Home buyers and debt: "We're thrilled"...45% of income not uncommon

[Bush_Eats_Beef]

Posted on Thu, Aug. 18, 2005

Home buyers get comfy with debt

`WE'RE THRILLED': 45% OF INCOME IS NOT UNCOMMON:

By Pete Carey, Mercury News

http://www.mercurynews.com/mld/mercurynews/news/local/12412865.htm

Brett and Sarah Klynn could be poster-children for a new, innovative generation of California home buyers that, despite soaring prices, has taken on crushing debt to push homeownership to its highest level in decades.

The Klynns, both in their 20s, took out five loans to buy a two-bedroom, two-bath condo near San Jose's Kelley Park in May. They are spending roughly 45 percent of their income on their home, a not uncommon portion for new home buyers.

One out of five recent buyers have committed more than half their total earnings to homeownership, according to a new study. Slightly over half of home buyers in the past two years spend more than 30 percent of their total income on housing, exceeding a level recommended by the U.S. Department of Housing and Urban Development. Because the study was based on data from 2003 and 2004, the situation now can only be worse because home prices have continued to rise dramatically since then.

``My biggest regret is we didn't start a year ago,'' said Sarah, 26, who teaches sixth grade at Windmill Springs Elementary School three miles from her new home. Some of the money to pay for the $436,000 condo came from deferred payment loans set aside for teachers by the state and the City of San Jose. The rest, including a $311,000 below-market loan from the California Housing Finance Agency, was arranged by Neighborhood Housing Services Silicon Valley, a non-profit that helps first-time home buyers.

[GOPisEvil]

1. 45%?! Are they high?

My house is 32% of net for me, but if I were married to a woman that worked at ANY job, that would be a lot lower percentage.

45% :wow:

[bleedingheart]

4. Mine is 15% of net income for me... (including property taxes)

we bought a home that our friends referred to as a "quaint" starter home...and as they all tripled their home debt...we stayed and refinanced into a 15 year loan so we could pay it off even sooner...

I truly don't believe that over extending yourself to pay for a home is a good financial move...Imagine what these folks will pay out in interest if they stay in that place!!

[ProfessorGAC]

17. Sheesh! Mine Is At About 8%

And my wife is retired. When she was working it was about 6%. 45%?!?!?!? That's preposterous. Is it even possible for them to have any furniture? After utilities, food, clothing, gas, and car expenses, it's hard to see how they'd have a dime left.
The Professor

[bleedingheart]

20. imagine how the rising fuel costs affect their budget...

hell it shocked me when I got my gas card bill....but then I have "wiggle room" in my budget and can absorb that....

[ProfessorGAC]

24. That's A Good Point

Very few people envisioned such a sudden price surge. The average car has 15,000 miles per year added to it. The average U.S. passenger vehicle fleet gets 23mpg. That requires 650 gallons of gas per year.

At $2 per gallon, that would have been $1,300. At $2.80/gal, that's an extra $40 per month! That's gotta sting when the first 45% is already gone.
The Professor

[Clark2008]

44. Same here - 32 percent and I'm single

Well, I'm single for a few more months. After that, it will probably be closer to 15 percent.

[AlCzervik]

2. your total housing debt shouldn't exceed 22% or at least that used to

the %. 45% is just scary.

[bleedingheart]

6. Yep...but those are those "old rules"...common sense has been thrown out

My mom used to say that you shouldn't buy a home that is more than 2.5 times your income...and she said to remain conservative about your earning potential.

[AlCzervik]

9. your Mom is a smart lady that offfers good advice

i was a realtor until 3 months ago and i always told clients to really, really think about how much they can afford and still have a life. So many people forget about property taxes and utilities as well. All these people that have a 0 down interest only loan better have a great knack for timing.

[bleedingheart]

11. thanks...she is a smart lady...

She and my dad started with nothing when the married. He earned around $7,000 a year when they got hitched in '65. When he died in '80 he was making about $14,000.

They bought and paid for their house in 7 years. (it cost $14,000)
They put away all spare cash in the bank and my mom invested it wisely..remember high interest rates when Carter was in office???

Even though he died while I was a child, she worked 4 jobs and put money away from her jobs (she made about minimum wage and got about 25 hours of work in a week) and we lived off the social security...(only $780 a month for her and two kids)....

Today she is retired and she lives off her social security, his pension and her investment income....and is debt free and comfortable...

She thinks the people that overextend themselves are just in for a big fall....

[Bush_Eats_Beef]

15. Current median home price, Santa Clara County CA: $700,000

So let's assume that a couple makes a combined income of $120,000.

In the Clinton years, that would have been a reasonable thing...now I'm not so sure.

120,000 x 2.5 = $300,000.

So not only will that not buy a HOUSE in this valley...it won't even buy a "thrilling" $436,000 two bedroom, two bath CONDO.

Two years ago I lived in an apartment complex in Santa Clara. While the landscaping and exterior design was nice, the apartments themselves had paper-thin walls. The management company (Archstone...NEVER rent an Archstone apartment) sold the property to a condo developer. They put in new carpets, new kitchen cabinets and appliances, painted...did NOTHING with the paper thin walls...and the initial selling price for a ONE BEDROOM, ONE BATH "condo"...formerly APARTMENT...was $265,000.

That was TWO years ago.

So that's what 2.5 x a combined income of $120K will get you in this valley...a one bedroom apartment. With a carport, no garage.

And day after day after day, people line up like lambs to the slaughter to get "thrilled."

[bleedingheart]

18. I feel bad for people in those areas, in fact we didn't move because of

that kind of situation...

We live in Pittsburgh...reasonable housing is available here as well as McMansions.

Hubby had a great opportunity to move to Ann Arbor Michigan. BUT...housing at the time was out of our range. For a home that was smaller and not as nice as ours in Pittsburgh it was more than double what our house was worth...and that was in a "so so" area...

Since my husband was in management the company hand picked the realtor and had them take us to neighborhoods they wanted him to move into....and those homes were in the $400k range...

In the end...we remained in da 'burgh...cuz we realized that our financial peace of mind was worth more than taking that position...and things have worked out for us...

BUT not all people have those choices and to see markets inflate like they do in CA...I can't help but think something is just so sinister and wrong....

I had a friend that worked for Boeing in CA...she and her husband were paying two mortgages and were waiting until the bubble got bigger again where their first home was so that they could sell it...that way they wouldn't be taking an even bigger loss...

[AlCzervik]

19. We live in Elk Grove and we bought 5 year ago

our house is about 2100sf and with some upgrades we paid at the time $209,000 and then 6 months later we put a pool in and did some other upgrades on our own so we've sunk about $35,000 into the property in the past 4 years. We were thinking of moving closer to Cupertino because my husband works there but after looking we gave up, the prices were just too high for us, we could have bought but we would have been house poor and it just wasn't worth it. My house now could sell for $575,000 and i had to rebuy it, we'd be house poor. We are staying put for the foreseeable future.

[bleedingheart]

25. Mortgage interest over 30yr fixed at 5% would be $606,000 and that

is if they put the 20% down on a traditional mortgage....

Egads...that means someone will end up spending about 1.3 million if they stay in a 700K home....

[Southpaw Bookworm]

40. But what do you do

When there are no homes available 2.5 times your income?

It's not always a matter of lack of common sense, it's that home prices are insane in some areas, yet people must have somewhere to live.

[bleedingheart]

43. you have to weigh the risks. It might just be better to rent

or stretch your commute...depends on the individual circumstances.

In some cases it might be worth moving if possible.

Somehow I don't think that it is good for people to rationalize themselves into bone crushing debt. If you collectively only make $100K a year and the only homes for sale are starting around $400K or up...then you have to figure out how to either save more for a down payment, or figure out whether or not it is worth the risk.

What happens if one of you loses a job? Gets sick? or the boss comes in and cuts your salary by 20%....

On the pro-side...you both can get extra jobs to try and pay down your debt faster or to create a better cushion....but that takes more sacrifice...and if you are already working 40 hours a week...and you need to put in 16 hours a week at an extra job....where is your quality of life????

Sex and Money are two of the biggest issues couples will split over and expensive homes and lifestyles have destroyed marriages...my hubby's parents split over the stress of overextending themselves...

[ProfessorGAC]

38. From The Board Of Directors Of A Small Bank

I can tell you that the number we always use is 30% of net income, monthly, INCLUDING property tax estimates. IOW, the total monthly payment. But, thinking about median income, that probably works out to 22% for principal and interest. So, we're probably saying the exact same thing.

The frightening thing about the article is that this 45% is JUST THE PRINCIPAL AND INTEREST! Who knows what property taxes are consuming of that income. They'd be using credit cards to buy all their food!

This is a bad situation. It's simply unsustainable.
The Professor

[bleedingheart]

50. and people have convinced themselves it is an investment!

...but is it...

When you look at what they will pay cumulatively over the life of the loan (if they remain there)...is is doubtful they will make most of that back in spite of the write-off they get from the government.

I had a discussion with a woman while my car was being serviced and she told me that she wondered why so many people lacked basic math skills/common sense when it came to mortgages...I told her I couldn't quite figure that out myself.

[ProfessorGAC]

51. I Agree With You

I think of my house as my HOME! The investment thing works fine if you place ZERO economic value on the hassle of moving and rebuying, etc. Then, it only works if you catch the wave of the market spike. There were people in California, in the 90's that were buying 2,000 square foot homes for $800,000, thinking they would stay 3 years and make a tidy profit. Instead, the bubble burst and they got hung with a half-million dollar mortgage on a house worth $450k and no market to sell.

As to your "common sense/math skills" question: No answer from me either. It's not that hard.
The Professor

[bleedingheart]

53. I also have to admit it is easy to get "caught up in the wave"

when we started to see the McMansions going up all over the place and the roomier master suites and private baths...we were more than a little "interested"... all it took was a few open houses and we were thinking..."we gotta have that"....then we sat down and did the numbers and realized what we would be doing to ourselves...and it was like someone poured cold water over our heads.

So I can understand the lure of it...but I just find it interesting that so many people are willing to take those risks.

[Rude Horner]

3. This is just plain scary

45% of their income per month goes towards their mortgage? FIVE LOANS?!!! And all this during a time of soaring gas prices, which in turn is going to lead to soaring prices for everything else. People in this situation are going to get a big wake up slap in the face when they can't afford to put food on their table.

But ol' George is telling us that the economy is strong. Hmmmm...I just don't get it. I mean, he isn't LYING, is he? :sarcasm:

[Thtwudbeme]

5. Did you catch the part about one of the loans being arranged by a

non-profit?

[Midlodemocrat]

7. Ours is 10%.

we chose to stay in our smaller home and add on rather than take on a much higher mortgage.

[Squatch]

8. 24% for us. Wife left her job after our first was born.

so we felt the pinch for a coupla months.

Before she left her job, it was around 15%...those were the days.

[LondonReign2]

22. There is much to be said of staying within one's means

Ours is about 17% of gross, and that is only because my wife is currently staying at home with our two small daughters. Sure, we could have even a bigger house, but ours is great as is. And while the neighbors plow cash into outrageously expensive cars and furnishings, we keep stashing away cash and investments.

I realize that housing markets are taking away such opportunites in places like California, and we'll probably get dinged somewhat when we move back to a more expensive market like Chicago, but people need to keep perspective and live within their means.

[Squatch]

32. Exactly.

We put 16% of gross away each month in investments. We live in a modest house (ten years old, ranch style, 1700 sf, .25 acres), and still have money to play with, which is nice. Not as much as when she was working, too, but enough so that we can enjoy the finer things in life often.

[stopbush]

41. Ditto. Ours is 24% including property taxes and HO insurance.

We are also saving big time on utilities compared to what we paid in NJ and NV, simply because the climate in N Central CA is less extreme. At least we don't have to run the AC all night!

BTW - we just bought our home this month. We paid $383,000 for a 3-bdrm built in 93. Not a bad price considering it's CA, but the sellers purchased this home for $180,000 in 98!

Further BTW - we sold our home in NJ in 2003 for $390,000. That same model in our old town is now listing for just under $600,000.

[MercutioATC]

10. 45%!!!!! I pay about 12% of my gross on housing.

[Rude Horner]

12. 14% here.

14% of gross. I can't imagine what things would be like if I was at 45%.

[bleedingheart]

13. Over 30 years they will pay more than $350,000 in interest...

how is that an investment????

[K-W]

16. In newspeak we call indentured workers invested workers. EOM

[MadHound]

14. With this economy fixing to go south soon,

With the housing bubble ready to pop, and energy costs soaring through the roof, the perfect economic storm is just offshore. When it hits, there is going to be hurt and want and misery not seen in this country since the Great Depression. And a sizeable portion of that will be made up of people like this couple, the Klynns.

Shouldered with a crushing load of debt, hung about the neck with the albatross of overvalued property, unable to get out from under it all via bankruptcy, it is going to get ugly out there. Suicides, murders, theft and property destruction will all make an appearance.

Meanwhile the rich will continue to get richer, while the rest of us die. Hopefully people will start to wake up then and take our country back from the corporatistas. Apparently they're not going to wake up before it is too late, at least judging by these folks.

Forty-five percent of your take home?:wtf: Somehow I think that these kids are a product of our instant gratification society. Hell, whatever happened to buying a starter house and then working up to the dream home? And let me guess, they're probably carrying $10,000+ in credit card debt. Idiots all.

[K8-EEE]

30. There ARE No Starter Houses In LA! Even A Ghetto Condo Is

at LEAST 300,000 if youc an find one. A decent 2 br house is simply out of reach.

We bought our 1 br, 1 ba house in 1989 and saved cash for 7 years to add on another bedroom and bath -- even so we spend 20% of our income on housing which around here is really LOW but only because we bought when we did.

[MadHound]

34. Then maybe it is time for people to start moving out of the LA area.

Seriously. I understand that the pay scale is higher there, but if one can't afford basics such as housing, utilities, etc. then it is time to move. Enough people do this and the demand will fall, bringing down prices with it.

[K8-EEE]

35. It's My Home...

I've lived here all my life, I don't want to leave -- since we bought our house years ago it doesn't affect ME so much but I worry about my kids if it doesn't straighten out.

[MadHound]

39. I understand that sentiment, and I really wasn't addressing your situation

I speaking more to the couple in the OP, or anybody who is just starting out in life. Saddling one's self with that kind of debt load right out of the gate is absolutely insane, and rather than doing so, they should simply move elsewhere. Hell, come on out here to Missouri, where one can get a nice 2400 sq ft house sitting on twenty acres for less than $150,000. And if not Missouri, there are many other fine places in the country to move to where the cost of living isn't outrageous. The coasts aren't the be all and end all of life.

[K8-EEE]

49. I Understand, My Husband Is From Buffalo

When we visit I am floored by the square footage and low house prices but by the time I leave -- I'm kissing the ground at LAX!! My dad is from Springfield IL same thing, gosh it just feels so flat and oppressive to me there. Both my dad and my husband left their respective Red State homes the week after high school graduation, headed out here and never looked back! After the 94 earthquake I was all set to move my husband goes, are you crazy? -- I'm not going back to 6 months of winter or dealing with rednecks, I'd rather be burried in rubble!

[sleipnir]

21. The new standard is 33%. You should not exceed that number.

It's now up to 33% folks. I can smell the housing crash coming very soon.

[LynneSin]

23. And Rick Santorum thinks women should stay at home and not work

How the hell would anyone be able to afford a place if women weren't suppose to work.

[bleedingheart]

27. My mother-in-law told me to quit....but when Hubby was laid off

I wonder if they would have shouldered our mortgage until he found a job.

[anarch]

26. speaking as a rent-payer, not a home-owner

and considering my S.O. has been laid off...I guess in the near term I'm looking at something like 55% of net income on housing...this is especially fun in the midst of rising costs for absolutely everything, medical bills, and lately an increased minimum payment on my maxed-out credit card (thanks to: medical bills, layoff-related financial woes, and being pretty much poor as dirt to begin with).

Wheeeee!! I'm "thrilled" too!! God bless America! :crazy:

Like I keep saying, good thing I've learned to get by without eating!!

[stopbush]

42. Renting sucks as you don't get that wonderful deduction for

property taxes. Yet, you're paying them for your landlord, aren't you?

[hfojvt]

54. alot of homeowners do not get that either

Only if your property taxes, sales taxes, mortgage interest, charitable donations, etc. are more than $4700 does that "deduction" mean anything. Even in the first year of my home loan, interest was only $1378. As is typical, those deductions do not kick in until you hit the higher incomes, more expensive houses.

[LSK]

28. is that based on pre tax income or post tax income???

I always get confused with what Net Income is.

[Squatch]

31. Net is after tax...may not reflect their actual takehome...

since 401(k), medical, etc are taken out on a pre-tax basis.

It would be better to show this in terms of gross pay, IMO.

[LSK]

33. ok, that puts me at 29%

But I do not have many other bills and no other debt or car payments and I am able to save 20-25% of my net income a month. I have a fixed loan at 6%.

Its just expensive to live in the Chicagoland area and stay somewhat close. I have a 30 year old townhome and Im still 30 miles from downtown Chicago.

[Lydia Leftcoast]

29. This is why I refuse to buy

Home ownership is nice, but I've done the math for condos that are equivalent to the apartment I'm renting, and I still come out ahead renting, even with the tax breaks, especially since I wouldn't be able to make a very large downpayment.

I had a friend in Portland who kept ragging on me to buy because I was missing all those wonderful tax breaks. She bought a house, spent $15,000 fixing it up, and then lost her job. When she was forced to sell it, she had only $18,000 in equity.

No thank you.

The people who buy expensive houses with interest-only mortgages are just plain stupid. This means that they're not building any more equity than I am as a renter, so if they were ever in my friend's position, they'd get NOTHING out of the sale of their property.

There seems to be a keep-up-with-the-Joneses mentality in homebuying. All your friends have a McMansion, so you have to have one too, even if it means living 50 miles away from your job and 5 miles from the nearest stores or services, even if it means spending half your income on the stupid house and probably another 25% on your two cars. Insane.

Where did I read the other day that in San Diego it costs far less to rent than to buy?

My past bad experiences with debt have made me very, very wary of it. If I ever received a windfall--the lottery, an inheritance, or some such--I'd pay cash for a condo, or as close to the full cash price as I could manage.

As one financial expert has pointed out, the tax break on mortgage interest has you paying $1 for 35 cents worth of tax break.

[TahitiNut]

36. Been there; Done that. (in 1983)

Rent in Silicon Valley is a minimum of 1/250th of the market value of the house/condo. So, a $500K townhouse would rent for $2,000/month. (Renters don't get the mortgage interest deduction.) A $500K townhouse is below the median in housing but, at 40% of gross income, the resident(s) would have to earn $5,000/month or about $60K/year - which is above the median annual income. It makes more financial sene to buy, if you can come up with a down payment - even by borrowing it. That's because that "below median" income gets taxed at federal rates that don't reflect salaries in Silicon Valley - where $60K is, in effect, barely above poverty level.

The biggest hurdle is first-time home buyers. Particularly in a rapidly rising housing market, leveraging a 5% down payment is just about the highest return on investment people can get. The market equity after a year or two is enough to do a 10-20% down purchase. A LOT of people in Silicon Valley are relocatees ... intending at some point to move back 'home' or somehwnere else in the country. These folks look at the equity inflation curve in the valley and look forward to cashing in in a less inflated market some day. With the exemption from capital gains enacted in the 90's, transferring that equity to a midwestern market buys a McMansion -- with widescreen high-res home theater and an SUV in the 3-car garage. The downside? Default - and the loss of a modest down payment. Even with a default, the income tax picture makes 'ownership' better than renting.

:shrug:

The conditions in Silicon Valley are, in a very large part over the last 20 years, due to financially immature younger people who live paycheck-to-paycheck. Freshly out of college, techies reacted as though they found the end of the rainbow. Rather than en masse conserving their income and living modestly, they went on buying sprees. Stock incentive (ISO) windfalls just fed the fire. BMWs, high tech gadgets, wide-screen TVs, and a host of luxury goods got scoffed up like mad. Already high, the excesses of the 80's blew home prices out of all proportion. With a 2-year hiccough during Poppy Bush, it resumed its explosion in the 90's. Adding to this is the extraordinarily tight leash on real estate (land and improvments) that is one of two big money power structures in California. (Water is the other.) Keeping supply below demand by hyper-reactionary licensing and zoning, the prices skyrocketed.

It's a huge game of "musical chairs." The trick is going to be not holding the ownership bag when the market bubble bursts -- as it eventually must.

[Lydia Leftcoast]

46. But in a two-income family, $2000 a month for rent

would be affordable and certainly not equivalent to 45% of their income.

As another poster above pointed out, they'll pay $350,000 in interest over thirty years.

Let's assume that each of them makes $60,000 a year, for a total of $120,000, not an unlikely prospect in that area. That means $54,000 a year in house payments, or about $4500 a month. This is $30,000 more a year than they would pay as renters.

They could take the extra $30,000 and put it into a variety of investments. In 30 years, even NOT taking interest into account (I have interest tables somewhere, but I don't have time to dig them out), just with the accumulation of their principle, they'd have $900,000 in the bank. With compound interest, they'd definitely be millionaires.

In extraordinary circumstances, conventional wisdom doesn't always work.

[bleedingheart]

52. even when you factor in the interest deduction on taxes it isn't a deal

cuz...the feds give you approximately $0.30 back for each dollar in interest spent.....so even on the $350,000 in interest that is about $98,000 in tax deductions over 30 years...and that is if your tax income bracket is that high...it may be lower...

People generally don't realize all that savings and many don't save it or even wisely put it towards principal...

So in the end if you have a 400K house and pay out 350K in interest ...and say you get 100k back on the taxes you write off....then....you are looking at a house that cost you 650K and will it be worth that when you go to sell it? If not then the "investment" in your home did not pay off as well. Now I realize that homes are more than just investsments...you live in them and you use them...they also bring enjoyment...but it is something that people should really think long and hard about before taking the plunge into the house debt bucket...

[newportdadde]

37. That is insane.

For us we are around 20% thats just the mortgage, no property taxes or insurance. I save 10% off the top pretax also so if I spent rather then saved that money it would be a bit lower.

We have a toddler with twins on the way. I simply cannont imagine having 45% of salary going to a house payment.

What if this couple is like my wife and I and finds out.. oops your having twins.. hell daycare alone for them and our toddler is way MORE then what my wife made as a teacher. Thank goodness we didn't need her income. This couple is really rolling the dice.

[bleedingheart]

45. our society does not encourage people to thnk ahead..

I remember when we were looking to buy a home. There was a house that was about 70K more than the one we ended up buying. We really loved that house...wanted it...but I remember going home and calculating our income and the "what if" scenarios...like daycare and if someone lost a job...and that house that cost 70K more just didn't look so "nice" anymore...
We settled for the 1200sq ft ranch which was $92K and we now are far more comfortable financially...

[MissB]

47. Good Gawd. I feel uncomfortable paying 14% of our income

towards our mortgage. Sheesh.

[Blue_Tires]

48. wow...and i'm nowhere near able to think about my own home

the first financial harship they come across will probably be the end