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Home Price to Income Ratio

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Re: Home Price to Income Ratio

#311

Post by lotsofpulp »

throwdecro wrote: post #304
game_the0ry wrote: post #284

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When…

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* an…

> Which is crazy, right?

No, because this is not accurate:

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price.

Homebuyers make their purchasing decisions based on the options available to them. They are not paying $x because they can afford $x+1, they are paying $x because that is how much they are willing to spend on that specific house in that specific location. The latter portion of that statement is important because implicit in it is the competitive nature of humans, and so it manifests as people competing to purchase land and being willing to pay as much as they can afford in exchange for the utility from that specific house in that specific location.

That utility can be in the form of access to income opportunities to lower future volatility of income, access to other people of similar or higher income so your kids can go to school with their kids, access to airports, downtowns, outdoor recreation, etc.

If you are projecting increased demand during your entire lifetime for the piece of land you are purchasing, then it makes sense to pay as much as you can afford, as it will only get more expensive. If you are projecting a receding economy and/or decreased demand for the land you are buying, then it does not make sense to pay as much as you can afford, but rather scale it to some measure of what utility you will get out of it.

Re: Home Price to Income Ratio

#313

Post by mandelbrotwurst »

pjerem wrote: post #310
throwdecro wrote: post #304

Earlier quoted context omitted.

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* an…

I don’t know how it works in US but can’t you just opt for fixed interest rates ?

Yes, most people do, it's just that increases in rates have a tendency to cause decreases in homes values because a larger proportion of monthly payments will now have to go towards paying the interest.

Re: Home Price to Income Ratio

#314

Post by shados »

fancifalmanima wrote: post #298
shados wrote: post #260

Earlier quoted context omitted.

I've thought about this a lot, though if you google around you'll find people who dispute this claim. Still, it makes sense to me. If you have single income households, and all of a sudden everyone's a double income households, you're not any better off. You'll get inflation, especially in housing. People will point out that stay at home moms weren't THAT pervasive, even decades ago (not as pervasive as us younglins…

I'm not going to say that the larger number of women entering the work force has had no effect on home prices, however even if it did it's not necessarily a net negative. A larger workforce leads to more economic output, more innovation (there are countless innovations that have probably failed to be made over the generations due to the impact of women not working) that leads to quality of life improvements, producti…

It's definitely not a negative and I'd pick a fight if I met someone face to face who said it was. I 100% agree with all of the benefits you outlined, and totally believe it's worth it.

I'd also not focus too much on the "women entering the work force", because that's only one part of it, and not even the biggest part. More families not having kids, fewer families supporting their parents, more complex family structures in general, etc all impact it.

I also don't think it has a significant impact on home price. After all, when accounting for inflation and interest rates, home price is not up by that much. Depending which periods you compare it to, it may even have gone down.

What it changes, is the dynamics of bidding wars in low supply areas, which is a lot more specific, and is generally what people talk about on social medias. The whole "Omg this home went 100k over asking!" shock factor. Again, adjusted home prices didn't go up that much at the median. It's specific homes in specific areas that are skyrocketing.

There's not many alternatives beyond increasing supply. I always like to contrast it with raising the level cap in an MMORPG. Everyone who quickly maxes their level after an update is back to square 1, all being the same. But the person who just started playing is at a huge disadvantage. It may be specific, but for readers familiar with Final Fantasy 14, if you start the game fresh today, you're in for hundreds of hours of catching up...It's very similar to the economic situation we're discussing.

Re: Home Price to Income Ratio

#315

Post by lolpython »

pjerem wrote: post #310
throwdecro wrote: post #304

Earlier quoted context omitted.

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* an…

I don’t know how it works in US but can’t you just opt for fixed interest rates ?

Yeah, you can. A random example I found from Rocket Mortgage is a 3.25% fixed interest rate for a $200,000 house.

https://www.rocketmortgage.com/learn/30-year-fixed-mortgage-...

Re: Home Price to Income Ratio

#316

Post by __turbobrew__ »

Fire-Dragon-DoL wrote: post #42
clipradiowallet wrote: post #14

Earlier quoted context omitted.

The 3x income rule is usually mentioned by your loan officer, and your real estate agent. They will present you with houses costing 3x your income as a baseline of what you can afford.

That's funny, you need to earn 250000/year to be able to afford _something_ in Vancouver by following that rule.

or 600000/year for a starter home

Re: Home Price to Income Ratio

#317

Post by [deleted] »

pjerem wrote: post #310
throwdecro wrote: post #304

Earlier quoted context omitted.

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* an…

I don’t know how it works in US but can’t you just opt for fixed interest rates ?

[deleted]

Re: Home Price to Income Ratio

#318

Post by shados »

medvezhenok wrote: post #294
shados wrote: post #276

Earlier quoted context omitted.

Not nearly as directly though. Social security is basically money in -> money back. A glorified forced 401k, or at worse a kind of retirement insurance. It's a bit more separated. When I pay taxes, I don't get a direct return for it, I get (in theory) a fully functioning society. Social security would be a little closer to a sewer and water bill from the city (which you have to pay if you're a owner, but you get a se…

It's not quite a forced-401k though. Social security could technically be abolished (or payments diluted, etc) via an act of congress (even though politically unfeasible right now) - then you don't get anything out of your "investment". It's much harder to "abolish" a diversified 401k plan unless you abolish all private property (i.e. Russia 1917).

Yup, like I mentioned, it's really its own beast, and all analogies will be flawed in some ways. But it also doesn't work quite like other taxes, at least in practice.

Re: Home Price to Income Ratio

#319

Post by hammock »

I have in my head the rule of thumb that you can afford a house 3x your annual income (or a mortgage 28% of your monthly[1]).

I don't see the line crossing 3 anywhere on that chart.

[1]Which translates to 4.2 on a 80/20 loan

Re: Home Price to Income Ratio

#320

Post by roland35 »

pjerem wrote: post #310
throwdecro wrote: post #304

Earlier quoted context omitted.

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* an…

I don’t know how it works in US but can’t you just opt for fixed interest rates ?

The standard mortgage in the US is a fixed rate 30 year mortgage. You can get lower rates for 10, 15, or 20 year mortgages. Also generally you pay an extra fee (PMI) monthly if you put less than 20% down. Adjustable rate loans and interest-only loans are still available but those are really not a good option unless you are not planning on staying in the home long.

There are some other options out there for veterans or first time buyers, but those are the normal options.

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