The Expert Podcast

So here we are once again looking at the housing options for consumers. A great article in Deseret News asks the sobering question: "Can anyone afford to live in America anymore?" It's a question we've talked about before in many surface-level conversations. It may not appear that it's possible to have a home for a reasonable price. The average or median price for a home is over four hundred thousand dollars. At current interest rates, with taxes and insurance, that’s going to put you at a mortgage payment of four to five thousand dollars a month. That may be out of reach for a lot of people. Rents have now skyrocketed, too. For a decent apartment, many places are asking you to spend $2,500 to $3,000 a month. So, the question "Can anyone afford to live in America?" is legitimate. But let's show you why it may not be true if you look a little deeper, and explore what options consumers have to actually get into a home that you can own for a reasonable price.

The article goes on to say that this person, Brita Joslin, makes $83,000 a year and was having a tough time renting an apartment. Why would you have a tough time renting an apartment with $83,000? Look, it's not millionaire status, but it's a decent amount of money because landlords are asking her to prove she makes triple the cost of the rent. Let’s take a look at that math. On this calculator, we’re going to take $83,000 and multiply that by 0.75, which is roughly your tax percentage. That gives you $62,250 take-home pay if you have 25% taxes. And look, with $83,000 and deductions, you may actually pay less taxes than 25%, depending on what state you’re in. But let’s say it’s $62,000, and if you divide that by 12 months, that gives you $5,187 a month. So if landlords want a third of that to go toward your rent, divide by three, and that gives you $1,700 a month. It's borderline. There are some cities where you can’t rent a decent apartment for $1,700 a month, especially if you have one or two children. You might be over $2,000. So finding something for $1,700 legitimately might be tough. That math, even though on the surface it doesn't seem reasonable, actually makes sense.

This article goes on to say that median wage earners in 97% of counties now find home prices are out of reach. Let’s look at that math. Here is the famous Google mortgage calculator. Coincidentally, if you just put in Google’s mortgage calculator, it pre-fills a series of numbers: it puts in a loan amount of $240,000 for a 30-year fixed mortgage at 7.8% interest, and it gives you a monthly payment of $1,739. It's very coincidental that that matches up with the income of that example. Totally a coincidence, no dots connected there. So, what does that tell you? If you are a person who makes $83,000 a year and you want your mortgage payment to be a third of your income, you need to finance $240,000. Let’s say you have a 10% down payment on a $280,000 or $290,000 house. That gives you $240,000. So, you need to be looking at a house that’s under $300,000. The problem is that a lot of times people don’t want to buy a house that’s under $300,000 or $250,000 or $260,000 because it doesn’t seem like a great house. Most people are looking for that dream house that has all the amenities, and it's priced at $400,000 or $500,000, or even $360,000 or $370,000. And you’re right: if you’re on an income under $100,000 and you’re looking at a house that’s $350,000 or $400,000, first of all, you may not qualify under the income requirements of a lender, but you also might not like the house because it’s not going to be good enough.

What we recommend doing is finding a house that’s livable, in the $200,000 range, and you can get a monthly mortgage payment that’s under $2,000 — maybe $1,500 or $1,800. Go ahead and buy the house, even if it needs some cosmetic work. Make sure you get a good inspection to make sure there’s nothing structural or with major expenses like the roof, foundation, or air conditioning system. Look, if it needs paint, carpet, or moldings, or landscaping, those are things you can do yourself on weekends. It’s not going to be fun, especially if you'd rather enjoy your weekends, but it’s a way you can lock yourself into a fixed monthly payment while owning a home with equity, rather than paying rent to a landlord. The trade-off and sacrifice is that you’re not going to be living in a property that’s as nice and shiny and new as an apartment. Even some apartments that you rent from a landlord have new paint, new carpet, new appliances, and decent countertops. At least they look shiny and new, so when your friends come over, they see something newer. An older home with a few dings and dents may not be as impressive to your friends and relatives, but it will be impressive to your financial statement down the road.

Especially in five years, if you get a mortgage for $1,739, your payment is still going to be $1,739. If you rent an apartment for $1,700 today, in five years your rent will probably be $2,200 or more, because it’s going to go up. And there's no guarantee that one year, your landlord could say, “I don’t want to renew your lease because we’re going to redo the building or sell it as condos.” With a home, you don’t have a landlord who can kick you out. So trading a day-to-day look at maybe an old carpet or paint or a dirty lawn will give you a financial advantage down the road. It’s not necessarily true that nobody in America can afford a home. It’s true that you may not be able to afford the home that you think you want, but you might be able to afford a home that you could live with and put you in a better financial position five years later. Maybe you can flip up to a newer home with your equity.