What should one's salary be in order to buy a $700,000 unit

After thinking about this for a minute, I realized the next poster is probably going to point out (rightly) that there are a huge number of variables not being accounted for in the price alone. I'd rather not get into an argument about what's typical, so, if someone wanted to pick an apartment in that range and base the discussion on it, that would be fine with me.

What are the taxes and common charges?

steve- assume $1500 CC's

assume a base salary and no bonus?

still need taxes - not abated.

steve just play along

dco, I think that's pretty reasonable. I'll go first: Personally, I'd need to be making 200K a year to feel comfortable. That number is off the top of my head without crunching any of the numbers.

I strongly agree.

700K minus the downpayment leaves you with a mortgage of about $560K, so roughly about $3500 per month. Add taxes and cc's of $1500 and you need to cover $5K per month for the apt. $200K let's you take home about $10K per month. I would not feel comfortable with 50% of my net salary going to housing, unless I really had not other big bills (i.e., student loans, car expenses, family expenses.) It does seem doable though.

The minimum would be $215,982 assuming a 6.5% 30-year mortgage with 20% down, 28% of gross monthly income in housing expenses.

NYCnewbie: I think it's easier to assume base salary, no bonus, so let's go with that. Steve, why don't you pick a number for taxes? You've been on this site longer and probably have a better sense of what's normal.

stevejhx- what about 1M?

$1500 cc

I would even venture a tad higher for income--220. Also to take into account would be savings surplus.

Do you guys/gals think that a household income of $200,000/year is great money.

For $1 million, assuming now a 7% mortgage rate and $2,000 CC @ 28% total housing expenses, $313,818.

I think if you look at listings in the 700K range, you realize that it's not great money. I mean, you'll get a bedroom... That said, I do think it depends on how far along in you're career you are and whether or not you have a family.

As to the 28%, I think it's a good number, but I know people in Manhattan who are paying a much higher percentage. Scary.

That's was the point I was trying to make. How many people actually make this kind of money. Excluding other moneyies.

Generally 28% is the most a bank will lend. Some will go up to 32%, but not higher than that - too much risk.

Well, those I know had guarantors.
dco, this is from 2003, but it has some interesting stats.
http://www.gothamgazette.com/article/20030611/5/421

Also, http://www.fiscalpolicy.org/PullingApartInNewYork_April2008.pdf is more recent, but I don't really have time to read it now. Maybe this weekend.

Hmm, I don't follow that, stevejhx.

>Do you guys/gals think that a household income of $200,000/year is great money.

Sure it is great money, but you won't live large on it in Manhattan.

That was an excellent article. WOW what an eye opener.

dco when taken into consideration that the median income is what? a little under 50,000, I think that anywhere but NY, 200,000 is a very comfortable salary.
Again, I'm curious to know what type of savings we're talking about with a 700,000 purchase. At least 6 to 8 months to cover mortgage and daily living expenses....50,000?

$200,000 will let you buy a nice 1-bedroom studio with a kitchenette, or rent a 2-bedroom 2-bathroom unit in a brand new building.

That's why it's so much better to buy at these prices!

$700k for a one bedroom, one bath probably not renovated. I'm with stevejhx on this one...RENT.

Too many variables. Some things to think about:

Are you 25, working in a field where you will continue to get salary increases? Or are you 55 and close to the top of your earning potential?

Is this one income, or two? With two, the possibility of job loss/interruption is twice as great.

What do you have left after the downpayment? Do you have six months of living expenses in the bank?

Do you have kids, or are you expecting to start a family? Your monthly nut gets higher when your family gets bigger.

Are you expecting any windfall income, such as an inheritance or stock option grants, etc? (Not counting on, but expecting.)

What sort of hardship will it be if you have to sell? (see above re: kids)

At 25, with a first year associate job at a law firm and no family, I'd do it on $200k in a heartbeat.

At 45, with two kids and both parents 20 years into their careers as programmers, I'd need $300k combined to even think about it.

Yorick just answer the question with the information above. Where not asking to see someones tax returns or have aconversation with their financial advisor. Just do your best.

Yorick does bring up some good points though...

"At 45, with two kids and both parents 20 years into their careers as programmers, I'd need $300k combined to even think about it."

However, 45, two kids is NOT gonna work out for $700k since you will not be able to squeeze all into a small 1-bed.

Wishhouse, a couple of other things to conside;

(1) Is the building a coop or a condo? Coops have guidelines on income & asset requirements, whereas condos typically don't. Coops usually require you to evidence a minimum amount in liquid assets. When I was looking last year the standard was 2 years maintenance & mortgage.

(2) If the apt is a coop, what comprises your total pay (salary vs. bonus)? Some coops look more at your income whereas others are more concerned about your total assets. This makes a difference if most of your pay is in bonus. Coops look for someone with finanicial stability. There are many coops that don't consider bonus as part of your 'income' because it's to variable. As ludicrous as it sounds, this is the way it works.

So as you can see, even if you meet the minimum salary requirements, there are other factors to consider when buying in NYC. Sometimes a good realtor is helpful in steering you towards coops that are more accepting of people who earn large bonus income so that you're not wasting your time.

(3) Closing costs: higher for condos than for coops, though lower-priced coops require a higher down payment, so your up-front costs may be equal either way you go.

MMAfia--Yeah, those people might have to go live in Brooklyn or above 96th Street or something...

uptowngal- good points, but this is all hypothetical, so you can pick your own answers. I'm not buying anytime soon (unless I win the lottery, which isn't likely since I don't play).

dco, I did answer the question:

At 25, with a first year associate job at a law firm and no family, I'd do it on $200k in a heartbeat.

At 45, with two kids and both parents 20 years into their careers as programmers, I'd need $300k combined to even think about it.

Ignoring all other factors, the ONE consideration has to be if your income is expected to grow or stay relatively flat. Are you beginning a lucrative career, or are you close to the ceiling in your field? Ramen as a daily diet isn't a big deal if you [assumingly temporarily] overextend yourself when you're young; it's untenable as a long-term plan.

Banks will lend up to 55% total debt to income ratio. And up to 45% with no problem.
Yes, some people will say this is what got us into this mess. But this isnt what got us into this mess. Its actually all the stated income programs and teaser rates what were troublesome. Everyone's comfort level with debt is different.

For someone making 200k, 45% of their total debt to income would be $7500. On a 700k purchase price and 20% down = 560k loan amount at 6% on 30 year fixed = $3357 plus tax and cc of lets say $1500 = $4857. This is definitely doable as long as the person doesnt have about $2500 is monthly outstanding debt. Even at about 900k purchase price banks wouldnt see this as a big risk. Even though it would be about 35% of their income. Whether the buyer would feel comfortable is a different story. Everyone has different spending habits.

So the above means that a household with a fairly good income by any mean cannot afford to buy a house in Manhatthan that is large enough to comfortably fit its members unless the breadwinners bury themselves by debts that will prevent then from making any substantial saving for the foreseeable future. That only means market is too leveraged and will correct itselfs. Yes 200-300K is good money.

Remember u have to keep the high income 4 30 yrs and potentially survive at least 2 recessions. The higher the income the higher risk of layoffs

foreignbuyer-WELL Said. I guess no 401k contribution.

shong, I know this is your profession but that 45% seems awfully high. If someone making 200k per year has 7500 in monthly housing expenses, they don't have much in the way of after tax dollars left for everything else.

My answer to the question is 175k-200k, but thats at 6.5% and 1500. Both those numbers are too high. My buddy just sold his 1 br for about 850k, 1200 cc/taxes, and this is a very nice building. Plus you can borrow the money easy at 6%, likely better, but lets say 6%. Someone making 200k could definitely swing that.

ccdevi, yes 45% is high. When I said 45%, I also mentioned TOTAL debt to income. That would include any credit cards, car payment, etc. But I understand what you mean.

Based on numbers there seem to be no rationale in buying at current price level. Market is overly emotional and only driven buy the desire of owning a "piece of stone". Prices are totally disconnetted with median household income, profitability from rent, etc. Still the continuos growth in prices leaves with the feeling that the only way of preserving one's wealth from inflation is to buy walls. In addition I do no understand (I am a foreign buyer after all) why loans are still at a 6% rate when interest rate on US dollar is around 2%. Wouldn't it make more sense to wait that the credit crisis adjusts to current interest rates before embarking on a mortgage?

foreignbuyer can you discuss your comments about interest rates further, you seem to think that interest rates will be coming down dramatically. Why is that? What do you mean interest rate on the us dollar is around 2%, you mean the fed funds rate?

It seems to make sense that if banks can get money cheaper, which they now can, either from the fed or customer deposits, that they should be willing to lend it out at better rates. However I think history shows that it doesn't always work that way. My understanding is that if there needs to be enough spread b/w risky (and obviously the level of perceived risk has increased lately) mortgages and no-risk or low risk investments such as treasuries, so the banks can sell the mortgage debt in packaged securities. One of the reasons why the place to look for mortgages right now is generally small banks, who are actually willing to hold the debt.

Interest rates though are certainly not my area, so any input is appreciated.

All of you: wrong. Mortgage interest rates are pegged to long-term bond rates, not short-term market rates. Conforming mortgage rates are subsidized by an implicit guaranty from the federal government. That's where the numbers come from.

Off to Fire Island!

Ok I am not a finance expert. I just cannot understand why a loan in the U.S. costs around the same as a loan in Euro here in Europe wheras interest rate (let's say Fed Funds rates) on the U.S. dollar are two points lower than interest rates on Euro. That means that U.S. banks are getting a much higher spread than European Banks. I am just wondering whether this situation is due to any unbalance due to the credit crisis and if so whether it could adjust or not. Thank you for any answer on this point.

It's a long story my friend. There remain huge differences in the US vs. Euroland mortgage markets. The main differences relate to what happens to the mortgage after the bank makes the loan. A bank can really do one of two things: 1) hold it and hope it receives timely principal and interest, or 2) sell it.

The US mortgage market had developed to the point where the was a very liquid market for banks to sell these mortgages. Most popularly, banks sell groups of mortgages to an arranger who uses the mortgages as collateral for a bond which is then sold to investors. If Fannie Mae or Freddie Mac were the arranger, they could sell these mortgages to investors with their guarantee to investors to receive principal. Their guarantee is know as an implicit government guarantee. A Fannie Mae, Freddie Mac or Ginnie Mae arranged mortgage is known as an Agency mortgage. A non-Agency mortgage is a bank arranged bond with underlying mortgages and no guarantee of receiving principal. Fannie Mae and Freddie Mac have underwriting standards which require underlying mortgages to meet certain criteria including borrower credit quality, loan/value ratios, documentation, etc. A bank arranged set of mortgages might have similar underwriting requirements or might not (i.e., sub-prime mortgages which were lower in quality and had higher risks of default). Buyer beware.

These mortgage-backed bonds are a huge part of the US bond market, arguably making up approximately 40%. It WAS very liquid and meant that banks could understand where the market was trading at any moment and thus understand at what rate to make new loans because they knew what price they would get when they sold the loans. Over the past few years until the 2nd half of 2007, the mortgage world was great because mortgage defaults were low and investors were happy. Until sub-prime defaults started picking up and mortgage investors got spooked. There came an unwillingness by investors to buy or hold new mortgages because of both rational and irrational fears of further defaults. Additionally, there were hedge funds and other leveraged investors that held these mortgages that got forced to sell putting further downward pressure on mortgage-backed bonds.

And when you put investment bankers, lawyers and the potential to make money together, all sorts of crazy things can happen. Underlying sets of mortgages were put together and different parts of the cashflows were sold to different investors. If it sounds complicated don't worry, most investors didn't understand what it was that they were buying either. The best way I've every heard it explained was that you can look at the underlying set of mortgages as a chicken. And the investment bankers sold different parts of the chicken to different investors. Some got the breast, some got the thigh, some got the neck and some got the gizzard. However, all investors expected they were getting a piece of a chicken. In the mortgage market what they really got was a piece of a turd because underwriting standards were so awful, defaults were becoming so high, that there really was nothing behind the mortgage.

So the US mortgage market is broken and it almost doesn't matter what the Fed does to rates, investors won't buy mortgages, so rates aren't tied to short-term rates. They're not tied to long-term rates either. They used to be, when investors looked for yields of about 1% more than 10-year Treasuries. But that's not good enough anymore. Mortgage bonds trade in their own strange world today.

So back to Europe. Mostly, they have no secondary mortgage market. Or at least it's in its infancy. So banks mostly hold mortgages on their books and receive principal and interest. Generally anyway, depending upon the country. Ignoring exceptions like Southern Spain and a few hot areas, underwriting standards were high and there mostly wasn’t a mortgage crisis. That's debatable, particularly in the UK where one large bank has already gone under. But because European banks generally didn't blow up on mortgages as they didn't have a market in which to blow themselves up, rates can still be tied to a bank's cost of funds. But just wait, they’ll eventually screw it up too and you’ll soon see 25-year olds bidding against crooked politicians to lease new Ferraris.

From an answer for another thread, this 1 bed apt has just sold for 699k which I thought would be useful for the discussion

http://www.streeteasy.com/nyc/sale/179502-condo-236-east-47th-street-turtle-bay-manhattan (after only 38 days on Streeteasy!)

monthly cost of ownership
CC 535 + Taxes 670 = 1205

Say costs of purchase = 30k so total cost if 729k
Borrow 80% of 699k = 559
Cash required = 170k
Borrow at 6.5% over 30 yeasr = 3533 (or 3028 interest only!)
Total monthly outlay = 1205 + 3533 = 4738

And looking at the rentals for this building this would rent for between 3300 and 3500 so lets say 3400

So the extra cost monthly is 1338 before taking into account any tax relief (dont know how this is calcuated) plus you have 170k "invested" and not available for alterative uses

No doubt Steve will answer this side track rent or buy scenario !

Shamrock, why would you gloss over the tax benefit? At the income levels we are assuming here, the after-tax cost could be $1,000 less per month in your hypothetical.

I did mention the figures were before tax relief and assumed somneone (thanks) would indicate how much that would be as I dont know how it is calculated !

My rule of thumb, which I have published in many places and people seem to like, is that you can have a mortgage balance of 2-3x gross income. 2x is right for people with higher incomes, who don't like to be house poor and often have better things to do with their money, and for people with high expenses because of kids. 2.5x is right for most people, and 3X, the "stretch," works for buyers with lower incomes who expect to be house-poor.

So if you want to buy a $700K place and have 20% down, you're borrowing $560K. That means you should be making a range $187K to $280K, and you'll be pretty comfortable if you're making around $235K.

This rule of thumb will similarly scale up or down. Assuming 20% down, the sweet spot for $300K is $96K; for $500K, it's $160K; for $1 million, it's $320K, for $2 million, it's $640K.

You can certainly borrow more -- I personally have been at a mortgage balance of 5x income -- but it's more conservative not to, and this rule of thumb will also get you past most co-op boards.

ali r.
[downtown broker}

Thank you Goldie. You were very informative.

This doesn't apply to foreign buyers, or to people with jobs that pay full benefits, but some people earning $200K are independent and have to pay their own healthcare insurance cost. Subtract $15,000 per year from "gross" income, and then factor in 17% per year premium increases. Thought about longterm care insurance? If you buy RE young you'll be free and clear by the time you think about it. If you're middle-aged, you might want to look at rising LTC premiums, i.e., if you want till you're 55 or 60, you're looking at a few thou more per year.

About the rent v. buy arguments.... look at future rent increases. Right now Manhattan rents are not going up, but every time they hit a lull and stagnate, it's followed by rip-roaring escalations. If the difference is $1,700/mo now, minus tax benefit, this difference will change over 10 years -- significantly.

$700,001.