4 ms·

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 beca

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.

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.