to constrain the salary ranges in question so much that you might as well just give bucketed dollar value estimates. (and similarly as it applies to sizing life insurance policies, saving for kids' colleges, buying wedding rings, ...)
  - staticman2 4y ago
    Well, at a 4% interest rate your person making 40k probably can afford a house priced at 3x salary. That would be about a 573 a month payment before taxes and insurance The person making 80k a year perhaps could afford a house more than 3x salary, but that wouldn't necessarily be a good idea, since buying as much house as you can afford is probably bad advice. I agree that the multiple is insufficient to determine what you can afford. I would certainly do a budget before deciding what I can afford, and a rent vs buy analysis. Though in my personal circumstances I would say somewhere between 2 and 3 times salary was realistic. At 2.75% interest I bought a house that was around 2.8 times salary. That was a good compromise on housing budget verse other things.

encoderer 4y ago

The sale price doesn’t really matter. There are standards for maximum % of your income spent on monthly housing costs. I think it’s like 25% but don’t quote me.

Avshalom 4y ago
35% is what I usually see. That includes taxes and insurance though so what portion of your income can actually get will vary depending on the location. Which works out to about 4x gross.
tmnvix 4y ago
It certainly does matter. The size of the deposit is directly related to the price and is the largest hurdle to overcome for many. I would even say that a lower price and therefore deposit together with a higher interest rate can make housing more accessible (even if not necessarily more affordable).
Kirby64 4y ago
Sales price definitely does matter though. It was problematic in the 2008 period because housing prices shot up so fast, then crashed, leaving people with houses that were deeply underwater. Although you can 'afford' more sales price with a monthly payment based on a 0% interest loan vs. a 10% loan, it puts you at greater risk. With a higher interest loan, you have more slack to potentially refinance in the future. Also, taxes and insurance are based (roughly) on the price of the house, not based on the monthly payment. The 2.5x-3x annual salary was always a rough rule of thumb, but when I hear people talking about 5-7x their salary... there's very few ways where that house makes sense.

bdcravens 4y ago

FHA loans (3.5% down) are still common.

j0hnyl 4y ago
Where are they common? I don't think they're anywhere to be found in any major metropolitan area, but please correct me if I'm wrong.
- bdcravens 4y ago
  1 in 8 home loans are FHA, and there's no reason why they wouldn't be in major metropolitan area. Are you sure you're not thinking of another loan type, like USDA? https://www.hud.gov/sites/dfiles/Housing/documents/FHA_SF_Market_Share_2022Q2.pdf https://www.hud.gov/sites/dfiles/Housing/documents/FHA_SF_Ma... "In FY 2020, the three most populous states — California, Texas, and Florida — had the greatest counts of FHA-insured mortgage loan endorsements. Together, these states accounted for 28.64 percent of such endorsements." https://www.ncsha.org/blog/fha-2020-annual-report-shows-fhas-impact-on-first-time-and-minority-homeownership/ https://www.ncsha.org/blog/fha-2020-annual-report-shows-fhas...

deleted 4y ago

[deleted]

parkingrift 4y ago

House price to media income ratio has breached 7x twice in the last 70 years in the US. The first was the 2008 housing bubble. The second is the time period we’re in right now. Make of that what you will. https://www.longtermtrends.net/home-price-median-annual-income-ratio/ https://www.longtermtrends.net/home-price-median-annual-inco...

staticman2 4y ago

Max house price being 3x salary is what I've heard, 2.5 is probably by a more conservative advice giver. But at any rate both are imprecise rules of thumb because they don't account for interest rates. A mortgage at 2.5x salary costs a lot more this year than it did last year.

hansvm 4y ago
Salary multipliers are inaccurate to the point of being painfully wrong in almost every context. On top of not offering any room for nuance in a person's financial situation (current savings, cash flow of buying vs renting, net wealth velocity of buying vs renting, ...), even if all of that were appropriately accounted for the range of typical incomes is still too large for the advice to be reasonable: - Suppose somebody is making $40k/yr in a smallish town. They keep $33k after taxes, at most $31k after food for two people, $20k after getting health insurance, maybe $18k after gas, insurance, depreciation, and repairs on a single vehicle (or else on cheaper than normal public transit), and if they're lucky maybe they have $17k left on average after all other expenses living with few adornments. Utilities and repairs are a bit hard to divorce from the home value, but as a rough lower bound you can expect at most $15k/yr left if you take another $1k off for repairs and $1k for electricity and water. Your home purchase needs to come out of that $15k/yr or less budget. - Suppose instead that somebody makes $80k/yr. They keep $60k after taxes and $42k/yr after making the same food, utility, insurance, .... payments. They can afford nearly 3x the home of the first individual, not the 2x a naive salary multiplier would indicate. That effect is even more pronounced with kids or a lot of the other motivating factors (expenses) that lead people to making home purchase decisions sooner, and the totality of the situation is such that for salary multiplier advice to be reasonable you need to constrain the salary ranges in question so much that you might as well just give bucketed dollar value estimates. (and similarly as it applies to sizing life insurance policies, saving for kids' colleges, buying wedding rings, ...)
- staticman2 4y ago
  Well, at a 4% interest rate your person making 40k probably can afford a house priced at 3x salary. That would be about a 573 a month payment before taxes and insurance The person making 80k a year perhaps could afford a house more than 3x salary, but that wouldn't necessarily be a good idea, since buying as much house as you can afford is probably bad advice. I agree that the multiple is insufficient to determine what you can afford. I would certainly do a budget before deciding what I can afford, and a rent vs buy analysis. Though in my personal circumstances I would say somewhere between 2 and 3 times salary was realistic. At 2.75% interest I bought a house that was around 2.8 times salary. That was a good compromise on housing budget verse other things.