I spent the latter part of last week in bed with a nasty virus. Because I was so wiped out, the only thing I felt like doing was lounging and watching old movies. In between Godfather DVDs I caught an episode of My First Place on HGTV. I’m fairly confident I have seen this show before, but as I was reaching for the remote control, a comment from the young couple being featured caught my attention.
“Our budget is $475,000 to $490,000.”
Huh? These young people barely looked old enough to buy an adult beverage, and they were considering a half-million dollar home? They had my attention.
For the next thirty minutes or so I watched these young people roam from house to house with their real estate agent. I was extremely impressed with their thoughtful considerations of each house. You know, like which one had enough room in the backyard so their two dogs could play without feeling “claustrophobic,” and which house would be best for “entertaining.” After all, these are important considerations when just starting out. End sarcasm.
It was at this point that I began to regain my strength. I think it was adrenaline actually, as I had the overwhelming urge to reach through the television and smack some sense into these people.
Admittedly, I know very little about this couple, other than one is an “account executive” and the other is in medical sales. However, I think it is safe to assume that unless they inherited a couple hundred thousand dollars, they planned to borrow most of their first purchase.
$3,000 a Month for Thirty Years
Let’s run some numbers working with our assumptions. I think the couple settled on a house listed for $490,000 and paid about $475,000 (I don’t remember the exactly sale amount). I’d like to think they saved up at least 10% to put down, which is a fairly large amount of money for this size house. Perhaps they did have $50,000 to put down, and financed the remaining $425,000 on a 30-year mortgage.
Their monthly payments would be around $2,281 before taxes and insurance, which could easily add another $800-$1,000 a month, bringing their total monthly mortgage payment to over $3,000. Let that sink in for a moment.
This 27 year-old couple was about to sign a binding contract promising to make 360 payments at $3,000 a month for the next 30 years. They would be 57 years-old by the time they paid off the mortgage.
During those thirty years they would likely have children, and have to continue working like maniacs to make that $3,000 a month payment. They would need to save for retirement, pay for the annual vacation (or two), buy, maintain and replace seven or eight cars between them, deal with a medical emergency, deal with a medical emergency with their parents, deal with a job loss, etc. They would have to deal with all of life’s curve balls with a $3,000 a month obligation hanging over them.
“But We Can Afford the Payments”
When I watch people engage in this type of transaction, I can’t help but be a little sad for them. And my feelings aren’t limited to those taking out a huge mortgage – even though these are usually the longest of financial commitments. Many people borrow money for expensive cars and such which obligate them to costly monthly payments for a number of years because they can “afford the payments.”
Hearing the statement, “we can afford the payment” is a sure-fire sign someone can’t afford the payments. Marketers have won the battle of convincing us that we can afford things we can’t if we only have to pay for it every thirty days, rather than all at once. But what happens when you hit a bump in the road? What happens when life happens? Because trust me, it will.
Someone will get sick. Someone will get hurt. Someone will lose a job. Someone will get stuck in a soul-sucking job and dread Monday mornings like a trip to the dentist. Life is not always rosy. Things happen. I’m not being a pessimist, I’m being a realist.
It’s hard to tell that to a couple 27 year-olds with their whole life ahead of them and without a care in the world. Sometimes people have to find out the hard way. I just wish people would listen to others who have been down the same road (if you are a parent, you can relate to this).
My First Place: An Alternate Ending
Imagine if this same young couple decided to put their $50,000 down payment on a $200,000 home, and finance only $150,000. Their monthly payment drops to about $800 before taxes and insurance, they avoid having to pay private mortgage insurance (PMI), and they can seriously consider a 15-year mortgage, or paying off a thirty-year mortgage in the same amount of time. They could easily be debt free before 40, house and all.
Yes, they would be giving up a little space for entertaining, and the dogs would have to get used to a smaller backyard, but imagine the freedoms they would enjoy. Imagine them as a 40 year-old couple with a $225,000 house, a modest pile of savings, and zero debt.
Imagine a young mom having the option to stay home with the kids. Imagine those kids going to college and graduating without debt because their parents can afford to help. Imagine those kids getting married and making a similar first-home purchase decision because they admired their parents’ frugality. In one single decision, that couple could complete change their family tree, and one day leave behind a legacy of debt freedom for generations to come.
This post appeared in the Canadian Finance Carnival
Not everyone cares to be financially secure — this couple is a perfect example of that. People like you and me look at the big picture and imagine having that mortgage paid off sooner rather than later, and not buying as much house as we can afford just because a lender says we qualify for the bigger mortgage. And your computations don’t even take into account things like property taxes (which are sky-high here in NJ).
Sure, my husband and I bought a home that cost a bit more than we had originally planned, but we wanted to live in a town with a good school system — that was our priority. But we also were able to put 20% down and didn’t spend as much as we could’ve just because the bank said we could afford more. It’s all about balance.
i think people think of property as a sure thing. so if you bought a place for half a million dollars and it increases in value over the time of the mortgage, you are making money through your house and also showing to the world that you are mega successful and have all the trappings of success. surely these two would have two fancy cars as well. i see that same thing in britain as well. the clamour to get on the ‘property ladder’ and to get in at as high a rung as possible is all pervasive. renting is of course considered to be ‘dead money’
the freedom of having no or highly manageable debt is not taken into account. the reason is that in britain atleast most young people have only see property grow in value thanks to the vile economics of gordon brown and his debt bubble. hence the feeling that debt is wealth and an opportunity not to be missed.
these people have only known near zero interest rates and that state propping up sick banks and homeowners. is it any surprise that they throw all their eggs in the property basket. afterall recent history has thought them no better.
As always, I enjoy your blog. I too agree that one should live comfortably within their budget and not to extend themselves into dangerous territory. A smaller, well furnished home can provide every bit the enjoyment of a larger home and require much less maintenance and time.
I come here regularly for great posts and I hope you don’t mind that I link to you from my own site at Links.com. I will be visiting regularly. Thanks!
So, so many of my friends and relatives bought that big mortgage with dual incomes, then had kids and wished that they could have a parent stay home…but can’t because feeding the dream home (and the cars) requires both of them working. I know a lot of women who genuinely WANT to work these days but I know a lot of others who want to work because they want to be able to afford their “things” – not because they enjoy their jobs or want their kids in day care. To me that’s really sad. You can get your big home later, but you can never, EVER get back those years when your kids are small. Our relatives gave us such grief for staying in our 1200sf house w/ 3 kids but the trade-off is that I could choose whether to work or care for my kids.
We won’t even mention people we know who afforded their mortgage by taking out a 2nd mortgage to pay that 20% down. Of course that 2nd mortgage is at 7-11% and they can no longer refi because the market crashed and no one has equity in their houses anymore
Let’s face it – you can clip coupons until you’re blue in the face but the biggest expense most of us face is our mortgage.
Ha! I just blogged about House Hunters (http://www.stepawayfromthemall.com/2010/09/why-watching-house-hunters-is-bad-for.html). It really is amazing what some folks spend on houses.
I think there is a battle between the “starter home” and the “never buy a starter home” folks. Some people try and grow into their houses thinking their income will grow and they will become more comfortable as their salaries increase. That’s very dangerous.
I think some people see their parents’ houses and want the same thing, forgetting that their parents are 30 years ahead of them – and they likely lived in starter homes or saved up until they had at least 20% down, paying around one year of salary for their house! If they were making $500,000 per year, go for it. But making $80,000 and spending five times your gross salary on a house is asking for trouble.
Those HGTV shows (only where people buy houses) make my blood boil! I try and stick to the home improvement shows (although I’m watching House Hunters International as I type… I just can’t change the station!).
It’s the beauty of credit indeed! Who’s to say they won’t be making 10X more in income 10 years down the road?
Many of us make much more at 30 than at 22, which is the beauty of progress.
“Imagine if this same young couple decided to put their $50,000 down payment on a $200,000 home, and finance only $150,000.”
This might not be an option, depending upon where someone lives. Or chooses to live. Here in the Seattle area, in order to find a $200K house, you’d have to drive 20-30 miles from the city to find such a thing, and even then, you might be buying an older house or a fixer-upper. Then, if your job is in the city, you spend 1-2 hours each and every work day getting to work, costing you time and money (car, gas, etc) not to mention the stresses caused by commuting.
I’m not saying your overall premise, which I read as “Don’t create unnecessary financial problems by buying more house than you can really afford” isn’t correct, I’m just saying that real estate is highly localized and for some markets, a decent $200K house is something that hasn’t existed since the 1990s.
True indeed – I should have mentioned that this particular couple was buying in the Atlanta area, and I know the area fairly well. They were looking in what I’d call an upscale suburban neighborhood and could have shopped around a bit for a smaller mortgage if they wanted to.
Atlanta has *plenty* of ITP (intown) properties around 300k in good school districts. My neighborhood of large 60′s ranch homes is one of them. When we bought our home 6 years ago, houses that stayed on the market more than 3 weeks were extremely rare. Now, as many of the older couples in the neighborhood move to retirement homes or to be with their families, these homes are staying on the market much longer, and dropping in price. This is happening all over Atlanta.
I will say that we planned before having kids to have the financial option of staying at home by living on one salary for a few years. But I have friends who are upside-down on houses and working like dogs to maintain payments, who want to stay home with their own kids but can’t — they bought too much house, or bought homes in pocket neighborhoods that were sure to turn around and net them a profit… but didn’t. It’s heartbreaking. I would love a well-appointed home… but am thankful that we’re moving toward our goals at a pace that allows me to spend quantity time with our kids.
I agree with you that it largely depends on the metro area, but to say that a “decent $200K house is something that hasn’t existed since the 1990s” is overly broad.
We bought our first home a little over 8 years ago in a northern suburb of Cincinnati and only paid $112K for a 4 bedroom, full finished basement, fenced in backyard cape cod that is 5 minutes from the local freeway (16 minutes from downtown). Granted, it hadn’t been updated since Reagan was in office, but we didn’t really care. We knew we could fix up things one at a time – as they broke or wore out – and enjoy ourselves while we did it.
Now, here’s the “funny” part… When we were shopping around for a mortgage, bank after bank told us we “easily qualified” for mortgage more than twice what we *knew* we could comfortably afford (considering property taxes, insurance, maintenance, etc…). I can only imagine that many first time home buyers get sucked into that – after all, if the financial “experts” at a bank think it’s affordable for us, then it surely must be!
I’m not the stay-at-home mom I dreamed I would be, but that’s because we made really dumb decisions involving credit cards when we were first married that we are STILL paying for some 10-15 years later… But there’s no point in looking back. All we can do is look forward and commit to behaving more wisely in the future.
Very similar situation here, and I agree about there not being any homes under 200K being ‘overly broad’. I’m up I-74 from you in the Indy area, and we bought our 3 bedroom, 2 bath, office, with a heated/cooled 2 car garage home for 107K in 2004. I’m 20 minutes outside Indy. Yes, it is a ranch built in ’58, is just under 1500 sq ft, but that seemed to be plenty of space for a family of four for decades, until McMansions came to be – and to honest, we don’t feel ‘cramped’ at all. Also had new AC, roof, furnace, and siding – sold!
We also bought for waaaay under what we were ‘approved’ for – I decision I’m glad for. It allows my wife to do work she truly enjoys (teachers aide) instead of something she hates because we need her paycheck to make ends meet.
CincyCat, you sound almost like me, except my husband and I live in central Massachusetts (about an hour outside Boston). This is an area where people genuinely believe you can’t get a decent home for $200K (or at least, that’s what our friends were saying 5 years ago). Well, we found one; and we’ve been fixing it up and improving it over the last 4 years. We also knew what we could really afford and sticking to that number (and having no debt besides student loans) is what has made it possible for me to stay home with our children.
I’ll preface this by stating that I obviously have an issue and angle because hubby and I bought our first home at age 27 and 33 that cost us close to half a million.
While I agree with you in some aspects of this post, I think it’s awfully pessimistic and short sighted. Admittedly you state that you don’t know much about their finances so I’m lost as to how you came up with whether or not they would be able to truly afford the place?
You do have to keep in mind where they live (which you didn’t mention) plays a huge role in housing prices. We live in DC metro and even now unless you’re living in the hood or 25-50+ miles off the Beltway there are no homes for $150k. Now there are always exceptions, but personally I know this because we have been looking at investment properties here and again unless the neighborhood is less than desirable or you go further out from DC proper, not happening.
Who says that if one wanted to stay home they could not? Then again, who says any of them want to stay home? Sure, it’s an ideal for some but it is for all? Using my own finances as a model because my husband and I at age 27 bought a home for close to half a million dollars. Can I stay home if I wanted to? Yep. And be just fine doing it while he holds down the mortgage and other expenses. We’ve been there: job loss, family member sick and having to support them, suddent death and needing to contribute to final expenses etc etc None of it broke our finances. Sure we’ve learned alot and made adjustments but we’re fine.
Who says they are struggling or would be to pay $3000 a month? I guess it depends on your perspective, financially. You don’t know if they have a good sized emergency fund, if their cars are paid off, debt load or anything else that would improve the outlook. I say this also because you certainly know, several of us PF bloggers have our stuff together financially so it’s not outside the realm of possibilities. You simply make assumptions that they are young and dumb without true knowledge of the the financial ties they are about to make with the bank.
But maybe that’s my real issue, the assumption that they are young and therefore dont know anything about money. After all, heaven forbid young homebuyers make good enough money to be able to afford all of the above right?
I just think you have to remember that even though the couple may be young it is very possible for them to have their ducks in a row financially enabling them to afford the home in more ways than one. Still, I realize that there are some out there who are young, make good money and don’t understand the true trappings of a mortgage. So I see your point, but I just think you’re making assumptions without knowing their whole financial picture.
Excellent comments, Ginger. The couple was house shopping near Atlanta – I should have included that for perspective. I know the area where they were shopping well, and they certainly could have found a cheaper place elsewhere in a great neighborhood, with room to roam, etc.
I certainly understand personal finance is personal, and I don’t begrudge anyone for buying a half million dollar home. The point of the post is that there are far too many people (young and old) out there making these types of buying decisions who are not in the financial shape you are.
I.LOVE.THIS.ARTICLE!
I love HGTV, but they are always giving bad advice. Have you ever noticed that NAR (The National Assoc of Realtors) is a huge sponsor of theirs. I really think that the home craze and part of the housing crash can be blamed on the HGTV frenzy.
A very good article, man me laugh that the adrenaline made you want to get up and start abusing the TV.
I completely agree that one shouldn’t buy more house than they can afford given all of our other financial goals. But I think TV by nature cuts out much “irrelevant information” – irrelevant as in what matters to the show (i.e. the house is the star here, not finances).
In their defense, medical sales (esp. pharmaceutical sales) can be extremely lucrative for top performers. And an account executive is making anywhere from $50K to $100K a year. So.. it’s not inconceivable that this couple can be making $150K to $200K combined per year. Then, their $475K house is around or well under the 3x salary rule of thumb.
I thought the days of people making very foolish decisions with regards to real estate were over, after the last couple of wrenching years. Guess not. Unfortunately for this young couple, the odds are great that some sort of setback will upend their lives, and eventually their dream home will wind up in foreclosure. While many of their peers are losing homes after making the exact same choices some 3-6 years ago, they are behaving as if “nothing bad will happen to us”. I’m a realist also – and realistically, I feel their next reality show will be “How We Lost Our First Place”.
Great article – I have watched that show with similar feelings toward young DINC couples who, with no consideration for the future reality, buy all that their money can afford. Even in you are wrong about their future and they grow amazingly rich – what a waste! Is life all about having the right house?!?
One point of consideration, though. I may have not seen the particular episode in question, but if you live in a place like D.C., coastal California, NYC, or (like me) Hawaii, 500k will buy you only a nice condo or tiny house. My home is located in one of the cheapest places to live in HI (Kapolei), it is 1500sqft, 15-yrs old, and modest (no frills whatsoever) by any measure. It is worth about 600k – four years ago it was worth more like 750k. So, proportionately, people spend a lot more percentage-wise of their income just to live in basic accommodations. It is just accepted for people to spend the lion’s share of their income to pay for housing.
Nevertheless, even here in HI, you could find a decent liveable condo for 350k. Of course then you’d have to factor in the expense for psychotherapy for your dog’s claustrophobia!
Jon, that’s why you say “Lucky you live Hawaii”. Having lived in Palm Villas and fought traffic on Ft Weaver road to get to the freeway or Kam Highway 20 years ago. I decided not to settle there realizing that I can always visit to get my fix of Shiro’s saimin. I have a friend living in Kapolei but he is retired and doesn’t have to commute. Perhaps the big island in my later years or Guam, if it doesn’t tip over
But the congestion of Oahu, no thanks.
Im going to assume my comment wasnt approved because it went against the grain LOL
No, Ginger…I have an overactive spam filter and I wasn’t around to moderate. Sorry about the delay, and I appreciate your comments.
Fantastic article. Regardless of the actual people on the show and what their real motives were, your point comes across loud and clear and I completely agree! Very well said.
This story could be repeated for most young couples in America. I did the same thing and just before the housing bubble hit I sold and got out. I rent now and I am happier about it. I’ll buy another house, but I’ll be following scenario number two you described rather than go down the “house poor” route again. Thanks for the article I hope some young couples read it and take it to heart.
Good article. That show bugs me too. When my wife and I got married (in our 40s, blended family) the mortgage guy told us we could afford close to $3000/ month based on our dual incomes. We just looked at each other and rolled our eyes. We ended up with an $1100/ month mortgage instead and haven’t regretted not buying a trophy house for one minute. We just paid off the mortgage after 13 years, and now it is just the two of us in a 3800 sq. ft. home in a great neighborhood with great neighbors.
Congratulations on paying off the mortgage early – that’s fantastic! You touched on what this article is really about…affordability according to banks and affordability according to the frugal home buyer. Those numbers are vastly different in most cases.
In my area you’re not going to find a place to live for $200k. The jobs around here pay accordingly! I would expect two gainfully employed people with no kids to be able to easily afford a 500k home by the time they are 27. I think you’re looking at this from your very closed perspective.
Maybe so. I had no idea so many people lived in areas where a $200k house is a dump. In most areas around the south, $200-$250k buys a very nice home (~2500 square feet plus) in a top school zone. I’m rethinking moving out of the south.
I’ll just add my vote for the same thing. I’m in San Diego. No $200K homes here, unless you want to be out in Julian (read: might as well live in Indiana [I'm from Indiana]).
Actually, you can get a condo on the east side for $200K, but then you’re stuck with HOA fees for hundreds of dollars a month. And I’d rather have a $3K/mo mortgage with no HOA than a smaller mortgage with a HOA.
We pay $3100/mo rent right now for a house that’s worth about $800,000, so we’re currently coming out ahead by renting. The last house we looked at that we really liked was priced at $569,000 and sold quickly to another couple. We aren’t quite ready to buy.
-Erica
We live in the DC suburbs and you can’t find a TOWNHOUSE/CONDO under 350K with three bedrooms that’s not in a really bad area. At this rate, we may look into buying my family home from my mom!
This is really shocking. I think people need to look much harder at housing options. In Massachusetts, for example, homes can go for millions of dollars. A simple house is at least $350,000. However, if you search out the outlying towns, you can find a nice quality mobile home for $100,000 or less. In that state, most mobile homes appreciate in value. Or, you can find what is called a “fixer-upper” which, in most cases, is just an older house that has not been upgraded. These can go for $160,000 or more, depending on location.
If the only houses in an area cost that much, and someone is committed to living frugal and focusing on debt freedom it is time to move to a less expensive state.
I live in the DC suburbs of Virginia. I have colleagues that live an hour west of me (and people in DC think I live far way). You end up spending the difference on gas and in time.
I live a little more east, have shorter commutes. I spent more on my house than if I went further west, but I have more time with my family in the morning and evening instead of spending it in traffic on the highway.
I will tell you that it did take some convincing to get my wife onboard with a townhouse instead of a single family home. We looked at both in our price range and she immediately saw a $400k single family was run-down or tiny compared to a similar priced townhouse (we have 3 bedrooms, finished basement).
BUT— all of you DC metro people—you are not looking north. Homes can be found in good school districts off of the MARC train areas. They start in the $250′s and are not dumps. I have a number of friends who have children who opted north instead of attempting where we brought them up in N. VA.
I agree North is an option. However, I don’t work in DC. I work in Virginia. I think a 2 hour commute is rediculous and you end up losing money to gas and you lose time with family (or yourself).
Of course the underlining point to all of these discussions is CHOICE. We have free will. I say let someone make the choice to live in the middle of nowhere to commute 2 hours each way. Let someone choose to spend money they don’t have. We all have the right to foul up our lives however we see fit. It is up to the rest of us to realize other people’s choices don’t have to be our choices.
North is not an option for me given our respective work locations in the District, Southern MD and NOVA.
I agree with CHOICE. People will do what they want and just because you don’t agree that 3500 square feet works for them because it shouldnt for you, doesnt make your thoughts any better suited. It’s just your CHOICE.
Frugal Dad,
There are several assumptions in your commentary that may not be accurate:
1) That there are “homes” in the $200K range in the area they live. Where I live (Silicon Valley) there was a time you couldn’t get anything under $250K, and at that level you got a Jr 1 bedroom condo. No house, no yard. If they could find a condo at $200K, it would be no better than an apartment, and they’d be looking to move up soon as the first child was conceived.
2) that saying they could afford the payments meant that they had no other savings, 401(K), stock options, bonuses, commissions, stock trading accounts, etc. They might have these things and more.
3)uncertainty over their salaries. Medical sales people can make as much as $750K/year. That’s the top 2%; most make $150-$200K year base salary and commission, sometimes including bonus, sometimes not.
I know you care about them as any Dad would; let’s hope they didn’t get caught up in the “have more – be more” loop and their payments are comfortably affordable.
One other assumption, is that young 20-somethings have other debts. You never say it, but I think you hint at it.
My wife and I both graduated college (and grad school for me) debt free. I even had money my parents saved for college that didn’t get spent (nearly $10k). That was the basis for downpayment a few years later.
You should preach that parents save for college and give the extra over to their kids to help them out early on.
i believe this was the same show on which i saw a seattle couple sign an INTEREST ONLY mortgage on a $375,000 property. i wanted to reach through my television to slap some sense into them. ugh. so frustrating and such a horrible example for others.
in my area you could have found a single family home in the $200,000 about 30 YEARS ago. today that would get you a shabby studio/ 1br/trailer. affordability shouldn’t be based on price. but rather a person’s/couples earning ability.
The house in question was a large, two-story with upgrades throughout. We’re talking five bedrooms plus a finished basement/media room, 3-car garage, etc.
Exactly, and the implication is that you will soon be furnishing those rooms. I doubt young couples so eager to be house poor are the kind to buy off-market furnishings, either.
I live in Australia. If I could get an apartment for $200,000 I would be all over it like a rash. We are looking at our first home, we live 45 minutes out of the city and we are still looking at $700,000 (Australian) for a normal, no frills house.
But, I get your point.
Our house is a bit too small, my sons share their bedroom. That’s sometimes difficult, because the eldest goes to college and has a girlfriend. So we compromise, the youngest makes his homework in a private homework class, the eldest sometimes sleeps in his dads study. It not an ideal situation but it is a temporary one, since the eldest will probably move out in a year.
Within 5 year my other children will also go to college and leave us, and then mu husband and I have a large house and a small mortgage.
I watch these programs all the time. I love them. I am just shocked by what people consider necessities in a home – Double sinks in the bathroom? Granite Counters? More than one bathroom? It is shocking! Give me an old fashioned, frugal house and I am happy.
I think your alternative ending is perfect and I dearly wish more people would think that way.
It used to be that couples were encouraged to base their mortgage commitment on one income, rather than two – so they would be financially secure through the changes over time.
I watch these shows once in awhile, and I also am always left wondering ‘how will they make these payments’? I also love these people that want to live on the beach in California, but are disappointed to find out they can’t find a place for the 250,000 they are willing to spend.
I don’t know if these shows focus on the people looking for bigger homes because it might be more interesting, or if many home buyers are delusional.
Though normally I 100% agree with this reasoning…it isnt always realistic. Some people live in areas (like myself) where you can’t find a home for 200,000-225,000. If you do they are generally completely run down, have little to no land and are only 20 bedrooms, so If they do stay for a full 30 years, they would outgrow it quickly. I know…I made that mistake, and then had the market turn so badly, that we couldnt afford to sell to move onwards and upwards. Unless you know their entire picture, it is not fair to judge their life or financial decisions.
Thank you for posting about this! I, too, watch this show and am shocked at how much these young couples say they can afford. My husband and I are in our late twenties with good jobs in DC and we still can’t afford anywhere CLOSE to what these couples are buying! I’m shocked that mortgage companies are STILL qualifying folks for something that they can’t afford!
It’s so interesting how much geography comes into play here. Just like you frugal dad, I could find a home for 250k that was very, very nice and pretty big (more than I’d need) in an area with good schools and other amenities. If I had the 500k that they had to fork over for a house, I’d be able to get a decent size lot (probably 10-20 acres) near the city.
I’ve been watching this show for a while and I understand that the people on there are making much more than I am, but the fun part about this show is going back and watching old episodes (available on HULU). Look up some episodes from 2005-6 and the crazy financing they did. I remember one couple that got an 80-15-5 loan!
Good post. When my husband and I were looking for a house in the 120 to 125 range my Realtor kept trying to convince us that we could afford 200s. While we may qualify for that we only had the 20% down payment for a 120- 125 house. Why is this so hard to comprehend? We did find a lovely house for 121 which we have been in for a year now.
Sounds like you made a very thoughtful decision and should enjoy that lower mortgage payment. We moved about a year ago now and qualified for twice as much as house as we bought.
I’ve only one thing to say: “Amen to your post!”
Spot on, man. Spot. On.
Two other things to remember is that Realtors have already sipped the Kool-Aid and make commission based on sales price. So they are convinced that real estate is the best thing in the world, want you to buy the highest price so they can get the highest commission and, for the most part, are “seller’s” agents (read the fine print on that contract you sign) who look out for the seller’s interested, not yours.
My wife and I were in that exact position a few years ago. Mid-20s with decent wages and potential. But, we were in a market where you either buy a 600k+ single family home, 400k townhouse, or 200k condo.
We settled on the townhouse since the condo market was saturated and no one can unload them when ready to move upward. The large difference in prices between condos and townhouses adds to this problem.
In the end of 2008, my wife took a 10% pay cut because her non-profit employer wasn’t raising any money. Guess what, we were smart enough to have planned ahead for this problem with backup savings and frugality in other areas.
I had a crazy experience when I first started talking to mortgage brokers. After leaving a voicemail with a potential broker, she called me back and asked me how much I make annually and then said “I can pre-approve you for a $300,000 loan today if you’d like”. I was shocked that she could offer something like that after only knowing my name and how much I make…needless to say I didn’t go with her…
My husband and I bought with-in our means even though we were approved for a very large mortgage. You may be making more in years to come, we aren’t. We’ve each been through a plant closing. Me having 23 yrs and him having 17 yrs. they were 2 separate places. But because we bought “less” house we’re not in trouble.
Great post! If kids were taught this in school, they would not go out and make these mistakes. You don’t know what you don’t know until you know you don’t know it. This scenario should be presented in a life skills class, just like the fake babies that cry all night! Kids think differently about protection after having to take care of someone else for a week. Create a scenario where the kids lose a job and then lose their house. This will make an impact and help them understand that your choices you make today will impact your future.
I completely agree with you. I was young, married, had the dream home and the life style so many strive to obtain. I lost it all in one day, the day my husband was killed in an accident. My life style changed but more than anything I began to see life differently. Having all the debt and possessions meant nothing to me. All I had was a big house and no husband, I know for some people it is love of the all mighty dollar, too each thier own. But I wish I had looked at the what ifs instead of the I gotta haves! We could have had more time together if we had lived within our means but instead we were working to have the debt dream. Thanks for you post I can see what you are saying loud and clear!
Annie, thank you for sharing that. So sorry to hear about your husband – I can’t imagine how devastating that must have been. Though I have not lost a spouse, I have lost close loved ones prematurely, and understand what you mean about a changed perspective. Living through these experiences certainly helps one focus on what is most important. Godspeed on your continued journey to financial freedom.
This is too much like right. =)
Your article is thoughtful, engaging, and insightful. Yes, everyone’s financial picture will have varying viewpoints. Yes, daily commutes, school districts, and quality neighborhoods will factor into the purchase of a home. I am just surprised (I shouldn’t be) how quickly many want to make excuses for taking on more debt. The excuses here support in-affordability. People want the home close to work, in a good school district, three car garage, huge back yard, and a wrap around walk-in closet. This is their normal which breeds more debt and if the amenities are not there then it must be the “hood”.
Yikes! No wonder more Americans are not saving and will not have enough for retirement.
Thanks for the article! Can’t wait for your next one. Keep up the wonderful work.
Don’t get hung up on the actual numbers, focus on proportions!
My explaination of 250k being unreasonable where I live was not an excuse. I carry a debt load of less than 30% of my gross income (not including my wife’s). We have two debts: mortgage and car (car will be paid off 4 years early).
I’m just pointing out that the raw numbers don’t matter. The proportions matter. If the couple on the show made $50,000 a year, they are way out of their league (72% of income going to mortgage). If they made $200,000 a year, they’re making a good choice (18% of income for mortgage).
A person buying a 90,000 house might sound better than these people, but not if they only make 25k a year.
Yeah, I got caught in the “we can afford this” trap. That is until we couldn’t afford it anymore. But, that’s the American way. We want the best house, best car, best wardrobe, and best job right out of college (not sure how college became the reason for ANYTHING).
These types of money mistakes can be disastrous. Sometimes for decades. I’m all about taking risk. But taking risk so I can keep up with the Joneses? No thanks.
The HGTV episode you watched is likely a few years old (during the peak of the housing market frenzy). Many of these comments still believe the hype, believe no reasonable homes are under 200K, and a 3,500 square foot home is okay for two kids with some dogs. Buying a home that is 10X your annual salary, in any market, is insane!
Great sound advice, and balancing priorities in life is critically important. If someone can have 3-6 months cash set aside (or even $2500) for emergencies, and still have wiggle room for savings – then they can “probably” afford the payments. Where you live has a huge impact, as does how you live. It’s all about staying on budget and living within your means, and still maintaining a quality of life – however you might define that. Just budget for it, so you know where you’re money went instead of wondering.
This is a great article. I too have friends that went down the trophy house path. It’s sad to see them having so much pressure to maintain a dual income household. I am lucky to have my wife handle our finances and my parents as role models of how to handle finances. We managed to pay off our $280k mortgage is less than 7 years with a single income and 2 little kids. I can’t tell you how it feels to be debt free. I can tell you how tempting it is to just go out and get that trophy house. But the thought of my family not having a place to live and struggling just to get by will always bring us back to the ground. That initial step when starting out young will make or break you for the next 30-40 years.
Dear Dad — at 40 something I look back and laugh. At 18 I thought my father was the dumbest man on the face of the planet. Fortunately I listened to him — and am absolutely amazed how smart he has mysteriously gotten as I get older.
I’ve watched friends get themselves upside-down and too many have had to “walk away” from their house. All because they never thought that “life would happen” to them. I even tried to warn some of them, but was told I didn’t know what I was talking about. So be it.
On the plus side — the house is paid for (mortgage free), no credit card debt, and the wife and I have nearly seven figures saved up for retirement. Thanks to dad I started saving for retirement in my early 20′s… I have friends, today, that are just now starting to think about it. Crazy!
How do parents watch kids make the same mistakes they made and NOT scream their heads off??? I’ll find out soon enough…
I love all those shows on HGTV and I am loving this post!
I am always stunned at the monthly payments that these twenty-somethings end up with. I wonder what their jobs and income are and what the cost of living is in their area.
My mom says she wishes HGTV would do follow-up shows to see if these people stay in their dream homes or not. Of course, that would be bad for business, but I would love to hear some “after the show” stories.
Thanks for the great conversation, everybody!
Hi there, thanks for the article. But I have to say I think you are reading into it too far. Even though a mortgage is a 30 year commitment, nothing stops you selling your house in that time. If they are a successful young couple with no kids, I say power to them. Pump as much of those salaries into the mortgage (ideally with a floating/principal scenario) and make the most of this life stage. ‘we’ all know that your life is full of unknowns like sickness, job loss, children, repairs, health etc etc…
The key here is buy low….do not pay over market value. If they ‘can’ commit to thew 3k per month now, then great. this does not mean they will want to do this forever, for this home. In fact how many people stay in their first home purchased anyway? This is a stepping stone for them in life’s stages and they may be in it for 3, 5 or 10 years. It doesn’t matter.
There are worse things to spend your salary on and if they buy well, they might even come away with 100-200k gains on the value and put that into a $300k house at a later life stage.
A mortgage is not a sentence, its just a vehicle to allow an asset to be built up over time.
CHeers
Good points. But it would also be nice to imagine the young dad staying home with his kids. Some of us gals are the larger breadwinners in the family, you know….
I want to throttle the people I actually know that seem to have the same thought process as the couple in the show. My husband and I were approved for $225,000 when we went to buy a house, but we still only looked in the $130,000 or less range. Our current home was actually only $114,000, will be paid off in 10 years total, and fits our needs perfectly.
I agree with Frugal Dad, of course with the understanding that housing is more expensive in some areas. Here in Louisiana it is not expensive, but we see lots of young couples looking for something big & fancy – and expensive.
I’m looking to have a house paid for by retirement age, even if I keep working. I’d rather something smaller & paid for than a big, expensive house I owe money on.
No one ever knows what’s ahead… if you later have money for a bigger house you can always buy one then. Just because you have a good job & income now doesn’t guarantee that will always be the case. I know from personal experience! Luckily, we hadn’t over-extended & I was able to keep the house & raise my sons there, even when my ex went over the edge & forced me into bankruptcy & a tax lien (long story). All I’m saying is – ‘things’ happen! Not always the smooth path you hope for…
After reading that this couple was buying in the Atlanta area and the house they were getting was quite large and unnecessary, I think your response was right on. I really do think that young people today want to have it all… and they want to have it now.
But, at the risk of sounding redundant to all the other comments already made, I would like to say this: If they were trying to buy where I live – in Los Angeles – merely 2 or 3 years ago they wouldn’t be getting a DUMP for 200k, they would be getting nothing. There were NO houses listed for less than 400k. It was only after the real estate crash that you could even consider buying a house if you only had 300k to spend. Which turned out great for us because we would not have been able to purchase at all if this hadn’t happened. My husband and I are both 30 yrs old and we have a baby girl who is 1yr. Our goal was that if we could not buy a house in LA within 10 years of moving here (it’s been 5) then we would move to a cheaper part of the country. In the end we decided to play it safe and we bought a duplex with another couple for $300k (we closed in Feb of 2010) and then put $20k into renovations to make it livable. We still dont live in a very nice area for that price, but we get to split our mortgage and are now paying less than we were in rent!! Yay. (BONUS is that this same property sold for 600k 2 years ago).
With that being said, I wanted to ask your opinion on a similar scenario. What would you recommend if the options are not
A) buy a house for 400k or
B) buy a house for 200k…
but rather the options are
A) buy a house for 400k or
B) rent for the rest of your lives
???
Because isnt a home purchase considered an investment as opposed to throwing money into hole for rent?
Just curious.
People, in recent years got the priorities twisted. First, what’s this “starter home” business? Are you kidding me? A starter home might be your dumpy apartment while you are saving your money, but to buy something only to buy bigger later is just silly – do it once and do it right (unless, of course you have to move/get transferred but for most of us, this doesn’t apply). Some people believe they will go through their entire lives paying mortgage payments (even into retirement and up until death) – I think they are insane. How did they ever get into this mindset? I have friends who bought a home for $50,000 a number of years ago (15 or so). They are now looking to “buy up” and they currently owe over $90,000 on that same home they originally paid $50,000 for over 15 years ago. They lease cars and buy everything on credit cards. Often when I suggest doing something or a small expenditure, it raises issues with my friend, but now I understand when I know their finances and how they are living off of credit. Sad to be literally enslaved to your bills.
Frugal Dad, I COMPLETELY agree with you. Most of the people on My First Place look like complete morons who think a “dealbreaker” is having to say, paint a room. My co-worker and I joke that there should be a drinking game during these HGTV real estate shows on how many times the prospective buyers say “entertaining.” Really? Is that all they can think about when buying a place? Not the location, potential for equity, or the bones of the structure? I have owned two homes. The first in El Paso, TX, purchased for $64,000. The current single family home is in St. Petersburg, FL one block away from the water. It was a short sale that we paid $47,000 for. Our TOTAL monthly housing payment is $560. Rent in this area for a 2 bedroom apartment is between $700 – $800. The house was in rather rough shape, but we’re fixing it up ourselves, little by little. I’d be much more interested in a real estate program where real people search for undervalued homes and get incredible deals. Or one on how to navigate property auctions. I’m NOT interested in seeing naive yuppies buying $400,000 “dream homes.”
We could so easily have been like that couple if we didn’t have our priorities straight when we were looking to buy a home 4 years ago. HOWEVER, we committed to having a mortgage payment that was do-able on one salary (and the banks we applied at laughed at us when we told them how “little” we wanted for a loan).
That said, it was incredibly frustrating trying to find something that was in our price range and met the following criteria:
1) Some kind of yard (ie. not a condo. Preference for detached single-family house)
2) A basement or other storage/workshop space
3) Neighborhood didn’t make me fear for my life
4) Three bedrooms; we didn’t want to have a house that would only work before adding children to our family.
5) Move-in condition: peeling paint, nasty carpet, etc. were all fine, but we needed the plumbing and electrical to work and no major leaks anywhere. We saw too many houses that were a “good investment” but would have required weeks or months of work just to make it liveable. We couldn’t afford to pay rent and a mortgage at the same time.
We finally found our “starter” home. In the last 4 years, we have remodeled 2 bedrooms, a closet, and a bathroom. We’ve repaired plumbing, insulation, electrical, replaced windows and doors, and dealt with 3 feet of water in the basement. But this house has allowed me to stay home with our children while also providing a “safe” place for them to spend their early years. I think it was worth it.
While I agree that lavish living, even if you can afford it, is wasteful and unnecessary, I disagree with your assumption that only houses that cost $200k or less are acceptable for a frugal person. I live in an urban area and to get that kind of house, I’d have a huge commute. We paid a lot of money for our house so we could live in a good school district (no private school tuition), walk to work (save money on the extra car, gas, time, environmentally conscious, etc), and have room for our young family. I would love to live in a super cheap house so I could sock all of our money away, but I would have to give up something else really important. Living a frugal life is liberating and noble, but sometimes you spend a lot of money on things because they are just that important.
I’m assuming this is an American story, but we have a pretty similar situation in Australia. Our cities are becoming so sprawled and urbanised that our house prices ARE half a million dollars for anywhere you’d want to live.
We aren’t bound by price now, but by location. If you want to own something near anything, you’re paying BIG. If you go down the road of frugality and debt-free, you’re living near nothing and adding one to two hours of commuting per day.
We now have no choice but to rent. It’s that or only see our son on weekends.
Maybe that couple was making a bad choice, maybe not. It is hard to determine from the scanty info given on a show like that. My first home purchase at 29 years old was a $430k condo. It might seem like a lot, but that is below the median home price in the city I live in, and this city is by far one of the cheapest in the area that is still safe and livable. I literally can’t choose to purchase a $200k home in this area because the only unit in that price range in the city are city run affordable housing, and I make too much money to qualify (and trust me, you don’t have to make much money to not qualify). The other option is to commute 1.5+ hours each way to neighboring communities that are more affordable…many of the people I know choose to do that, but that isn’t acceptable for me. I purchased at 29 because I had to spend years saving the money to do it. I put 25% down and I have well over a years worth of reserve cash. I have a comfortably funded retirement plan. I don’t have any debt other than the house. I don’t have car payments, cable tv, or a cell phone plan. Everyone’s situation is different. You can’t compare housing on the coast to housing in the midwest (I’ve lived both places, I’m well aware of the differences.) The problem isn’t that the couple is purchasing a $500k home, the problem is that the show doesn’t discuss any of the financial aspects of the purchase. They don’t discuss the details of the local housing market, they don’t discuss the financing of the home, they don’t discuss debt to income ratios…they just show a young couple spending lots of money and they make it look like it is something everyone is doing, regardless of circumstances. But, if they did discuss all those things, the only people watching the show would be people from the PF blogosphere and not the other 99% or America…then their show would get canceled, they would lose their jobs, and they wouldn’t be able to afford the mortgage on their McMansions
Budgeting in the small stuff, Way to go!
I enjoyed this post and didn’t take it personally as so many people seem to.
I think the point of this post wasn’t *just* to say that the amount this couple spent was too much and that they couldn’t afford it because no one here knows this to be a fact. Furthermore, we all know that in some areas in the country, $500K+ is for a standard, no-frills house or apartment or condo . The point (at least as I read it) was that this couple could have bought something less expensive (less bells and whistles) in their area freeing up more money for other future things (education, children, small mortgage, savings etc…). I think it was a good suggestion. Maybe not one everyone should follow, but certain something eveyone should consider.
This posts reminds me of a House Hunters episode I saw once. The show, while completely staged, does tell you the couple’s budget and their selection of homes. In this one episode, the couple didn’t like one sigle home in their budget, so their parents stepped into add to their down payment. The couple was then able to “afford” a much nicer, more expensive home. That really turned me off of the whole show. Why bother with a budget if you’re not going to follow it.
sure, just buy a $200,000 house instead. it’s a thousand miles from where you work, in a different city, but whatevs.
seriously, though, i totally get the point of this post, and am completely on board with the sentiment. but it’s just not that easy.
where i live, a $200,000 home would require a pretty significant lifestyle change. that’s why i rent and save money in other places instead, so i can live with my family where i want to, at a price that fits my budget.
Saying at the outset *sarcasm:* OH, Frugalie, you are getting so conservative in your “old age.” Did you see all the comments on this post! Wow! We watch those shows all the time, mainly so we have someone to make fun of and click our tongues over. Not a lot going on around here obviously. My favorite ones are the ones planning a wedding and househunting at the same time. Especially the ones who are living with their parents. They want to have the house all set up before the wedding. How much stress can a couple set themselves up for? I don’t know how you can get the word out to those determined to imprison themselves in this way. They will just have to live the dream until the dream goes “poof” as they often do. These wise words only fall on deaf ears for the “entitled” generation. Life is too short to pay a huge mortgage!–and for what? Oh yeah, P.S. Well-loved dogs just want to be with you–they don’t get claustrophobic.
Frugal Dad – Great article – wish I read it when I was looking for a house a few years ago.
We WERE that couple. Both my husband and I made great money for years, had plenty saved, and ultimately bought a pricey home that we both believed we “could afford” and we really felt that we were being smart in our investment. Beautiful home, beautiful neighborhood – up til then, the market still hadn’t burst and we could only expect to make money on that place.
Well, first the company my hubby worked for folded – Fine, my strong salary still covered the mortgage and most of the bills. Yes we had to dip into some emergency funds, here and there but that’s what they were there for. 8 months later, he landed a position that was a 3rd of what he once made but still, we were OK.
Then, 2 months later – the company I worked for (after 12 years) announced it was closing it’s doors. Oh no.
It was the beginning of the economic downturn and almost 3 years later, I still haven’t replaced that salary.
Ultimately, in order not to have to use up every dime of savings/retirement/etc we had, we were forced to short sale. We were lucky to even be able to do that in this climate… but buh bye, investment, buh bye “our American Dream.” It was a tough pill to swallow, all that “shoulda, coulda, woulda.”
So we’re in a modest apartment now and rebuilding. We won’t make the same mistake again – I only wished we didn’t have to go down such an arduous path to learn the lesson. But it is what it is and we’re feeling better about where we are at now.
The first few paragraphs describing the show cracked me up…because I love this show, and this is exactly how I feel 90% of the time. Who in their right mind? I do understand those who comment about cost of living in various parts (I lived in NYC for 11 years – but this is why I never bought anything there!). Wish there was a show “Follow up 10 years later…”
You don’t say where the show takes place. $500K barely buys you a starter townhouse or condo in some cities or their close-in suburbs, which is where my family and I live. Similar homes or apartments rent for over $2,000 a month. There is absolutely nothing around here for $200K unless you want to have a commute of over an hour; I know people who do that to save money and they are paying the price in other ways (e.g., obesity, always being tense due to their awful commutes, having to put their kids in daycare from sunrise to sundown).
My thoughts *exactly* about the so-called starter home. That couple doesn’t seem to realize that their costs have just started on the day that they close. Wait till they put their old furniture into their new home–oops, that won’t do…gotta get some new stuff! Have they considered the cost of maintenance? Typically 1 to 1.5% of the house value per year…no not every year, but it evens out that way. What a millstone around the neck of a young couple! Nothing to look forward to..no “move up” potential because they are already at the top. I guess this couple also bought a Mercedes Benz as their first car, right out of school. Sigh!
I completely agree with your post, however, in the city I live in a you cannot get a house for $200,000 even in the worst part of town right by the railroad tracks. You’d be hard pressed even to find a crappy condo for that low of a price here. If you want even a half decent place here unfortunately you are “forced” to pay at least $400,000 (the drawbacks of living on the west coast). I guess the argument could be made that perhaps buying a place in this city should be given a second thought. I have often thought that when I am ready to buy I will have to move away, but it’s hard to truly fathom when you love where you live and your family and friends are here.
I do agree though that the couple on this show should have completely slimmed down their priorities…sounds like they were in a city where $200,000 could have bought something half decent at least.
One thing most first-time homeowners don’t realize is how *expensive* houses can be… they are money pits waiting to suck every dollar out of your wallet if you aren’t careful. If they are buying on the pretense of image and prestige, they are going to be regularly remodeling/renovating on top of all fo the regular maintenance costs that crop up with any house (new furnace, new roof, new hot water tank, water leaks, the list goes on…). The bigger the house, the bigger the cost of upkeep.
This is partly the reason that the real estate bubble burst in the US and is set to burst in Australia and Canada. Only a matter of time.
I always love when the woman on this show tries to talk them into getting a more expensive house … “It’ll only be $34 more per month…” – as if the only option is use every last penny in your budget.
I don’t own a home, for several reasons – but when I do buy, it’s going to be a multifamily property that generates money.
Bought an old house in an area where most people wouldn’t buy — good bones if neglected and a big backyard. Five years forward and this area is now “trendy” and prices have risen substantially. I chose this area because of the location — close to downtown and shops. The nice part is I can afford it on one salary and even manage weekly mortgage payments.
funny and thought provoking post, as always. i am chuckling, though, because my husband and i often have the REVERSE reaction to that show. a young couple will be looking at homes, insisting it have X number of bathrooms, Y number of bedrooms, large closets, etc., etc. and their budget is $200,000. we lived in DC for many years and would be rolling on the couch at how spoiled they were for getting so much for such a small amount of money. our first house was 960ish square feet, had to have all new windows, new roof, completely repainted interior and exterior (read: lot of work). we paid $307,000 for it. we did the work on our starter home for around $20k and sold it two years later for $499,000.
while i completely and wholeheartedly agree with the spirit of your post, i think it’s rather naive to assume that you can judge a situation solely on the amount they are spending.
I guess from reading the comments on here that I wish I know what kind of great jobs you all have to pay that much for a house.The part of Ohio that I’m in lots of families make $25,000 a year wages& raise 2-3 children on that .We make that amount & get along fine . We have a 720 square foot apartment that costs $450 a month. We do not receive any govt. assistance either. Our health insurance runs us $194 for medical, $25 for dental & $5 for eyes every 2 weeks before taxes.Our 2 older cars Buick century 1998 &Geo metro 1999 run great and are paid for.I thank God for all he has blesses us with & am content.
I’m tired of hearing the word ‘granite’. The kitchen has to have granite counter tops, stainless steel appliances, wood floors,neutral colors etc. It drives me crazy when they walk into a perfectly good house and start talking about how they’re going to tear it all out. I bought my house 4 years ago and paid cash. I lived in mobile homes and apartments so I could afford it. My car is a 1999 Mercury and runs like a new one because I take care of it. I don’t have granite or stainless steel or wood floors however, I do have a roof over my head that is in a nice neighborhood. Three homes in my neighborhood have been foreclosed on because people bought these houses thinking they could afford them. I’m lucky because very nice people bought these houses and the neighborhood is still nice and quiet.
Life does happen. I severely injured my back about a year ago and am unable to work. However, I have a nice house that I don’t have to worry about because I don’t have a mortgage and I saved money like crazy when I was working. When I am able to go back to work then I will do upgrades as I can afford them. People want all the bells and whistles right off the bat. I’m in my home for the long run. I loved this article because I also wonder how these 20 something year old people afford these homes. It is a big mistake. As for some of those who say you cannot buy a decent house under $200,000 I’m sure that’s true but your salary is probably higher than those in rural small towns.
I know this is an older post but I wanted to add my 2 cents. First I must say that my first reaction to the show was “They only looked at 3 houses????”
I enjoy watching the house shows and found myself making mental notes and learning about what I like. However, we are just starting to shop for a house and I’ve been getting my hands on all financial advice I can get. Seeing the financial side of things has certainly made me adjust my expectations and this post is yet another reminder (slap in the face) of reality versus ideals.