How to afford a $400k house? Are most people in these "house-poor" or stuck with ARM about to increase?

Question

I don't mean to sound like a wide-eyed country bumpkin or anything, but I was recently walking around the NW side of Chicago (near where the brown line terminates) and it seems like every new house (mostly teardown-and-rebuild jobs) is going for $400k-500k. And I realize homes in CA are often double that.

I make about double the average salary for my town (won't say where, but in the midwest US, population about 100,000 people), and my house cost well under $200k, and I'm certainly not left with tons of money left over at the end of every month.

So...do the people in these houses all earn over $250,000? Or do they all pay 80% of their net income towards the mortgage and eat peanut butter sandwiches? Or are they all pinned under some sketchy mortgage and about to lose the property?

Obviously I know that this question can't be answered for "all" people in homes that cost that much. I'm just looking for a couple of realistic examples of how people can afford such a property.

Answer 1

you can look at city-data.com to see what people make on average.  

the most common cases iv'e seen are:

1. people bought long time ago, so their mortgage and payments are a lot lower then a new buyer would get at current prices: 80% of people

2. people are house poor, paying most of their income to stay in home: 10%

3. people have so much money, they doen't care what the cost is: 5%

4. people can't afford the house, they paid too much, have sketchy mortgage, and will soon lose it to foreclosure: 5%

(percentage are based on people i know here in LA, you community may be different)

Answer 2

I live exactly in the area that you're referring to -- the Lincoln Square/Ravenswood/Albany Park neighborhood of Chicago.  I'm off the Kedzie el stop.  Moved into a rehab about 3 1/2 years ago.

We have a fairly large condo and didn't pay the amount that you're listing above.  We bought in before the area became hot and there are much smaller places than ours going for more than what we paid.  I can gaurentee that the HHI for many homes in our area is less thank $250K.  We don't make that kind of money, but can still afford our payments, send my kids to private school, live comfortably and do the things we want to do.

It seems like downpayment is the biggest driver that determines monthly payments.  If you're able to come to the table with a good chunk of cash up front, more the better.  When we first bought we were on an ARM and recently moved to a 30-year fixed, which I'm happy about.  ARMs can also be beneficial up front, but given the market today, I wouldn't go there.

On the flipside, my bro and sis in law live outside of SF.  Found some "wonderful" place they had to have and went house poor buying it.  Took out extra loans, put down minimal.  They told us their housepayments and I was floored.

It's all in how you play it.  Having decent HHI helps, finding the right loan and being able to come to the table with a healthy downpayment.  And having good credit...

Answer 3

I don't know how you calculated income to house value, but here in Southern Cal, where our avg. home price (in my area) is like $800k, I know most of the people here don't make $250k.  $250k income should buy you a $1mil+ house easily...

Answer 4

I live in California. And as far as how people can afford these house prices, you've pretty much named the most common ways.

A lot of factors come into play (credit worthiness, income, assets). Most people who want to buy real estate need to be strong in at least 2 of these categories, if not all. A good downpayment (preferably 20%) helps a lot too.

Although, assuming the property is $400,000 how many people actually have $80,000 lying around for a 20% downpayment?

So many have probably getting into interest-only ARM's, where the payments are much lower, but only for a certain amount of years.

In general, I'd say most home-owners here in California are having to use much of their monthly income to pay their mortgage payment. And many who have purchased houses, actually CAN'T afford them. So the house ends up foreclosing after a year or two. This is happening all over, which is why foreclosures have increased so dramatically over the last few years.

So, back to your question, I think you nearly answered it for yourself. I think its a combination of people who pay a large chunk of the net income and eat peanut butter sandwiches, people who found "creative" financing, and people who just plain got into something they can't afford and will lose the house eventually.

Answer 5

you may be right or they may earn that much only the people living there know for sure