Episode 62: What Does it Mean to be Able to Afford a House?

The cost of a thing is the amount of what I will call life which is required to be exchanged for it, immediately or in the long run.” Henry David Thoreau, Walden From time to time I see snarky comments floating around the internet with folks commenting about how they’ve been paying rent for 10 years without missing a payment, but the banks won’t qualify that person for a house. I absolutely understand the frustration but it comes from a partial understanding of the trust cost of owning a home. Home ownership has become one of the defining features of the American Dream and it can be quite devastating and difficult for people who see this dream as a part of life and also forever out of reach.  The insane housing market now coupled with high rents is making this feel worse.  I’ll tackle renting vs. Owning another time. Today, as part of a series I want to do on financial literacy, I’d like to dive into what it means to be able to “afford” a thing and in this case specifically a house. Before I start, I’m not giving any specific financial advice, just broad observations from my personal experience as a homeowner and a former financial planner for the previous 27 years. Ok with that out of the way, let’s dive into what I mean. First, banks do want to lend money and to as many people as possible who can pay them back with interest. Lenders are customers.  The reality is, sadly, that a huge number of people who did “qualify” to buy a house, can’t really afford it, or at least that house, and it has a profound impact on their lives. When you “qualify” for a loan they banks look at your credit score to see what kind of risk you might be from your history, your loan to value ratio, and your debt-to-income ratio. The rule of thumb I was taught in my training as a financial planner was the 30% rule. That is, spending 30% of your income on housing is a good place to start. Problems: Real time depreciation is rarely budgeted for accurately, if at all.  If you buy an investment property, the government acknowledges the fact that you have to keep investing in the asset to keep it up and gives you a tax break to help pay for it, this isn’t recognized the same way for you as a home owner.  According to investopedia, the depreciation for rental homes is 27.5 years, or 3.63%. A quick google search shows that the average home price in the US is over $400,000.  To use that as an example, a homeowner should budget $14,520 per year to account for entropy.  That is, repairs and maintenance. Read More Here --- Support this podcast: https://podcasters.spotify.com/pod/show/carlopodcast/support