September 13, 2009

"If you’re determined to be truly conservative, don’t spend more than about 35 percent of your pretax income on mortgage, property tax and home insurance payments."

Wow. I've only bought 1 house in my life, and that was 25 years ago. All I can say is, wow, I had no idea how profligate you could be and still deserve to be called "truly conservative."

34 comments:

chickenlittle said...

How about 10%
Is that too conservative?

wv: "bancierg" -the front desk in the lobby at the bank

Joseph N. Welch said...

Actually, you have no idea how expensive houses are.

You lucked out buying a house so long ago. Instead of thanking your lucky stars, you manage to insult all kinds of people who did not have the good fortune of buying when houses were cheap.

Charming.

traditionalguy said...

Profligate must be the new character fault of the 21st century. Thank god for non-profligate women with brains. They are hard to find.

Synova said...

I've bought several houses... we're in the fourth. The first were GI Bill secured loans with no down payment and very strict rules. One we bought with cash. The last with a regular bank loan and 20% down.

People buy more house than they ought to because the first thing you do is "pre-qualify". If you pre-qualify for up to $210K the real estate agent shows you houses in the top end of your range and maybe a little bit lower but, really, the 208K house is a whole lot nicer than the $180K house.

It's really hard to convince yourself that the smaller house in the sort of crappy neighborhood is a better plan than the nicer house in the better neighborhood that you can't quite afford. Particularly if you've got kids.

Also, I blame a lot of the "poorer" neighborhoods on the idea real estate agents and agencies push that there are things called "starter" houses and that a person should expect to keep moving into bigger houses in better neighborhoods. Neighborhoods end up unstable without long term residents.

My sister is in the same too-small "starter" house... paying the mortgage payment set 15-20 years ago... with two nearly grown children who will soon be out on their own.

Maybe it was a bit cramped for a while but it will soon be plenty big enough for two adults and nearly paid for besides.

THAT is the smart thing to do.

rhhardin said...

A true conservative pays cash for houses.

BJM said...

@rh - Exactly, We've always paid cash for cars too.

Spending 35% of pretax income is reckless unless you have a very large cushion and who has that nowadays?

Why would anyone figure their budget in pre-tax dollars? Doesn't make sense? Not in CA or any of the high tax blue states.

Chris said...

I think you're confusing necessary and sufficient conditions.

chickenlittle said...

It's really hard to convince yourself that the smaller house in the sort of crappy neighborhood is a better plan than the nicer house in the better neighborhood that you can't quite afford. Particularly if you've got kids.

The former is kinda what we did. It's actually worked out pretty well so far too.


A true conservative pays cash for houses.

Yeah that works if you're born wealthy, unusually successful, or on your second or third home- get real rh and BJM.

miller said...

I wish I could spend that little, but I can't stop my property taxes and insurance from increasing at a wild rate because my county is "broke' and I'm "rich."

So my taxes go up even though my income has been literally flat (no raises this year but kept my job).

Thanks, Seattle! You care for the little guy -- so much do you care that you rob my wallet.

ricpic said...

I always thought the rule was no more than 25% for shelter. Who the heck in their right mind wants to be house poor?

ricpic said...

This is the last house I'll ever own and it's a "starter." They ain't gonna brainwash this doofus!

Joe said...

I thought that the rule was that your debt load didn't exceed 32% of your gross income. The revised lending formulas raised this to 38% and then 45%, which is arguably a contributor to our fiscal problems.

(If I bought a house 35%, that would put me on the edge of bankruptcy if my income or other fiscal circumstances changed fairly slightly. Right now my housing costs me 11% of my income. Spending three times that would be silly.)

Dust Bunny Queen said...

Years ago when I was a lending officer, that was the rule. Debt service on the house could be no more than a certain percentage. 26 to 28% as I remember. Other debt added, such as credit cards, car loans and other loans could not total more than 36%. Although I had some latitude in those figures depending on the assets the person owned and the cash reserves.

We would only lend no more than 80% of the appraised value of the home.

This was before Freddie/Fannie relaxed all the lending standards to you only had to be able to fog a mirror. I had to tell a lot of people no, and it wasn't pleasant.

Commercial lending, which was my specialty, was even worse. We would only lend 50% ltv on commercial properties. In addition for commercial loans we really delved into the financials of the borrower AND their capacity in to handle their business.

Loans unsecured by collateral were very very rare. Either property, crops, machinery, cattle etc. To cover such loans we would also sometimes demand that the individual borrower take out a separate life insurance policy with the lender as an assignee. Just in case the farmer died, I really really didn't want to reposes the cows.

Things have really changed.....for the worse.

BJM said...

@Chickenlittle

Nope, I come from blue collar and farm stock. I know it's a shocker, but I paid my own college expenses too. No loans or grants.

We bought a one bedroom, neglected 1920's bungalow in a so-so neighborhood at a tax auction for $1200.00 cash. The elderly owner died without heirs and owing property taxes.

Over the next five years we spent another $5-8k and a lot of sweat equity fixing it up. Everything except our bed was bought at thrift stores or yard sales and refrusbished. We both worked two jobs to reach our goals and believe it or not we still had some fun. We sold it for a profit that we rolled into the next house and so on. So you could say that we've really only paid $1200 for any house we've owned.

Sorry, but there's no excuse for being in consumer debt or house poor.

Penny said...

Looser guidelines to accommodate those who play fast and loose with their money.

Balfegor said...

Why would anyone figure their budget in pre-tax dollars? Doesn't make sense? Not in CA or any of the high tax blue states.

That was my reaction too. 35% of your pre-tax income has a very different proportional impact on your post-tax income, depending on whether you're making $50,000 a year or $150,000 a year.

William said...

None of you are looking at the big picture. Buy the house you want, not the house you can afford. In a few years you're going to be making more money, and the house will be cheap at that income level. Plus you won't have the added expense and hassle of moving. What do you think is going to appreciate faster: your savings or the price of this beauty. Sweat equity in a fixer upper is a sucker's game. Let the wife get a job for a while. She knows more about retail management than she does about pvc plumbing. You can make extra money easier than you can make space and sunlight in that hovel you were looking at. Nobody ever got rich saving money. You're gambling with the bank's money, and it's all leveraged. Smart people like you never lose.

class-factotum said...

I bought my first house in 2001 with payments equal to about 13% of my gross income (not counting bonus, which only happened for two of the next four years I was employed). I lost my job in 2005, 4.5 years after closing on the house, and when I sold it for my asking price in Feb 2008, I was within $300 of paying it off.

My husband and I put down 50% on our house last year and pay extra toward the mortgage every month. Why would anyone want to be in debt?

blake said...

The house I bought was about 1 year's salary. It was "less" than I could afford, but I just had a feeling it was best to play safe.

That decision sure made life easier when the tech bubble burst.

William, it's not like it's guaranteed you'll be making more money in the future. Though with the coming inflation, maybe the best thing is to get into debt up to the hilt.

BJM said...

I have to admit that I burst into tears when we walked through the house the first time after we bought it.

Every surface was filthy, the plaster & lathe walls peeling away. The kitchen and bathroom were icky beyond description and the battered wood floors reeked of dog urine. But it had good bones, a corner lot with mature trees and we were young. We rented a tiny trailer and lived in the driveway for six months. Good times.

Penny said...

Frankly, I don't see how we can talk about "first houses" without talking about college loans.

First houses used to be about those twenty and thirty-somethings, but for today's young adults, going to college anywhere but a Community College is like a life sentence to apartment living, or OMG, living with your parents until they can't stand you anymore and THEY move out of their own home under the guise of "downsizing".

Synova said...

I figured that William was cleverly channeling a real estate salesperson.

:-)

kentuckyliz said...

The old conservative rules even seem risky nowadays. After all, they come from a time when you got a job for life. Not the instability that is there now. We're used Kleenex tossed aside and who knows if you ever get a job that pays as well ever again. I'm dealing with that with laid off coal miners right now. Damned EPA. Hoping for manufacturing to recover and a cold winter to create a little demand.

WV prelei
just off the plane in hawaii and you don't have you flower necklace yet

scinfinity said...

I bet the limits on development might be helping raise housing costs.

As the old saying goes, an environmentalist is a developer who already has a nice home in the woods.

Penny said...

"I figured that William was cleverly channeling a real estate salesperson."

And I figured he was saying that reasonably "risking" on a house, or on a stock, is what keeps this country going.

If you are uncertain which of those two is your personal way to go...then by ALL means, go out and buy something...ANYTHING...while you ponder.

BJM said...

@Penny,

I don't know how younger people cope with the debt load they acquire along with their education now or parents trying to provide educational funds in this economy.

We really need reform in this area as much as in health care.

dick said...

DBJ,

I bought a house when I was married back in the late 60's and the rule then was 28% of your taxable. That made a lot of sense to me then. Now with the taxes it seems a wee bit high. Of course that depends on what your taxes are. My buddy has a house in Bergen County, NJ and his taxes on a house that would sell for $250K run him about $8K/year. My old landlord in Montclair, NJ was paying $14K for a home that would sell for about $350K then. It is higher now. And the lot was 15 ft in front of the house, a driveway on one side, a narrow sidewalk on the other side and 25 ft behind the house. Outrageous.

Penny said...

Dick, I live in that state too, and it is as unfair as we have allowed it to become. Unfortunately, it is at a tipping point now.

So many are sucking off the federal/state government and union teats now, that bankruptcy may be the only way out.

Shamefully, I am wishing for California to speed up their demise to serve as an "example".

BJM said...

@Penny, hey, we're digging as fast as we can. (another story Big Media ignores)

WV: asparadex - The asparagus growers exchange.

Shanna said...

My house was appraised for 60/70k more than I paid for it (a scant two years after I moved in), but we have that homestead act thing, so my taxes go up every year by 5%. They would almost double if they had raised it to the county appraisal.

LarsPorsena said...

Get ACORN advice..no job, no credit, no problem. Want to get a starter whore house with 100% financing?
Call today.

Spending your own money? You're a bunch of dolts.

AJ Lynch said...

Kinda surprised at this poor advice from the NYT.

When you add the income tax and payroll taxes and approx utilties costs to their 35%, it totals 63% of your income and that is BEFORE you pay for your food, car, transit costs, life & hlth insurance, entertainment, clothes, other debt, vacation etc.

This NYT writer may have flunked arithmetic. The 35% advice shows why we had a housing bubble!

Calvin Brock said...
This comment has been removed by the author.
Calvin Brock said...

The solution came in the form of a piece of white PVC plumbing pipe that we had lurking out the garage (these lengths of white plastic plumbing pipes along with their different connectors make very cool rancho cucamonga plumber