Why I Am Not in the Real Estate Market

Wednesday, March 23, 2005
As a young, successful, 20 something male, I should probably be looking into getting a house. However I have decided to sit this one out and not invest in real estate at this time. Why? Look at the numbers. They are crazy.

The average household income in california is $49,320. The average home price in Los Angeles is $470,900. Do the Math. Assuming a 30 year mortgage at the national average of 6.25% for $450,000 mortgage (I am assumming very little down as most people these days are doing 0% down) that comes out to a mortgage payment of $2770.73. All this on a monthy income of about $3,288 after taxes. This of course assumes you can come up with a $20,000 down payment which most people can not.

Do these numbers seem right to you? Do you really think a family can live on $500 a month when you haven't paid for utilities, food, clothes, etc.?

It use to be the rule of thumb that you should not spend more than 33% of your gross income on rent. That equates to $1277.43. A mortgage payment of $2770.73 on $49,320 of income equates to almost 72%, PRE-TAX! Now lets just say interest rates rise .75% which they are likely to do (especially because loan rates have not closely matched the fed in recent months). Most people these days have an ARM. That now equates to a payment $29983.86. It starts to get ugly really fast.

There is no conceiveable way that housing prices can stay at this level unless wages rise dramatically. However if wages rise that much it drives the price of doing business in California through the roof. It simply doesn't equate. So I will sit this one out for now and see where we are a year from now.