How Much Income Do You Need To Buy A Home Now?

I honestly don’t think most people know how much income you need to qualify for a mortgage to buy a home, so that’s why I’m posting about it.

These statistics come from an HSH.com article, and they are based on National Association of Realtors fourth-quarter 2015 data, assuming a 28% front-end debt ratio and a 20% down payment.

30-year fixed-rate mortgages at or near 4%, adjusted locally, were used to calculate the needed salaries:

Location of Home                    Salary Needed to Buy              Average Home Price
Minneapolis                             $50, 250                                   $223,700
Dallas                                       $51,806                                    $206,200
Chicago                                   $57,982                                    $209,800
Miami                                       $63,048                                    $286,000
Denver                                     $68,436                                     $363,500

The HSH.com article lists 27 cities, so this is just a sample. I picked the ones of interest to me, since I have properties in Dallas and Miami, for one reason.

I’m wondering if anybody else remembers the days when the rule of thumb was, “Don’t buy a house that costs more than twice your annual salary.” Remember that rule? What happened to it?

I decided to search that phrase, and there it was, in the March 1953 Kiplinger’s Personal Finance Magazine. And here it is in a recent Salary.com post:

“In The Complete Idiot's Guide to Buying and Selling A Home, Shelley O'Hara and Nancy D. Warner estimate that a buyer should plan to borrow ‘roughly 2 to 2-1/2 times your annual gross salary.”

So, could somebody explain to me how the NAR came up with these salaries, when the home prices are 4X and 5X higher? Am I missing something here?

Naturally, times have changed. But it’s pretty obvious that home prices have changed a lot more than salaries. The only way to move residential real estate in any area is to offer mortgage money to buyers earning local salaries.

I’m going to call this Ratio Creep, because I like the sound of it. Ratio Creep is basically a marketing tool for moving inventory that must be moved. It does not reflect sound money management practices, and it does not match up with traditional real estate advice.

In case you’re wondering, in San Francisco you have to make a LOT more money to buy the average home. You will need to earn $148K to afford the average home price of $781,600. And your 20% down payment on that home in San Francisco will be more than the price of most houses I buy and sell as investments in Oklahoma City. And that’s for the entire house…

How will Ratio Creep affect typical homebuyers’ ability to make timely payments on their homes?

And even though a 20% down payment was assumed for these examples, we know many buyers get financing with 10% down. If I’m not mistaken, a lower down payment and a higher principal balance makes Ratio Creep even more dramatic. That cannot be a good thing.