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Housing Prices

August 14, 2018

Have you seen housing prices lately? They seem to be going through the roof. Since the last recession they have increased (nationally) from about $220,000 to about $325,000 according to the St. Louis Federal Reserve. WOW!!

Around San Antonio, where I am located. The median housing price is about $233,000 according to the San Antonio Business Journal.  It has increased about 5% over last year. Year over year prices have increased substancially over the last few years.

I am a little bit of a numbers guy so lets see what it costs and what someone has to earn to afford the median home in San Antonio. First lets get together the total cost of the home. At $233k purchase price, the payment at 4.5% interest rate on a 30 year loan would be about $1,180. When you add in taxes at about $525.(2.7% annually) and insurance of about $160 the total comes out to about $1,865.

If you thought about getting a 15 year loan the payment with taxes and insurance would go up to about $2,440 assuming a 4.25% rate for the 15 years. Interest rates move almost daily. This is of course for illustration purposes only.

For now lets stick with the 30 year mortgage because that is what allows people to get a bigger house. So you will have a payment of about $1,865 per month. The simple rule of thumb is that you should earn at least 3x what your mortgage payment is to be able to afford your mortgage. For our purposes that would mean that you should earn about $5,595 per month or about $67,000 per year.

The median income in the area is just over $67,000 per year. So everything is great, right?? If you break down the numbers even more, you see that $67k per year ends up being about $1,288 per week or about $32.21 per hour.

The median teacher makes over $54k per year according to Salary.com. The median pay for a police officer is about $52k per year. So a teacher and police officer combined who have worked for several years together will make about $105k per year.

This should be great news that a couple of professional people together can afford the median priced home, and it is. Where it gets a little crazy is that we listen to all the marketing that says we should drive the nicest car possible. We should live in the best neighborhood that we can afford. And why not, we deserve it.

This couple can afford a bigger house than median, so why not buy the bigger, more expensive house? They work hard, they deserve it. Actually they can probably afford a home with a payment of about $2,900. Which would equate to a home of over $350k. For the San Antonio area, that is quite a house.

After taxes, someone making 105k per year will actually net about $5,500 per month after you take out insurance of several hundred dollars per month as well as income taxes. Dont forget 7-10% of you income going towards your retirement.

You are probably thinking there is still $2,500 left after the mortgage, income tax, retirement, etc. Well, you still have to eat, car payments, car insurance, kids (probably the biggest expense of all). Multiply your car payment times 3 or 4 if you have two kids driving.

Now think if they had a smaller, non-glamorous 200k house. The couple would have over $1300 extra every month. Not only that, if one of the two needed to stop working for an injury, leave of absence, go back to school, or whatever, they could still make the payments and still be comfortable.

The problem is when you push things to the limit. Everything has to go perfect for the next 30 years. I can tell you from past experience, it usually does not happen for more than a month or two at a time. The car has a blow out that costs $150. The kids get sick and need Dr. visit and medicine, $150. You have to take some extra time off of work, you lost sick days and vacation. Your next illness will cost 3 days off or $400.

Shit happens. Your housing costs only go up. Things break over time. Costs other than taxes and insurance are a constant. If the price of your house does goes up, so do your property taxes. Have you ever known your homeowners insurance to go down?? I have not had that happen to me. Costs go up every year.

PLEASE, dont get me wrong. I think everyone should own a home. I am just saying, buy what you can afford. Buy way less than you can afford. Because when shit happens, you dont have to worry about making the payments.

Divorce is another thing that happens. I have bought too many houses from people who got a divorce several years before. One moves out and with a single income, they can not make the payments. They do not want their friends to know that there are problems in life so they stay in a house that they can not afford. It is so sad for the family.

I end up coming in to buy the house because they are at a point where they are 8 months behind and they are about to lose it. They have no way out but to lose most of their equity or get foreclosed on.

I hope this does not happen to you. I pray that you will heed my warning about buying at the limits of affordability. Believe it or not, we are at or near the top of the housing cycle with housing prices at record highs. In the near future prices probably will stabilize and maybe even go down a bit for a few years.

Nobody wants to be underwater on their home. It is bad enough when you finance a car for 6 years and you are underwater or upside down on it for 4 of the 6 years. If you want to sell in that period, you end up putting it on the next car and things only get worse. Lets not let this happen with your home.

My personal opinion is that when you get qualified for a mortgage you should ask, “What can we qualify for if we only use one income”. That should be your top price. You know 100% that with one income you can afford the house. With 2 incomes you will never have to worry. You might even be able to save 15% of your incomes in your work 401k AND get out of all your credit card debt.

Happy Investing