Can you afford to buy a home?

This has been on my mind a lot over the last few years. From a simple observational perspective in much of Manhattan, do the math. Without parental help, it's simply impossible to buy a family-sized apartment.

While mort­gages have become more acces­si­ble over time, the fun­da­men­tals haven’t changed. You put a por­tion of mon­ey down, the rest cov­ered by a loan of either 30 or 15 years. The bank col­lects tax­es and holds them in escrow, pay­ing them for you (to low­er their own risk). And, if you put down less than 20% of the home val­ue you pay addi­tion­al insur­ance against default.

I bought my first con­do in Hoboken, NJ in 1995 for $204,000 with 10% down. It was a 1,400 square foot duplex with two out­door spaces. I remem­ber scrap­ing every­thing I had to get that down pay­ment (and clos­ing costs, etc). It wasn’t a risk as employ­ment was more secure in those days and I knew I could cov­er the pay­ment (inter­est rates were much high­er then too).

Buying my first place was fun, I was even offered a job by my attor­ney! Though, that’s a whole oth­er sto­ry.

That was a long time ago. And while I don’t track real-estate prices, I think it wouldn’t be hard to imag­ine a “starter place” going for $1M or more.

Quick math on what it takes to buy a one mil­lion dol­lar apart­ment…

20% down = $200,000

Where is a 20 or 30-some­thing with­out wealthy par­ents going to come up with $200,000 (plus clos­ing costs, fur­nish­ing, etc)?

Ok, so even if you man­age to come up with $200,000, that’s still leaves you with the priv­i­lege of an $800,000 mort­gage. At a 4% inter­est rate, that’s about $3,800/month not includ­ing tax­es or build­ing main­te­nance fees. If we pre­tend that all in, that’s $5,000 a month, one needs to earn about $100,000 a year just to “feed the mort­gage”. (There are some tax ben­e­fits to a mort­gage, but we’re sim­pli­fy­ing here for the sake of illus­tra­tion.)

And, by exten­sion, if you want to keep your hous­ing costs to 1/3 of your income, that means a fam­i­ly income of $300,000 (which prob­a­bly still leaves you house-poor).

Put down “only” $100,000 and that adds about $500/month to the pay­ment (plus mort­gage insur­ance). Which rolls up to need­ing to earn $30,000 a year more before tax­es to keep your hous­ing expense inside of 1/3 of pre-tax income.

Even so, I still can’t get past the need to save $100,000 for the down pay­ment. I’d walk down the street shar­ing this line of think­ing with my wife, shak­ing my head, won­der­ing how no-one seems to notice this. “What am I miss­ing?”, I’d ask, won­der­ing if there was some­thing that inval­i­dates this assump­tion (that kids who start out like I did 30 years ago have a chance at home own­er­ship in a big city like NY).

This line of think­ing is why I took note of this sta­tis­tic:

Thats’ not quite as bad as the stats around who watch­es Fox News, it’s clear that in 10–15 years this is going to have a big impact on things. (What “things”, I’m not quite sure of!)

I don’t have any answers. I won­der if maybe banks could/should do a 50 year mort­gage though it sounds a lit­tle like inden­tured slav­ery to me. I won­der if there are oth­er options that an inno­v­a­tive bank could bring to bear as a way to help peo­ple build wealth, through home own­er­ship. There are way that banks help peo­ple build busi­ness­es and every­one wins… why not sim­i­lar with home own­er­ship?




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