What is the max home I can afford?

[mysticaltyger]

Originally Posted by nagleepark

Isn't this a pretty good retirement plan? Buy a Cupertino house in 1980 for $25K and sell it in 2015 for $1.2M. Then, buy a house in Utah for $250K and live off $900K (plus whatever you put into retirement plans) until a ripe old age. This ISN'T my plan but it's a reasonable plan.

Not saying it can't work, but I think there are too many things that can happen for it to be considered anything but a Plan B. Sometimes people don't want to move because they have family in the area. You can't bank on home prices appreciating as they have in the past (although I concede, I think they will in this area...although home prices may not increase as fast as stocks will). The other issue with living in the expensive neighborhood is that there are a lot of non-house expenses that go with living in a more expensive neighborhood...more expensive stores for shopping, neighbors doing more expensive activities, etc...ultimately people end up consuming at the level of those around them. Everyone thinks they won't end up doing that. Most are wrong. The people who can resist that temptation are most likely the ones who won't stretch to buy the house in the first place.

Originally Posted by nagleepark

Are you saying that, if somebody takes a $1M loan now, that they'll have the same chance of defaulting on the final payment in 2044 as their first payment? $1M may be a big risk now but, in 10 years, it may be a relatively average loan.

Maybe not in 2044, but what about 2024 or even 2034? You make it sound like getting through the first 10 years is no big deal. I beg to differ. Look at what's happened with our economy over the past 10 years. Then go back the past 15. It's been a wild ride.

Originally Posted by nagleepark

There was a time when a Coke was a nickel, average salaries were $6K per year and a house was $25K. In the future, there will be a time when a Coke will be $5, average salaries will be $200K and a house will cost $2M. That's just inflation. It's ridiculous to think that $1M in today's dollars will have the same value/risk/worth 30 years from now. The inflation rate isn't 0%.

I don't disagree with any of that. I just think it's irrelevant. If you're stretching to get the max mortgage, you're asking for trouble.

Originally Posted by nagleepark

You're right but it's a matter of odds. Even if the guy borrows only $250K, there's a chance (however small) that he and his wife lose their jobs, be unemployed for 10 years, be foreclosed on and lose everything.

Correct.

Originally Posted by nagleepark

How do those odds change if he borrows $500K instead? Or $750K? Or $1M? That's the question. The loan industry has its answer; it approved him for $1M. Only if he rents is there certainty: in that case, the chances are 0% that he'll be foreclosed on.

Yeah, and I don't trust the standards of the loan industry....and the evidence is abundant for not doing so for those willing to open their eyes and see. The loan industry doesn't care if you have to work until you're 70 to retire, or if you have to live on a fairly meager SS check because you didn't save much for retirement, etc. They don't care if you have to eat peanut butter & jelly, drive old jalopies, and/or otherwise have no flexibility in life because you have a huge mortgage. Heck, for a while there, they didn't even care that they were handing out mortgages like candy....they just went to us, the taxpayers, for a bailout. Don't think they won't try it again.

[NoMoreSnowForMe]

Originally Posted by mysticaltyger

Yeah, and I don't trust the standards of the loan industry....and the evidence is abundant for not doing so for those willing to open their eyes and see. The loan industry doesn't care if you have to work until you're 70 to retire, or if you have to live on a fairly meager SS check because you didn't save much for retirement, etc. They don't care if you have to eat peanut butter & jelly, drive old jalopies, and/or otherwise have no flexibility in life because you have a huge mortgage. Heck, for a while there, they didn't even care that they were handing out mortgages like candy....they just went to us, the taxpayers, for a bailout. Don't think they won't try it again.

Amen. Back when banks were giving out ridiculous mortgages, they told my daugher she could afford a $500,000 loan. She was making just under $80,000/year. She knew she couldn't afford the payments on a $500,000 loan, so she kept looking for a house with a payment she could "really" afford.

When the housing market collapsed a couple years later, she bought a home for $189,000 and was comfortable with those payments.

The banks were lying just a few years ago. It was all over the news. Why would anyone trust them now when they tell you you can afford a loan that common sense says you can't afford?

Saying that the "bank said you can afford it, so you should do it" is just.............silly?

I can't believe they're already back to doing this. But, if you think about it, what did they lose? They approved all those bad loans, and then got bailed out. Sheesh. I guess they would figure they might as well do it again. Scandalous.

But, really, how can people be so dumb as to not figure out their own budgets, too?

[nagleepark]

I look at the guy's family income and what I know about him and, from what I see, he can afford a $1M house. If he wants to be conservative, fine, but that doesn't mean that I'm wrong. That just means that he could afford more but decided to afford less. He can afford Mercedes but he decided to buy Toyota anyway.

Yes, there's a chance that he might have a reversal of fortune and be foreclosed on. But, knowing what I know, in my opinion, he still has a pretty good chance (well over 50%, in my opinion) that, if he buys the $1M house, he'll make the payments, be very happy and it'll be a better investment than a $750K house.

Sure, you can rag on banks. I don't like banks, either, but your criticisms a misunderstanding (albeit a popular and common one) of what actually happened in 2007-2009. The banks use math, statistics and applicant data to determine loan limits and, from what I know of this guy, they've done a good job with him.

[frugaltechie]

nagleepark:

Thanks for your thoughts. I agree that my original question was whether it makes sense for me to buy a $1M home with my income. The opinion in this forum is that mostly I can afford it, but whether it would make a good investment or whether the benefits outweighed the risks, job security, etc. On that front, I guess I alone can make the final decision based on my scenario, which is fair.

I myself think that both of us losing our jobs is a outlier, a rare scenario. So it definitely would be good if I can buy now. But looking at peak prices now being the same as those in 2007 makes me wonder if there will a market correction and I should wait. In that case, I would be locked into the house with no refi option because of low LTV.

Thanks.

[ambient]

Originally Posted by frugaltechie

Thanks folks for your long and details answers. This is the kind of argument I wanted to hear. A $1M home costs exactly $5000 a month PITI (4% interest, 1.25% property tax, home insurance, etc). This is excluding maintenance and furnishing and the increased utilities, gardener/lawns, etc.

Our takehome pay (@175k per annum) is about $7800 after all taxes, deduction, etc. If I invest $5000 per month on the house (agreed, there is a saving the mortgage interest tax deduction and it will end up to be about $4200 pm), isnt that too large for a home? This leaves about $3500pm for ALL other expenses.

When we have a kid in a year, the costs are going to increase and squeeze the budget. We currently have older used cars which are fine but they will need replacing in in the near future (1-2 years) if we have a baby.

Please bear with me; I am trying to put myself in others' shoes and see how they manage with $1M houses.
(One colleague says that he bought a house taking into account his salary+bonus+unvested stock and would have a critical problem if there was a downturn!)

I agree with you, would be wary of doing it at this time - and I am a home owner around these parts. $5K PITI sounds about right, I did the math when we were home buying. I'd want a take-home net of around $10-12K for a $1M home. So with all deductions, that would probably put you into territory north of $225K gross before bonus/equity.

And if you think of having a kid, ask yourself how you will handle child care if you both work - it is not cheap...

Now the big gamble is on how you see your future income stream. Are you both good at what you do and have good opportunities and willingness to work for promotion? If so, locking into the $1M house now can seem like a smart thing in 5 years when your incomes are perhaps closer to $300K together.... But of course, that's an if...