How Much House Can You Afford? Part 1: Can of Worms

On September 12, 2010 in Housing by notrustfund

My Barbie Dream House

A few months ago my husband and I decided to start looking at houses.  With great excitement, I took on the project of figuring out THE question.  How much house can we afford?

We currently live in a 2 bedroom condo that we will most likely outgrow in the next couple of years.  If we lived in NYC, we could practically raise a whole family in this space. But where we live, people have been asking us when we are going to buy a house ever since we got engaged.

I’ll cover the framework I used for determining our home buying power in another post.  After I came up with our price range, and we had already agreed on a general location, I thought to myself, how hard could this be?  Then we started looking at houses and I realized that deciding on how much house you can ‘afford’ is a lot more complicated than looking at your current savings and income.  Here are some of the questions that have come up for us:

1) We like our jobs but do we like them enough to commit to doing what we are doing now, or something similar, for the next 30 years? The conventional way to buy a house in the United States is with a down payment and a 30 year mortgage.  However, this requires you to make a massive commitment, 30  years, to a certain level of income.  Needless to say we’ve been spending many hours to address the question of what we want to be when we grow up.

2) How much of our savings are we willing to have tied up in a down payment?

3) Will we always be a two income household?

4) Do we want a house we can only afford with two incomes? This one was actually pretty easy, we quickly decided no.

5) How many years of after-tax income do we want to spend on a house?

6) How house poor do we want to be? How much of our income do we want to have left over for vacations, eating out, day care costs, private school tuition if we want that to be an option, college savings, and other general savings?

I quickly discovered that how much house you can ‘afford’ is only partially related to savings and income.  By far the biggest topic of conversation for us has been tied to our jobs.  We both like our current jobs, but the idea of being stuck in them, just because we have a house, is very unappealing.

So, almost five months after we first started looking at houses we have not even come close to putting an offer on a house.  The options as I see them for us now are one of two things.  1) stay in our current location for a lot longer, save more money, and perhaps start to have some more clarity on all of the above questions or 2) buy a house that is much cheaper than the amount any bank is going to tell us we can afford.  This leaves us the option to not have the above questions answered , but still have room in our budget for job changes and school options.

In relating this back to my last post, the world of personal finance has changed a lot from previous generations.  Housing prices are up, mortgages are longer, and job stability is not what it used to be.  I think before a person buys a house it is prudent to have a heart to heart with yourself and whoever you may be buying a house with, and discuss what is really important to you before you even begin to think about price point.  If you are at all like me, this conversation may be a bit of a can of worms, but I think it will put you in a better place in the long run.

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One Response to How Much House Can You Afford? Part 1: Can of Worms

  1. Will says:

    I’m really torn on this one. I like your phrase “house poor.” I’m pretty student-loan poor. I graduated school with considerable school debt, and once I finally realized how expensive it is to have debt, I’ve devoted much energy and money to ridding myself of it. I think it really kicked in once I learned about interest theory. Fortunately, in about six months, I’ll be debt free (my net worth moved into the black only recently) and I think about what I’ll do with my newfound income. Owning a home inevitably enters my mental conversation. On the one hand, I find the arguments that renting makes more financial sense than owning a home very compelling, irrespective of your income (to find them yourself, just google “is it cheaper to rent or buy a house”). On the other hand, how awesome would it be to wake up in and come home to this:

    http://realestate.boston.com/homes/listing/1597-70897939/

    I’ve got a couple of things going on here. First, I’m falling victim to the wanting versus needing syndrome. Second, I’m victim to wanting the best possible house ever built as my first house, instead of an intermediate step a little more, shall we say, affordable. But the most important deterrent is that I’d constantly be thinking of how much money I’d waste on financing and I’d want to devote every idle penny toward paying off my mortgage. And I’d be living like a pauper with a really nice house. The definition of house poor. Kinda stupid honestly. If you read some of my other comments, you might get the idea that I’m some sort of bohemian. Quite the opposite: there are a lot of incredible things I’d like to experience that require plunking down significant cash, and that squandering what I have now on frivolous purchases won’t help me get where I want to be. But then the conversation invariably moves to one about happiness, and whether having that manse on Comm Ave equates to happiness, or whether I can be as happy or happier renting a studio in Brighton. But then I ask myself about the i-banker or the high-powered lawyer who works 80+ hours per week and can afford the Back Bay manse but may not have the time to enjoy it, and is it worth it?

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