Homes: Affordability versus Income

“Well, you know, I’ve been lying about my income for a few years; I figured I could afford a fake house in the Hamptons.”-Seinfeld

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Our old Alaska home.  Photo by The Boy.

Houses are both an economic and emotional topic.  As a half-human cyborg travelling back in time from the year 2000, I tend to focus on the economic side of the equation, however I realize fully that there are a huge number of emotions (like happy, or sleepy, or caffeine) tied up in a house.

A house can also be a home.  And a home is for living in, for entertaining, for loving in, for building memories, for first steps, for raising children.  It’s also where I keep my pants, and that is fairly emotional for me, too.

The process of home-buying is built entirely around emotions.  The agent taking you around to view properties will have the emotional antennae of a cocker-spaniel with daddy issues, attempting to understand what you like, and, if they’re good, they’ll swap around the listings to show you the one that they think you’ll like the most as the last one on a long day.  It’s happened to me.  It’s effective.  For the most part, you’re tired at the end of the day, and you don’t even blink when the realtor tells you about the repeated haunting of the house by the soul-stealing-infant-snatching ghost.  Honestly, you can always get another infant, right?

When selling, though, the realtor puts on an entirely different hat.  It looks a lot like the Pope’s, but it’s orange.

A list of things we’ve been told:

  • No odd objects. Where did you even get a Battlestar Galactica helmet?  Do the lights work and everything?    (Apparently the buyer can’t imagine their things in the house if yours are too striking or unusual, like that coffin we keep in the corner with Uncle Drago’s skeleton.)
  • The smell of freshly baked cookies should permeate your house. If you grill a burger?  It should smell like a cookie.
  • Move your, um, things out. We can then stage it with things that normal people might own.

There’s also a huge amount of emotion based on the selling price of a house.  I’ve seen (and when I was younger, I was guilty of) being emotionally tied to the value of the house.  The value of the house was a reflection of my value!  How dare you say you don’t like the color?  I painted that!

Also guilty of?  Emotion in negotiation.  True story, I once negotiated back and forth so often that the realtors (both of them!) pitched in to close the difference.  At the end we were arguing back and forth over 0.25% of the price.

Also guilty of?  Mixing emotion in with the inspection report.  The Home Inspection is the rite of passage for a home whereby an inspector tries to make the current homeowner’s head explode by picking out every tiny possible thing wrong with a house and then whining about it.  I mean, what’s wrong with exposed copper wiring in the children’s playroom?  They love the way it makes their arms vibrate when they grab it.

I know that emotion is important to those of you who had that chip implanted at the factory.  But, really, in the longer term economics is more important.

In my opinion, the most important aspects of home ownership are:

  1. Affordability/Tax Deduction – When I moved to Houston, I was talking on the phone to the nice lady at the mortgage company, and she said I qualified for a loan that was eight times my salary. The payment alone would have been enough to keep President Trump in hair product for a month.  Me:  “Why would you even offer me that, there’s no way I could ever repay you?”  Her: “I have to tell you that you qualify for it.  They make me.”  More about this topic follows.
  2. Insurability – Let’s pretend you buy a house. Can you even get insurance?  Check with your company – they have a list of houses that they won’t insure based on previous experience and claims at the house.  It’s a downside of the data-driven world, but your mortgage company (unless you’re buying outright) will demand you have insurance, lest they unleash a cauldron of lawyers to play Justin Bieber songs outside your window all night long until you are insured.
  3. Cost of Upgrades/Code Compliance/Upkeep – Over time, these items add a lot to the cost of home ownership, not to mention the amount of personal time you have to spend polishing the Great Orb in the back room, and making sure that the bare wires in the children’s playroom are where they can reach them.
  4. Cost of Commute/Time – If you have a job, where your house is determines how long it takes you to get to work, unless you’re a witch and can teleport. Commuting costs time and money, and detracts from your ability to spend time with your family though, with some families, that might be a plus.  A little more on this follows.
  5. Resale/Future Value – I know I put this kind of low, but this is my list – yours will likely vary. My actual results are below.
  6. Cost of Private Schools/Time – We’ve always bought homes where we didn’t have to worry about this – the public schools have been adequate, and in small-town America, most are pretty good. Our worst schools? Houston area.
  7. Storage Costs – If you buy too small of a place, this might be a thing. Hard not to buy an adequately sized place where we live.

Item 1. In the list above is where it is because, for me, it’s been the most important.  You can have an awesome place that you can’t afford, and that wrecks your life, since the insurance and taxes are consuming so much of your income.

Home Number 1 2 2A 3 4 5
Home Cost as a % of Gross Income 22% 17% 20% 17% 14% 5%
Return (Annual) on Sale 16% 3.4%   11% 0% N/A

Home 2A was a refinance, home 5 is our current home.

Affordability

My experience on home price to income:

  • Home 1: Too expensive, very little money left over.  The cheapest home on the list, but also my lowest income.  Bought at just the right time, but wasted the equity on Pez®
  • Home 2: Next house. Even at 17%, the house was too expensive, but primarily because other debt loads were too high.
  • Home 2A: Same house, just refinanced to buy more Pez®.  Got rid of car payments, so very livable.
  • Home 3: Great house, made a killing, no car or Pez© debt, so that worked for us.
  • Home 4: Debt level okay.  Also a help? We still had no car payments.
  • Home 5:   Next to no income spent on the house.  Plenty of money for Pez™!

Cost of Commute/Time

Home Number 1 2 3 4 5
Commute Time Minutes 20 20 10 30 20
Commute Cost (at $0.35/mile) $14 $12 $6 $14 $14

 

Meh.  Not a lot of difference there, though I will say the 10 mile commute was awesome, and sometimes I biked to work.  In Alaska.  Yeah, it was awesome.

Resale

As you can see, I’ve never lost money on a house transaction.  House 4 was our most expensive house to date, and I had to sell it in the middle of the real estate crisis.  It’s at a zero instead of a negative (it should be about a 20% loss) but when I took a job with that company, one of the conditions on the job offer was that, if they moved me, I would, at minimum, be kept whole on the house.  Nice work, and it was an easy negotiation that took the form of one question, followed by a “sure, we can do that.”

It’s likely that whenever we sell our current house, it’ll be at a loss.  We bought it at a time when the market was (locally) pretty hot, but those days are likely gone.  It’s okay, because at my current equity and payment, it’s really not a strain.

What would have been a killer for me would have been living in a house that was too expensive and unaffordable.  Based on the above, I’d peg that as a total home payment (including taxes and insurance) of less than 1.4% of your annual income.  Above that, and I think (depending on your debt structure and payments) that is enough that ever purchase has to come under extreme scrutiny.  And it gets tough, and life is much less fun.  So, I’d go for a less expensive house, even if it means living with the soul-stealing-infant-snatching ghost.  At least it does dishes more frequently than Pugsley or The Boy.

John Wilder may be a Nobel©®™ Prize winner, but he is not a financial advisor.  So, talk to someone who isn’t the Internet equivalent of Bluto Blutarsky.

Author: John

Nobel-Prize Winning, MacArthur Genius Grant Near Recipient writing to you regularly about Fitness, Wealth, and Wisdom – How to be happy and how to be healthy. Oh, and rich.