When we finally turn that magical age of 18 and decide to fly from the nest for the first, and possibly last, time we are handed pearls of wisdom that our parents have spent a lifetime gathering. They did their best to raise us to become productive adults but there were simply some things that we could not know until we were leaving the home for good in search of our own place. “Always remember to check the water at a new apartment before renting,” my mother said as I left for college. Some things were more practical than others and some were meant to make sense when buying a house. There has always been the old adage that you should never let the amount you pay in rent/mortgage be worth more than a 3rd of your take-home income. Having this cushion allows for there to be ample funds to pay off debt, bills, and even put into savings. More so than simply just being a rule of thumb regulations have tightened in order to protect those seeking to take out a home loan restricting lenders from giving out a loan where your monthly payment will give you make your debt-to-income ratio exceed 43%. But, what does that mean for those looking to buy a house?
Business Insider recently did a data analysis to see just how much of a salary you would need to have in order to afford the average house in 25 of the largest metro areas in the United States. While the results may not be overwhelmingly shocking they do shed some light on some of the most popular places to live in the country. For instance, the average house in San Francisco is priced at $682,410 which carries with it a monthly mortgage payment of $2,695.23. In order to be able to make this payment under our classic rule of thumb (this metric uses 28%) you would need to make a yearly salary of $115,510. This may seem like a lot, but that’s because it is. Let’s take a city a little bit closer to home, shall we? Portland is one of the more affordable “large” cities in the country, but given its recent rise in popularity there has been a slight shift toward unaffordability. The average home price in Portland is $267,500 which brings a monthly mortgage payment of $1,070.36. This means that you would need to have an annual salary of $45,872 in order to afford the average home in Portland. Portland, apparently, remains one of the most affordable cites…for now. This is an interesting perspective on a problem that is faced daily by homeowners and potential homebuyers. It was found that nationwide the average home price is about six times the salary required in order to afford the principle and interest payments with a front-end debt-to-income ratio of 28%. You see, all of those things our parents told us as we left to explore the world on our own have merit. If not for our parents telling us to avoid paying more than 1/3 of our income in rent/mortgage payments we may have ended up in an underwater mortgage with a bad loan.