Affordability

I love your question and am curious to hear other people's responses. My understanding is that you should purchase a home based on 2-1/2 times your adjusted gross income so for $500,000 that would translate to a $1,250,000 home. But alot of the calculation depends on how large a downpayment you can afford, what other types of fixed monthly expenses you have and other factors.

I am very concerned about monthly maintenance costs and tend to look at apartments at the lower range for my price apartments.

I always thought that 3X income was considered fairly conservative. If you used that parameter would it open up a lot more choices for you?

i do not think the calcs work so well for manhattan as then no one would be buying the apartments or the doomsayers would be right and housing prices would need to crash. I am at about 3.5x income in terms of purchase prices when i just bought my apartment with 25% down.

but this formula would need to adjust based on your downpayment as you could afford more the more you put down.

Mikev. is right, you need to adjust for down payment.

So the way to do this is to think of mortgage balance, not price, as 2-3x income.

ali r.
DG Neary Realty

But of course all of these estimates assume a universe where there is no chance of prices going down. So affordability becomes a function of monthly outlays vs. Monthly income.

But, if you consider that prices could (not for sure, but could) drop as much as 30%, then the idea of buying a place at a multiple of your animal gross income seems absurdly risky.

The issue is more when you are buying and why. I bought for the long term. I do not believe in this mentality of buying and selling every 5 years. You might as well rent as there is to much risk in the price movement especially today and especially since you need an almost 10% appreciation just to cover costs to get out.

My decision was based on buying what i would be happy in as long as I am around, the fact that my wife and I both have stable jobs with no concerns over layoffs, and afforability based on todays dollars, not on what we hope will happen.

I think the idea of a 30% further drop in manhattan is a bit extreme. I would concede that if things just stay stagnant or get slightly worse that maybe a 10% to at most 15% is a slim possibility. I think more of what seems to have happened is people stopped trying to sell and that has helped stabalize the market. There are enough buyers for the little bits of inventory that is slowly popping up.

It's worth noting that underwriters generally measure "affordability" using the ratios between income and monthly outlays, not between income and purchase price. As a result, historically low interest rates can dramatically skew the normal relationship between income and price.

For example, a 5% jumbo loan actually enables a person with annual income of $500K and a large downpayment to pay $2.5MM (5x income) or even more, while maintaining acceptable debt:income and housing:income ratios. I think it's a terrible idea to do that, unless the buyer has huge cash reserves; and a lender may balk at funding the loan without additional security; but in terms of traditional underwriting standards for "affordability", the ratios surprisingly work at 5x or even higher. Hence the allegation that the Fed is artificially keeping property prices above sustainable levels, relative to income.

If rentals are 40x or 50x monthly rent, or 3.3x annual income to 4.2x annual income, how does this relate?

Assuming a 20% down payment, you can assume you can afford a home priced at 2.5 times your annual income.

Therefore:

$500K income = $1,250,000

$600K income = $1,500,000

$700K income = $1,750,000

By the borkers and all in buyer logic, there is NO limit regardless of income. Nyc re purchase is based on your downpayment. Never look at the credit cycle, the bubble cycle nor anything else in the tea cup. Just when you get a nyc re buying boner, just hump it. Who needs to look at the mantle when you are poking th fire.

Double flmazo. Oh '15%' is a possibility but definitely not 30%....... oh my fg! That's rich.

Hey nycmatt.

Dwell. Pv = stream of future cash flow. The key is future. :)

If you want to live comfortably, your monthly hard home ownership expenses (mortgage,tax,insurance) shouldn't exceed 25% (the low) to 33%(the high) of your net income.

NYCMatt--$700K income = $1,750,000

So assuming $1200 psf, imagine that a phenomenal $700K income affords you a small two bedroom new development condo with a kitchen sitting squat in your living/dining room. Better not buy bigger than that cause tax abatements will cease and when they start charging for all those free amenities after property taxes go up, you will be crimped. That in itself is why prices need to come down. A hedge fund/banker guy earning 700K will feel he deserves more and can indeed get a lot more in the burbs.

to answer splaken, relating rentals to sales changes at different income points (because the rule-of-thumb for sales affordability is based solely on mortgage costs) but let's take a look at a $500K income.

A gross income of 50x rent would mean that the customer is being guided to spending $10,000 a month, which is a nice two-bedroom downtown or a three-bedroom uptown. Housing costs would then be 24% of gross income.

A mortgage balance of 2x gross income would be $1 mm, and at 3x gross income would be $1.5 million. Assume 25% down (probably required by many co-ops) and you're looking at a purchase of $1.3 million to $2 million. That again puts you in about the same housing submarkets, a two-bedroom downtown and a three-bedroom uptown. Your mortgage costs at 5% are going to be $6500 to $10,000 per month, but you'll also be paying maintenance of maybe $1,500 to $2,300.

So your housing costs would be $8,000 a month on the low end (19% of gross income) to $12,300 on the high end (about $147,000, or 30% of gross income.)

ali r.
DG Neary Realty

ali: as i posted on another thread, i just refinanced and could not find a bank that would give a jumbo fixed mortgage without 30% --or more--down. (we have excellent credit and good cash reserves). are you finding that your clients are getting jumbo mortages with 25% down? Don't co-ops discourage the shorter term arms that might allow a smaller down payment?

I wish I could laugh with you w67thstreet, though I agree with you. We are just maybe emerging from the worst economic crisis since the worst depression. A crisis brought on by a collapsing real estate bubble. Prices of real estate in Manhattan and north Brookyn are now close to and in some cases higher than their 2007 peaks. Yet, people don't think they risk losing 30%+ on their property. When the governors of the Fed are praying every night that this unprecedented monetary easing will prevent us from dropping into another recession. I'm sorry, but it is scary. Yes, interest rates are super low, so your running costs are not very high. But if you had to sell in 5 years and the property is worth 30% less,can you take that hit? What would be the effective cost of your housing over the prior 5 years in that case. I am not saying that a 30% fall is the most likely scenario, but it is definitely a plausible one.

And one overlooked part of the scenario of selling in 5 years is the likely rise in mortgage rates from these unprecedented lows. I'm old enough to have bought a house in 1981 when the going rate was 16%. So all of the potential buyers for housing in 5 years will see their monthly payments skyrocket when interest rates go up a few percentage points, as they likely will. It seems hard to grasp the possibility that housing prices will rise in this environment. Most younger people can still remember a few years back when 8 or 9% mortgages were considered excellent.

"Most younger people can still remember a few years back when 8 or 9% mortgages were considered excellent."

I'm one of those "younger" people.

Compared to our parents having 17% mortgages back in the '80s, in the '90s and early 00's those 8% mortgages felt like they were GIVING money away!

Most important part is stability of your income. People should think what they would make in a poor economic environment on an average (think 2008,9 and 10 average). 3 times that is ok as long as you have enough liquidity after downpayments for 2 years worth of mortage and living expenses. Remember, if you are not working you can deduct mortgage interest. This means Doctors and Govt employees can afford more house relative to their income.

Sorry typo. Remember, if you are not working you can NOT deduct mortgage interest.

apt23, earlier in the summer Sunny Hong at Bank of America was doing up to $1.5 mm with 25% down, don't know if he still is.

ali r.
DG Neary Realty

W67: By the borkers and all in buyer logic, there is NO limit regardless of income. Nyc re purchase is based on your downpayment. Never look at the credit cycle, the bubble cycle nor anything else in the tea cup. Just when you get a nyc re buying boner, just hump it. Who needs to look at the mantle when you are poking th fire

I am gonna have to come back to this site more often to catch these gems of yours, w67!

front_porch, thanks for detailing the range of housing costs for someone making $500,000/year. I find it difficult to imagine spending $12,000/month for housing costs on that salary, but clearly people do. I can image buying an apartment for $1.5m on that salary because of the inflated RE prices in NYC, but more than that seems risky to me.

I do not necessarily agree that making a large downpayment means that you should choose to buy a more expensive property. Depending on your age, it might be better to take on less debt.

Ali, Very few people with $500K income will spend $10K per month on rent. More typical is $5-6K if you have children. If you are single, typically 4-5K. Also, nice 2 bedrooms downtown are $5-6K for an apartment (1200 sq ft appx) which would sell for $1.2-$1.3mm. Ultra luxury will be $7-8K. Buying the same apartment is far more expensive.

Anyone know how much money a typical $500K income household (with and without kids) is saving each year?

Thanks Everybody!!!!! Excellent ideas & info. Much appreciated.

"Anyone know how much money a typical $500K income household (with and without kids) is saving each year?"

I'm socking away $150K/year.

NYCmatt, Assume you are single. That seems reasonable. Some may save a little less say $125K. Typical expenses for a single guy in New York are 10K a month if you live in a nice 1B/R and go out on some nice dates 4-6 times a month at $250 per date.

Depends on your tax status - more than single, married, etc., self-employed (me) means min. $50k in 401k contributions. Savings is after that.

Hi ali, yes still doing 25% down up to a 1.5M loan amount. That means a 2M purchase price with 25% down. Sunny.hong@bankofamerica.com

Well this is a listing for the financially retarded ppl on this board... you knowz... the if you can put down enough, the sky's the limit baffoons out there.. You know who you are.

http://streeteasy.com/nyc/sale/557096-coop-109-west-78th-street-upper-west-side-new-york

Rooftop. chk
location. chk
triplex. chk
cheap maintenance. Chk
2 working fireplaces. chk
W/D. Chk
$550K mortgage. Chk.

Oh yeah, yaz gotz to put down 80%... ya know that $2.2MM.... and you wants to put a 0% handle on the opportunity cost of that money for 30yrs...go get em lemmings

Look at it this way, w67. After your 80% downpayment (which was earning 0% in the bank anyways), you're in a govt-subsidized mortgage with an after-tax nut of $3000 a month. Where else are you gonna find 1500 sq ft plus rooftop for that kind of nut?

You know what inonada, you are right. The solution to the slowness in the nyc re market is to ratchet up the downpayment thereby lowering the monthly carrying nut. Why the f'k didn't I think of it first.

Okay borkers at the next coop meeting we all go 100% down. M'okay.