Are you paying too much for housing?
I love and hate watching house hunting shows on HGTV - I love seeing what great deals we can get in Atlanta on homes compared to other parts of the U.S. and Canada, but I hate the fact that when I save enough money to buy a house here in Atlanta, if I want to move to a different city, then I won't be able to afford nearly as much.
Is this rickety shack all you can afford to buy in your city?
You should get a higher wage in cities where it is more expensive to live, but of course that doesn't really happen: people don't move to New York City for the high salaries waiting for them there, they move there with a dream. A similar thing effect happens in Portland, OR. There is a shortage of jobs, but people want to live there because of the city's personality, rather than solid, economic reasons.
I decided to compare Atlanta's median home prices and median income with those of other cities, to see how we really line up. (I'll give you a hint - it's still way cheaper here, even with higher wages elsewhere!)
| Metro Area | State | Median Home Price* | Median Household Income** | % income/home price |
| San Francisco | CA | 725,000 | 70,040 | 9.66% |
| New York | NY | 420,000 | 50,173 | 11.95% |
| Seattle | WA | 363,000 | 58,990 | 16.25% |
| Portland | OR | 250,000 | 48,053 | 19.22% |
| Chicago | IL | 222,000 | 46,781 | 21.07% |
| Co. Springs | CO | 205,000 | 53,359 | 26.03% |
| Austin | TX | 183,000 | 50,236 | 27.45% |
| Atlanta | GA | 178,000 | 50,243 | 28.23% |
The final column, income shown as a percent of median home price, gives a rough feel for how "expensive" housing in that city is.
In more understandable terms, let's take a look at Atlanta. If you have the average household income of $50,243, less 15% tax, is take-home pay of about $3,560.
If you buy a house for %178,000 with 20% down, at 4.5% interest, your monthly payments would be roughly $907/month.
In the Atlanta scenario, your home payments would be about 25% of your tax-home pay each month.
However, in San Francisco, if you bought the average home with the average salary, your home payments would be about 77% of your take home pay each month (and you wouldn't be able to get a mortgage for that much, even if you wanted to!).
The home price data on San Francisco also lists the median condo price at $540,000, so condos may be the way to go there, but that would still average about 55% of take-home pay (and you still wouldn't be able to get a mortgage for that much.)
Conclusion, we're better off in Atlanta, but San Francisco still seems cool enough to make me want to live there anyway!
What percent of your monthly paycheck goes to mortgage/rent payments? How much of your monthly pay would you be willing to put into living in the right area? Do you live in an over-priced area, relative to your income? (I know I have some readers living in some expensive Canadian cities up there!) How does that affect you?
*home price data from Kiplinger.com housing tool
**median income from census data
Mortgage payments calculated at MortgageCalculator.org
Image copyright Rocket6to3 from sxc.hu
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June 10th, 2011 - 08:33
I live in Western MA and it’s much much cheaper than living in the Boston area for example. For a while there, I was considering moving so that we would have more job options vs the 1 horse town we live in here. Not only would housing double but it’s likely our pay would go down. Because we’ve been at our company for so long, we’re kind of out of whack vs similar jobs.
It’s a blessing and a curse living in a lower COL area. I love it because we can save more but moving anywhere else is very hard to swallow even if it’s a cooler place to be.
June 12th, 2011 - 13:08
I grew up in a one-horse town in Western MA. But real estate was still pretty expensive there. We sold a fairly small, poor quality house there for $100,000 more than my parents bought their house in GA for. (This was right before the crash though.)
Is living in the “cooler” place worth it though? If you spend most of your time working, and then don’t have the money to justify taking advantage of the activities available in a more populous area, it kind of defeats the purpose of moving there. You can always move later, after saving, but saving is worth so much more the earlier you can do it.
June 10th, 2011 - 11:49
I live in Los Angeles which is probably one of the top 3 most expensive cities to live. My mortgage payment represents 10% of my gross earnings. My daughter lives in San Francisco, her percentage is 16% based on salary. If I include bonus, it drops to 12%. Normally, I use 25% as a rule of thumb for a mortgage.
I approach debt fairly conservatively and would never take a mortgage that would exceed 25% of gross. When my daughter bought her condo, I advised her the same way. That is why the percentage is lower, her income is considerably higher now.
Normally in an expensive area, you may need to have a larger down payment to meet my 25% rule.
krantcents recently posted..KC Awards- Weekly Recognition
June 10th, 2011 - 12:39
Your daughter is lucky that she took your advice. Much less stressful than struggling to make payments from month to month! I know that I would be willing to buy only about 50% of the price that my mortgage company approved me for.
Kellen recently posted..Are you paying too much for housing
June 10th, 2011 - 18:47
I love it here in Portland OR.
Yes, it’s expensive comparing to the rest of the country, but it’s relatively cheap for a west coast city. I think people also buy smaller/cheaper houses here. If I move to Texas, I probably want a big house and it will push the cost higher.
We paid too much for our housing, but I think it is offset by going with one car and cut back in other areas.
retirebyforty recently posted..Car Purchase Do-Over And Over And Over
June 12th, 2011 - 13:03
Sometime soon (ok, when air tickets drop a little) I’m going to visit Portland, because I am convinced that I would love it there, and need to confirm this somewhat irrational conviction. What is the rain really like there? Is it like an ever-present part of the landscape, like in Ireland?
June 10th, 2011 - 22:42
I live in Dallas, which has a similar low cost of living for a major city. I bought a 3/2 in good condition condition 15 minutes from downtown in an area with good schools for $150k. In a way, I think the housing costs in a place like Dallas or Atlanta make it hard to later live in one of the “great” major cities.
In order for homebuying to be a smart financial move, the following needs to be true:
Equity built + homeowner tax benefits + appreciation > buying transaction costs + selling transaction costs + additional homeowner expenses (vs. renting) + amount mortgage payment exceeds what you’d pay in rent
Anything else to add? You really can’t overestimate the transaction costs. Or the additional homeowner expenses. You know this, but only a tiny portion of those first few years of payments go to equity. As far as appreciation goes, has any place but D.C. done well? Those calculators that show how smart buying a home is have always relied heavily on appreciation rates that may not return anytime soon.
When I bought my house, I had a stable, boring audit job that I felt lucky to have in a terrible labor market. Slow, steady salary increases and no desire to move anywhere else were anticipated. In the 18 months since moving in, I took a better job that pays more and then got promoted there to a position that pays a lot more. Suddenly instead of just a house in a “decent” neighborhood, a place in a “cool” neighborhood is feasible. Moreover, my recent audit experience has been in an area that’s in really high demand. I could probably find a decent job in most cities. I’d really like to spend a few years in one of the “great” major cities when I can still afford (no wife or kids) its unaffordability, if that makes any sense.
My advice: Especially if you have aspirations to live anywhere else, don’t buy now. Wait til you’re a second-year senior and have a better idea of career and geographic aspirations.
June 12th, 2011 - 13:01
Yeah, I could pretty much get a decent, move-in ready house in a decent (“up and coming”) neighborhood for that price. But thanks for the advice, I do need to wait until I have a better idea of where I’ll be in a few years and what kind of job I’ll have.
June 11th, 2011 - 01:20
I’m happy being here in Chicago, though San Francisco has an incredible quality of life. But, you pay for it!
Another important factor is real estate taxes. Here in the Chicago area, particular in the suburbs, the taxes can be ridiculously high on a percentage basis. Don’t forget to consider taxes when assessing cost of housing relative to income, as mortgage payments aren’t the only part of regular housing payments!
June 12th, 2011 - 12:55
Squirrelers, that is a very good point!! I was looking into buying a house earlier this year, and the monthly taxes were over 50% of my mortgage payment, which still makes me think “How is that even possible??” After living in the house for a year ( or rather, once I’d owned the house ON december 31st) I would be able to get a Homestead Exemption and save a lot on property taxes, but I’d have to pay the first year at full price (and if I ever moved out and rented it.)
June 11th, 2011 - 14:23
First off, loved the picture of the house in the post. Seriously hilarious. haha
I live in Utah where the median houses are around $200K. I thought I had a good thing going but it looks like Atlanta is even better. Fortunately, I purchased a house that was pretty cheap and it doesn’t look like the one in the post.
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June 12th, 2011 - 12:51
I regret that I’m not in a good stage of my life to buy a house now, since you can get them for so cheap here! Good for you for getting a good deal on your house
I’m glad you don’t have to live in a windowless shack to get a good price!
June 12th, 2011 - 11:46
I live in the Silicon Valley, renting from a family member who bought in the 70′s. Even paying less than market rate, rent takes 50% of our income. That’s down from the 2/3 we were paying at the beginning of last year. If your income is low, you still have to live somewhere! It’s a nice area and we love it, but we don’t anticipate that we’ll be buying anytime soon. In our city, the median house price is just shy of $1,000,000. A 2 bedroom, 1 bathroom house from the 40s just sold across the street for $700,000. The quality of life is great, but not $700,000 for 900 square feet great!
June 12th, 2011 - 12:48
That’s the problem isn’t it? There are people with low incomes in every city, no matter how expensive the housing costs. There also seems to be an effect when people move from a cheaper cost-of-living area to a more expensive one, it takes a lot of adjusting for them to realize that they might need to live in a bad neighborhood when they’ve been used to living in a decent one. I see this a lot with my new friends moving into the city after going to college in small towns with cheap student apartments.
June 12th, 2011 - 11:54
Funny, in looking up the median house price, I discovered that we’re on Money Magazine’s top 100 places to live in 2007. The median income is $130,000, so the income/house price ratio isn’t quite as bad as San Francisco. But we’re not making anything close to $130k and won’t be buying a million dollar house anytime in the foreseeable future.
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June 14th, 2011 - 12:23
I’ve been house shopping in Atlanta and the prices are great right now! Too bad I’m not ready to buy. But quit telling everyone how cheap our homes are, that’s what caused all the northerners to move down here and bid up our home prices in the first place
Financial Success for Young Adults recently posted..How Much Do We Save to Buy a House
June 27th, 2011 - 09:36
Believe me, it would be good for us if we had another influx