Friday, July 20, 2007

Starter Home Blues

A quick back of the envelope calculation reveals that virtually no one can afford a home. Below is the average household, but with no children. Both working adults are young, receive health insurance, and have no student loans. In other words, the most "financially ideal average household."
All in very gross approximations:
Average household salary: $60,000
Less 25% Federal Tax: $45,000
Less state tax & SS: $40,000

Monthly Equivalent $3,333
Less food, gas, insurance,

utilities, etc. $1,600
That leaves the average household with about $1,600 to a) save for retirement (experts suggest young workers max out their 401(k) limits, currently $15,500 / yr or $1,300 / month), a child, life insurance, coffee addiction, a rainy day, and b) pay monthly mortgage payments.

Say the misses wakes up one morning and - taking my father's advice - says, "I think I'll make more money. Yes, I think ... yes, that's what I'll do. Make more money." Her boss, agreeing with her sound logic, increases her income 133% to $60,000. With their household income now at $100,000, well above the 25th percentile of all American households, this fictitious family should have no trouble affording a home. Unfortunately, because the family is young (or because they were stuck in the Peace Corps for two years) and this would be a first home purchase, the couple still cannot afford a house in the hyper-inflated market.

If any young couple wishes to buy a home where they work (not move to Porterville or Detroit to pursue a career in home flipping), then it takes superstar circumstances: income in the top 10% of all Americans, rich parents donating 10% for a down payment, or buying a home and renting out the downstairs to a random family from Craigslist. This is not the way our parents or grandparents experienced first-time home buying. For many of them, the difficulty of buying a $450,000 first home is inconceivable because they are already sitting on an $800,000 track home.

On a similar vein, Rachel and Rob find it tragically amusing that home sellers can't seem to find anyone to buy their $500,000 nondescript homes with hastily installed granite counters and hardwood. We know that the intrinsic value of the home is probably closer to $200,000, and that the other $300,000 is "entitlement equity." If you want your home to sell, don't lower the price by $10,000, lower it by $150,000. That's still a reasonable return on investment.

2 comments:

Bob Mardock said...

Try Porterville, CA. OR, make more money. Isn't life simple?

Kelleigh said...

Oh, my goodness. Surely there are homes that cost less than $450 up there?!

By the way, your rent is our mortgage payment . . . :o) You are always welcome to move to friendly, little Dallas, Oregon! I know a good insurance agent!