Monday, April 28, 2008

"Yeah, but I'm in it for the long haul..."

That's an argument that I clung to when I was seriously house hunting at the peak of the market. Whenever anybody said to me: "Now is not the time to buy" I would respond with: "I'm not in for a quick buck." I did! Check out this old L.A. Land post I wrote.

Which brings us to a comment that was posted by UserAndy today. He writes:

I think the 3x rule should be reiterated to buyers and lenders alike: No one should buy a home that costs more than 3x their yearly gross pay. Alternately, no one should be paying more than half thier monthly take-home pay on their housing costs. I like this rule better because it's just as good for renters as it is for potential home buyers.

However, you [Kate] don't address people that are buying to STAY. There is a really big monthly savings for home-buyers that have payed off their mortgages altogether. Not only does their month-to-month living expense drop significantly, but they now have a nice big asset that long-term renters do not. Prices, in the long run, will go up for both renters and homeowners.

For that fact alone, it SHOULD be (Andy's rules of Fairness) less expensive to rent than buy!

Andy is right that owning your house outright is a big savings. But most people stay in their home for about 5 years and never own their homes outright. (Go ahead, Google it if you feel the need). And so, for those people, it makes no sense at all to buy right now -- in this market. Essentially, those five-year "home owners" are really just in an outrageously expensive rental situation.

And, even if you really truly think you will be in your house for a very long time, you still should try and follow the tried and true affordability guidelines. Because even though you don't PLAN on selling, you could get divorced, or sick, or laid off, or have to up and move to New York City. And then you will be plenty glad that you bought in a buyer's market and didn't get in over your head because you will have options.

And don't give me that "but I have to buy a house RIGHT NOW" argument. You do not. I don't care if your wife is pregnant with twins. You have to find a place to live -- you don't have to buy it. There's no shame in renting. There is shame in wasting a lot of money. Especially if your wife is pregnant with twins.


Anonymous said...

I want to own someday, but you also have to factor in the cost of inflation when figuring just how big of a savings owning a home free and clear is. My parents will pay off their 30-year mortgage in a few years. Their payments are $650 a month. When they bought the house, $650 was a lot of money every month. Now it's a tiny amount (for California). Paying off the house won't really free up as much money as you expect if you pay it over 30 years. Yes, it will be nice to own the home free and clear when they're in their golden years, but right now, it's money for a couple of trips.

Anonymous said...

More power to anyone who is "in it for the long haul." That's a mindset that needs to become much more common again (and I think it will be now that the mother of all bubbles has popped). However, you can be in it for the long haul and still have common sense. You can plan to spend the next 30 years in a house that costs you $600,000 today, or you can spend the next 30 years in an equivalent house next year for $500,000.

l.a.guy said...

In my experience the rule of thumb is your mortgage payment can not be more than 1/3 your monthly gross income.

I don't know where the 3x your annual income rule comes from, but in as much as the median household income for LA is something around $45K, it would mean no one should finance a mortgage of more than $135K. (Which even in the "good times" wouldn't buy you a garage)

If you made $45K per year, got a 30 year conventional at %5.75 you could finance $200,000 for payments of $1,167.00, still less than 1/3 your gross. I guarantee most people buying $1M homes are not grossing $330K per year. Of course if you buy a $1M home today you'll need to put $200K down, so if you finance the balance of $800K on a 30 year conventional at 6.25% you'd be looking at mortgage payments of around $5,000 per month, meaning you need to gross $15,000 per month or $180,000 per year.

I've bought 5 properties in the past ten years and never once has a mortgage broker mentioned that the home can't be more than 3 times our annual income.

And no you never have to buy a house, but I think if you find a house you love, is reasonably priced and can comfortably afford, then why not buy it now? To me it would be like trying to time the stock market. Buy sensibly, enjoy your house and don't obsess over every last penny. Yes it may go down another ten thousand. Interest rates may go up another point too. $100K at 5% is the same monthly payment as $90K at 6%.

I'm not really disagreeing with your point, I just don't like these broad generalizations that anyone who buys now is an idiot. It depends on the circumstances and it depends on the house.

Anonymous said...

20% down and 3x annual salary pretty much means the persons getting the mortgage can actually afford the house and still manage to set aside some savings.

Buying a house is not a savings plan.

Laura in L.A. said...

As an adult child of aging parents, I thank God that my folks own their house free and clear. They planned for their retirement, so I won't ever have to support them financially. I have lots of friends around my age who are not so lucky.

My mom told me that when shopping for houses half a century ago, she told the real estate agent that the monthly mortgage payment couldn't be higher than $95, because that's what they paid in rent, and that's what they could afford! :):):) "Don't laugh! $95 was a lot of money!"

Love your blog, Kate!

kate said...


I wonder if we have the same parents? Nah, we'd probably know by now. :-)

Renters Insurance Quotes said...

I think l.a. guy has it about right. Your mortgage payment shouldn't be more than 1/3 your monthly gross income.