What Does “Affordable” Mean to You?

Good comment from Jonness on this week’s poll:

Personally, I would not feel comfortable leveraging into a $360K loan on a $100K income at a time where a significant risk of price declines exists. But, apparently many people have no problem with this. From what I’ve read, many people actually consider 28% of gross annual household income to be a conservative amount.

My question is, how do other Seattle Bubble posters feel about the 28% affordability measure? Is this realistic as an affordability measure?

Confused Man Reading a Bill or Bank Statement
Because what article isn’t improved by a generic stock photo? (credit: s_falkow)

I’ve always heard it as 30% of gross annual income, which is the number I used for my Simple Affordability Calculator, and the number I use when calculating the Affordability Index.

On the other hand, my personal opinion is that families that take out a mortgage whose payments eat up 30% of the gross of two incomes are putting themselves in a precarious position should either breadwinner lose their job or even take a pay cut.

My family’s threshold is quite a bit more conservative than the “traditional” measure of affordability. When we bought our house this year, we kept our total monthly payments (PITI) at around 15% of gross income—half of what is traditionally considered “affordable” by most. We also only counted one income, and have no other debt whatsoever.

So what does “affordable” mean to you? Would you take out a mortgage that required 30% of your gross income to make the payments, or is your threshold 20% or even lower?

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

38 comments:

  1. 1
    Jacob Beaty says:

    I am in the 30% camp, although it is based on 1 income and that’s the front end calc. I really don’t care much for the fear of continued housing price pressure as 1) My mortgage is 3.875% over 30 years with CPI @ 3.8% this year, 2) my wife & I purchased a home with the intention that we will be there for the long haul 15+ years.

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  2. 2
    Cheap South says:

    When we were both employed we were at about 8%. I agree that anyone using 30% with two incomes could get in trouble really fast.

    There aren’t any guarantees. No one is secure in a job for 30 years. The days of graduating from High School and going to work to the factory where dad, and uncle Bob work and from where grandpa retired after 40 years with a pension are over (the RV industry will be suffering).

    I would keep it under 20%; but keep on renting if it’s cheaper.

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  3. 3
    Betsy says:

    I’m cursed with contextual knowledge. My mother’s home in Spokane, in the nicest, safest neighborhood/school district, 4BR, +7000 sf lot is assessed at $173K.

    While technically we could afford something around 30% income in Seattle, we pay less than half that for our MIL rental in Magnolia. My husband, also from a low-cost hometown of Tucson, can’t shake the feeling that a home in Seattle is nothing more than a box rotting in the rain, just not worth the price. We could afford buying, but again wonder if quality of life in Seattle is really +2x better than Spokane. We’re going to reassess in a few years, but at this point we just can’t see buying here given all the downsides of City living.

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  4. 4
    Dave0 says:

    I would say that 30% of the highest single income of a household is “affordable.” This allows only one person in the household to work, or gives a buffer in a two-worker household if one of them loses a job.

    Personally, my significant other and I live on a boat, which we purchased for about the same amount as a 20% down payment on a house. We now own our “home” outright, and our only shelter expense is moorage (which is about the same as HOA dues would be on a condo) + maintenance. Those two expenses are about 10% of our combined income; which is definitely in the “affordable” camp!

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  5. 5
    Dirty Renter says:

    Cash………like the good ole days.

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  6. 6
    goldbach says:

    It probably depends on the circumstances. Including HOA fees, I’m at about 32%, but I’m also single with no children, and no car (unless you count Zipcars), so my transportation costs are about 2% of my income. I eat out frequently, and still save more than 10% of my income every month.

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  7. 7
    Drone says:

    I’d say that ~25% of gross “feels right” to me for a mortgage payment. Add in taxes, insurance, repairs, etc, and total housing costs end up at ~30%. However, my plan is (and has always been) to purchase a property with an existing or potential MIL, so that the rental income offsets the price somewhat and brings the total cost of ownership down to a much more conservative level. So true cost might end up closer to 15% of gross.

    As things stand today, my personal situation does not allow me to move out from the “special” parts of Seattle… and I’m not comfortable spending that much for the current batch of inventory. My income today would buy me a 100-yr-old moldy box rotting in the rain. Hooray.

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  8. 8
    No Name Guy says:

    Affordable = what I can pay cash for without compromising my savings.

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  9. 9
    patient says:

    By goldbach @ 6:

    It probably depends on the circumstances. Including HOA fees, I’m at about 32%, but I’m also single with no children, and no car (unless you count Zipcars), so my transportation costs are about 2% of my income. I eat out frequently, and still save more than 10% of my income every month.

    And this is why income is not a useful guidance. As a comparison we pay $5k a month in child expenses, another $2k to college funds and then add $4k to two 401ks. If goldbach and our household both made $300k a year the same affordability threshold in income percentage is not viable for both of us. Affordable is when you don’t need to borrow to buy.

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  10. 10
    jeanette says:

    our total monthly payments (piti) are at 22% of our total gross monthly income. this doesn’t include the annual bonus from my work – if that were spread over 12 months, our total monthly payments are at 18% of gross. 22% is right at the max of what we consider to be affordable. the bank qualified us on my income only (which would put our total monthly payments at 44% of gross, exclusive of my annual bonus), and while we would be able to survive on only my income, it would be downright unpleasant. bottom line – total monthly payments at approx 20% of gross income is our comfortable spot, what we consider to be affordable.

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  11. 11

    Debt Based On Gross Income is a Joke

    Number one, the second income isn’t really a second income, it about 2/3s of an $100K income, factoring in bracket creep.

    30% of a $100K gross income, let’s see now, that’s exactly $2500/month….about half a $100K net pay….the 90s banks [2011 banks too????] would turn you down flat, you simply don’t qualify.

    If I was a banker, SWE would turn you down flat too…way too risky. Try 30% of net pay, minus college, car and credit card loans…..BTW, my private bank would still be in business [without taxpayer Freddie/Fannie life supports] in the coming years too.

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  12. 12
    BubbleBuyer says:

    We’re at 12.2% PITI as percent gross income on our home now and it is the first time I’ve felt remotely comfortable with the cost. I will feel completely comfortable only once we’ve paid off the mortgage completely and idiot Seattle voters stop approving special assessments on property taxes.

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  13. 13
    Drone says:

    By BubbleBuyer @ 12:

    I will feel completely comfortable only once we’ve paid off the mortgage completely and idiot Seattle voters stop approving special assessments on property taxes.

    So, never then?

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  14. 14
    bd says:

    When we bought our first house, we did it because we could afford the mortgage payments on one income, when we both had incomes of about equal size, and because our mortgage payments were about roughly equal to our monthly rent.

    That seemed both reasonably safe and a good time to trade in renting for buying as we value the (non-financial) benefits of home ownership over the benefits of renting. (The percent of gross income going to mortgage payments was something like 18%.)

    I’d use that sort of calculation, one informed by the personal details of your life and your acceptable level of risk, rather some generic blanket principle of percent of gross income.

    Nowadays, for instance, I’d be more willing to take on additional risk related to job loss because we have much more in terms of financial assets. When we bought our first house we didn’t have much in the way of liquid assets, so the amount of risk we were willing to take on was much, much lower.

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  15. 15

    Reality check: FHA lending guidelines are still allowing loans with a back end ratio of 50%.

    Principal, interest, taxes, insurance plus all revolving debt divided by gross monthly income.

    …and FHA defaults are hovering in the 15% range right now.

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  16. 16
    doug says:

    Our house works out to 18% using your calculator, and drops to 16% once we get 20% paid off. This works well for us, and I think 25% would be our absolute max.

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  17. 17
    wreckingbull says:

    I have always calculated the threshold a bit differently. Whether this is a good method or not, I don’t know, but it is what has worked for me in the past.

    I estimate what I would bring in working a minimum wage job, and make sure I could pay for minimal food, mortgage, and fuel, without digging into my savings. If I didn’t find a home that met the criteria, it was back to the grinder for several more years in order to save up more of a down payment.

    Given our government’s war on savers over the last decade, I questioned my sanity. Who knows, maybe I was the fool not to take out a HELOC, default, and walk away with several hundred thousand in cash.

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  18. 18

    Everybody’s got a different definition for “affordable”, and for me and housing, affordable is not so much a percentage of your gross income as much as not having to sacrifice one’s lifestyle to make mortgage payments, and to have money left over to spend on other things, or to save, or to invest in other things
    Even if you view your house as an investment, it’s best not to put all your investment money in a house. It’s best to diversify, not to put all your eggs in one basket, and to minimize risk.
    I’ve always lived pretty frugally, and never felt that it was important to have stylish appliances or counter tops. I don’t have to live in the hippest or trendiest neighborhoods, or neighborhoods that had the very best schools. I understand why people do it, it’s just not my style.
    When my wife and I lived in Leschi with the kids, we had a duplex , lived in the upper unit and rented out the bottom. After the rent came in, we were spending about 15% of our gross income on housing.Now it’s closer to 7% without a mortgage payment and just paying for taxes and insurance. But everybody has a different threshold. For some, it’s that important to live in a great school district or to be 10 minutes from work , or to be within walking distance of Whole Foods, that they’re willing to sacrifice to make mortgage payments. I couldn’t live like that. I like to have money to play with and don’t want to feel like I’m a slave to the house.

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  19. 19
    gr8day says:

    When we were considering buying in the ’05-’07 years, we followed this formula-

    1. Get advice from different categories of advisers. We got advice from investors, economists, a couple of good books/websites and other financial gurus….and a couple of real estate people. If we had gotten advice from just one category, even if it is several people, the advice is the same, as they usually have the same outlook. (ie: real estate people usually say “this is a great time to buy”…financial advisers say “fund your retirement first, kids college second” etc)

    2. Gather the advice, and develop a range. We got advice like:
    a. 30% of gross monthly income for your payment
    b. 25% of net monthly income for your payment
    c. What amount still allows me to save 20%
    d. What amount is 50% (of my take home) for all expenses (not including fun and savings)
    e. House price is 2x my annual income
    d. House price is 3x my annual income
    We gathered all of that advice, and figured a price range for us.

    3. Add in my personal situation and develop a risk to reward.
    a. Life stage (am I 20 or 50?)
    b. Children?
    c. Job stability/National economy?
    d. How long will we be in this house?
    e. Health situations?

    There were some other criteria that I cannot remember right now. After all of this, we decided to NOT buy and keep saving. Sooooooo glad we did.

    The bottom line for us was buying a house (and still saving for car/educations/retirement) stretched our budget, and we have reasonably good jobs. We saw a lot of people stretching their budget waaaaaaaay beyond ours to buy a house. They often eliminated any savings program. It all did not make sense using ANY of the metrics we were advised on (A, B, C, above). The risk to reward was really high.

    We figured it was not going to work out in the long run for those people, as the numbers did not add up……….little did I know.

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  20. 20

    RE: gr8day @ 19

    Tip of the Hat for You

    You just got SWE’s Betty Crocker Seal of Approval :-)

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  21. 21
    gr8day says:

    Softy @ 20-

    The interesting part is…..I really wanted the numbers to work, I really did. I truly wanted to buy a house. But as they say, numbers don’t lie. When I got advice from someone related to the real estate industry, she said that people were taking out riskier loans, and that surely some of them would default. She then taught us a little about defaults/foreclosures/short sales etc. After a number of conversations with her, I could see that being a possibility. We thought we might be able to get a better price if we waited. Again, we could not see how people could afford what they were doing…so certainly one or two would go into foreclosure. Maybe we could buy then.

    We are not financial geniuses, nor did we have a magic looking glass into the future. We just used a $5.00 calculator, and studied up on the topic. And I have to admit – it was extremely difficult to not get in on the bandwagon. There were times we really thought we may be priced out forever. There were time I was truly baffled, and thinking what is wrong with me, why can’t I understand why so many people are doing this? Then we got the $5.00 calculator out again, and started all over.

    So, Tim – that is my definition of “affordable”. I do not use just one criterion or metric, I use several.

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  22. 22

    RE: gr8day @ 21
    $5.00 calculator=affordable
    $450,000.00 house= not so affordable

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  23. 23
    David Losh says:

    Does this mean “how much can I afford to lose?”

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  24. 24
    Scotsman says:

    RE: gr8day @ 19

    “We figured it was not going to work out in the long run for those people, as the numbers did not add up”

    It can be frustrating knowing the math while you watch the world seemingly continue to move forward. Now we all know the reality. And frustration has been replaced with some mix of relief or vindication and real fear for the future. Interesting times.

    Twenty years ago when I briefly worked as a mortgage broker (with 12% rates) almost everybody we financed was really broke. Forty year olds borrowing the last $2,000 from parents wasn’t uncommon. FHA ruled. Somehow I thought/hoped people had gotten more conservative. Wrong!

    I’d live on our boat if the wife would go for it, but no dice. Too much stuff that we probably don’t really need.

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  25. 25
    Jonness says:

    We just used a $5.00 calculator, and studied up on the topic.

    :)

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  26. 26
    Macro Investor says:

    RE: gr8day @ 21

    “There were time I was truly baffled, and thinking what is wrong with me, why can’t I understand why so many people are doing this? Then we got the $5.00 calculator out again, and started all over.”

    Bravo. I would just like to add — if everybody is doing something, it probably makes sense to DO THE OPPOSITE. By definition, what everyone else is doing cannot be interesting or special. In a capitalist society, what ever the crowd wants will soon have it’s price jacked up.

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  27. 27
    Macro Investor says:

    RE: Betsy @ 3

    “… can’t shake the feeling that a home in Seattle is nothing more than a box rotting in the rain, just not worth the price.”

    Indeed. What good comments today.

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  28. 28
    Azucar says:

    By Ira Sacharoff @ 22:

    RE: gr8day @ 21
    $5.00 calculator=affordable
    $450,000.00 house= not so affordable

    Well, there’s plenty of FREE websites that can help with the affordability calculations (why, there’s even one right here: http://seattlebubble.com/blog/2009/03/06/simple-affordability-calculator/ ), so is a $5 calculator really affordable? Ok, so most people can afford to spend $5 on a calculator… but there was plenty of arguments against the post discussing how the housing affordability index was making it more affordable to buy a house because both prices and interest rates are way down, so by the same token I’m arguing that paying $5 to allow you to manually do some calculations… that you can do more easily for free on a website or with excel or any available spreadsheet program… isn’t necessarily “affordable”.

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  29. 29
    Hugh Dominic says:

    Thank you all for commenting on this subject. I will now provide the answer. Barring any unusual life circumstances, you can look up the correct affordability profile based on your age using this chart:

    Age…….%Down…..%Monthly Income
    20-25………05………………35
    25-30………10……………..30
    30-35………20……………..28
    35-40………30……………..28
    40-45………45……………..28
    45-50………60……………..25
    50-55………75……………..25
    55-60………90……………..20
    60+ Do not take a loan

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  30. 30
    gr8day says:

    The $5.00 calculator is a figure of speech – “a part for the whole”.

    As I stated in my post @19, we went to websites – that is where I got mortgage payment info and affordability index – I did not run those numbers manually. At times we huddled around our computer and used excel (even tho it took electricity to run it). And then there were the times we sat in the living room and used the $5.00 calculator and discussed the situation – “well if I cut out the gym membership how much is our monthly budget now. Can we buy a house if I do not go to the gym” etc etc?

    Really, it does not matter if I used websites, excel, a $5.00 calculator or an abacus. The point is we ran the numbers, and it did not make sense. And at the time I was frustrated as to why I could not figure out how to do this, and so many others could. I felt that kind of debt could put our family in peril if the economy went sour/health issue came up, etc. You are right Scotsman – we were a little frustrated at the time, but now feel relieved that we did not do it.

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  31. 31
    Updog says:

    While lenders certainly care about the %, I look at it in terms of disposable income–if I’ll have enough disposable income regardless of %, then it’s affordable e.g. someone makes $500K per year, depending on lifestyle, they may be able to afford 60 or 70% if the $150K pretax would be enough to cover the rest of their expenses/savings goals etc.

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  32. 32
    Matt the Engineer says:

    Strange that everyone is so focused on the income side of the equation. The other side is just as important, and while I’ve rarely heard of a house affecting the income side (unless you rent it out, or use it to grow pot plants), it always affects the expenditures side.

    If you have a 1-hr drive to work and pay to park, then go home to mow your huge lawn while saving up to repair your 2,500 sf roof and your huge power and water bills… your $300k home might be much, much less affordable than the $600k home you could have owned in the city.

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  33. 33

    RE: Matt the Engineer @ 32 – I would agree, but perhaps not in that extreme range (300k to 600k). But to some extent, I think the cost to commute is already accounted for in price, because the distance of the commute affects demand.

    And to counter your argument some, when I used to walk to work from First Hill to Downtown I used to say that my risk of dying in a car accident was greater than when I drove to the east side. Seattle drivers are not good when it comes to pedestrian safety.

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  34. 34
    joeblocks says:

    By Betsy @ 3:

    We could afford buying, but again wonder if quality of life in Seattle is really +2x better than Spokane. We’re going to reassess in a few years, but at this point we just can’t see buying here given all the downsides of City living.

    Apparently the more than 2x as many people who live in Seattle vs. Spokane (including yourselves) choose to live here for some reason. I guess “city living” must have some advantages… I wonder what they are?

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  35. 35
    Lisa says:

    I think the risk of price decline today is no worse than any time in the last 10 years. However, 30% of gross income is scary even from a cashflow perspective. Personally, I have an aggressive 10 year fixed rate mortgage, and my mortgage + maintenance + tax is still less than 30% after tax income. I also have enough savings for more than 1 year of expenses in case of emergency. Even so, I sometimes wonder if I should have taken a 15 year mortgage to lower my monthly payments.

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  36. 36
    Matt the Engineer says:

    RE: Kary L. Krismer @ 33 – Seriously – looking just at commuting car costs, a 100 mile commute will cost you $500.000 over 30 years. Assuming an hour commute is, what, 50 miles? That a $250k difference. And that ignores the other trips involved in the suburbs/exurbs (driving kids to school, need for a car for your kids, driving to the grocery store, etc), or other suburban costs (larger house = higher utilities, more time cleaning, lawn maintanance, water bill for a large lawn, etc.).

    I agree suburban homes have been discounted by the market because of this, but remember that the $500k you lose from a long commute is just gone. If you spent that on a house you get much of it back when you sell.

    Re: pedestrian death v. driving. I believe about 7 pedestrians are killed each year in Seattle (though the number goes up and down a lot per year). According to NHTSA, 11 out of every 100k people die each year from cars. Using Seattle’s population, that’s a total of 66 people. Therefore it’s about 8.4x more dangerous in a car than walking (ok, not exactly – there are a lot of other factors involved, like how much you walk or drive). I believe Sightline did a good story on this a few years back. I seem to recall that considering the extra excercise you get you actually increase your life with every step you take, even factoring in traffic dangers.

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  37. 37
    Matt the Engineer says:

    (forgot the link)

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  38. 38

    RE: Matt the Engineer @ 36 – A 100 mile commute, I’m assuming round trip, is quite a way out of downtown. But even assuming you’re right about the cost of that commute, the $500,000 is not worth $500,000 if you discount it to present value. At 4% it would only be about $370,000. Compare the price of a house on Capitol Hill to one in Maple Valley. If you found something similar, I suspect the difference would be much more than $370,000 (But I haven’t tried that experiment).

    As to the car thing, I suspect you’re probably right, if for no other reason, it’s a bit easier to control your activities as a pedestrian. In a car you’re a bit more at the mercy of others’ bad behavior.

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