Metrics for affordable cities — May 13, 2014

Metrics for affordable cities

This Atlantic Cities piece measures which metro areas are the easiest for middle-income folks to buy homes in. They define this by the fraction of homes that the median earner in the city could buy, assuming this earner stays within sensible limits for what he spends on a home. That is, the earner is expected to spend 31% or less of his income on a home. I never know whether the 31% number there refers to gross or net. Again, people often make the mistake of considering their homeownership decision outside the context of the rest of their finances. You want your whole financial picture, including retirement savings and so forth, to be healthy, not just your homeownership picture.

But setting that aside: by this measure, Boston is not very affordable. If you take even the looser standard of the fraction of homes that are affordable if the head of household (love that Victorian label) has a college degree, then Boston ranks 93rd out of 100.

Consistent with my impression, Pittsburgh is 45th, and Detroit is 17th. This gets at something: you really want to measure along two axes. Along the x-axis, measure affordability; on the y-axis, measure desirability. Detroit is affordable but not desirable. The Bay Area, let’s say, is desirable but not affordable. What one wants is the set of cities that are both affordable and desirable. Or maybe, within the set of desirable cities, one wants to maximize the amount of desirability from the marginal dollar. (You’d want to limit to desirable cities to avoid Detroit showing up on the list. If you’re willing to consider the possibility of living in Detroit, perhaps you can relax this in the thought experiment.)

I don’t know how one would measure desirability. Basically you’d measure it by how many people want to live there. But the only way you can measure that is by how many people *do* live there or *have* tried to move there. The price of housing is a decent measure of those things. But the price of housing measures the intersection of demand with supply, and supply is controlled by regulators. So I can’t think of how to measure desirability.

It’s odd, though, that Pittsburgh may well end up maximizing the combination of desirability and affordability.

Buying a home in Boston, redux — April 6, 2014

Buying a home in Boston, redux

For whatever reason, I’ve been obsessed for a long while with buying a home around here. Interest rates are crazy low, and the housing market is insane, and it seems like every other conversation I have around here now is on that subject.

I can’t make decisions on complicated open-ended topics like this unless I can pin down some of the parameters. So here’s what I think I can safely say:

* I don’t want to lower what I contribute toward retirement. Right now I contribute the legal maximum toward my 401(k). (The house shouldn’t crowd out other financially important decisions. I think people tend to think about the house in isolation.)
* I figure that after all is said and done, I can afford to spend 30% of my net income (net of 401(k) contributions, taxes, health and dental insurance, etc.) on housing. 30% works out to about $1600 per month, in regular months (months when I don’t get paid a bonus, etc.). That would have to cover the mortgage, any repairs (whose expected cost I could only guess at), property taxes, etc. (I’m lucky not to have any other debts, having paid off my college loan 18 months ago.)
* With reasonable guesses for property taxes and so forth, and with a pretty low-interest mortgage, $1600/month will get you an approximately $373,000 house.
* If you ask Zillow or whomever, it turns out that $373,000 will buy you a few hundred square feet in Cambridge. Not a lot of space. Prices in Cambridge average $512 per square foot, last I checked; at that price, a 1000-square-foot condo would cost me about $2200 out of pocket every month. (Alternatively, I could put down a quarter of a million dollars as a downpayment toward a 1000-square-foot condo, but I don’t have that much cash on hand.)
* A multi-family home changes things a bit. If you aim to spend $1600 a month, if you buy a triple decker, and if you rent out two of the units, you can buy an approximately $1 million home. Of course this assumes that you put down $200,000 for the downpayment. I don’t have that kind of money sitting around just yet. Give it a year and a half, and maybe I will. It’s also not clear that there are any triple-deckers available around here for that little money.
* If I ask the [newspaper: New York Times] and probably lots of other calculators, and I tell them what I’d expect to pay for rent, and I plug in $373,000, and I don’t assume any appreciation in the value of my home (which seems like the safest approach, even though values are going up rapidly [1]), then it turns out that owning is only better than renting after six years. I can’t be certain that I’ll be living here in six years. Though if I bought a home here and left after a few years, I could hand it over to a property-management company to take care of for me while I’m gone. (At the moment it does seem like Boston would be the right place for me and my family long-term.)

That’s what I’ve got at the moment, when I try to consider buying a home rationally rather than for the emotional reasons that get pounded into every American’s head. How about you? Do you have any other fixed points of analysis?

[1] – Would home appreciation even help me? Suppose the value of my home rises at some stratospheric rate every year — like 10%. I sell it in 5 years for 61% more than I bought it for. But now I need to live somewhere else. Assuming there’s nothing idiosyncratic about the place I’ve just sold, the new property I would buy would likely *also* have risen in value by 61%. So I wouldn’t profit off the appreciation.

Seems like some of the only ways to profit off of a rise in home prices are to

1. move to somewhere where prices haven’t risen as much (e.g., the suburbs);
2. borrow money on the increased value of your home and invest it;
3. rent instead of buy; or
4. buy a smaller (hence cheaper) place than the place I’m selling.

If I sold a home in Cambridge, I would likely want to buy a new home in Cambridge, so 1) is out. 2) entails some obvious risks, but is probably the smartest of the 4. And if the market is sane, then the prices to rent and to buy should be approximately equal, which knocks out 3). Finally, 4) makes sense if you’re buying the new property during your retirement years, after your kids have moved out, but the standard arc of a middle-class American life would suggest that your new home would likely be larger than the one you’re selling.

A rough outline of the basic economics of owning a home in Boston’s urban core — July 16, 2013

A rough outline of the basic economics of owning a home in Boston’s urban core

I think these are fairly reasonable assumptions on the sort of home you could buy in Boston / Cambridge / Somerville / Brookline:

* Home value: $600,000
* Downpayment: 20%
* Mortgage interest rate: 4.5%
* Mortgage term: 30-year, fixed-rate

(For the home price, see, e.g., the Census Bureau’s Cambridge QuickFacts. Boston’s median home price is lower, apparently. Somerville’s is higher than Boston’s but lower than Cambridge’s.)

Then the mortgage you take out will be $480,000, and the monthly payment will be $2,432.09. Add in property taxes, a low estimate of monthly repair costs, and an estimate of the water bill. Subtract the mortgage-interest deduction. What I end up with, in Somerville, is a total monthly out-of-pocket expense of about $2,800.

The standard guideline seems to say that you should spend 30% or less of your income on housing. So to afford $2,800 a month, you need to earn $9,300 or more every month, or about $112,000 per year. Only about 5% of all Somerville tax returns claimed adjusted gross income of more than $100,000 in 2008. (Check ZIP codes 02143, 02144, and 02145 in that spreadsheet.) Now, granted, if you and your spouse both file separate returns, and you each earn $100,000, you really should count — for the purposes of this exercise — as a household earning $200,000; that’s certainly the unit that would be buying the home together. In 2010 about 95.5% of all married-couple tax returns were filed jointly, so it may be reasonable to assume that the tax statistics aren’t hiding much income across multiple tax returns.

So is that it? Do you have to be in the top 5% of incomes to even afford a home around here?

__P.S.__: The illustrious mrz, in comments, mentions the other part of the math that I worked out: homes around here are much more affordable, on a month-by-month basis, if you buy a multi-family building and rent it out. Figuring that your standard 1,200-square-foot unit rents for a couple thousand dollars per month, a triple-decker gains you $4,000 in rent every month. You lose some of that in income taxes; assuming you’re in the 28% bracket, for instance, that’s $1,120 in income taxes every month. But then, a multi-family home usually costs more than a single-family home, which means a few things:

1. Larger downpayment. I assume that around here the price of admission for a triple-decker is about $800,000. Again assuming you put down 20%, that’s a $160,000 downpayment.
2. Since the home is worth more, you pay more in property taxes. In Somerville, for instance, a home assessed at $800,000 would cost $427.47 every month. (I haven’t looked into whether the two units that you’re not living in are eligible for the residential exemption, so don’t quote me on this. The actual property-tax amount may well be higher than $427.47/month, because you may not be eligible for the exemption.)
3. Those property taxes are deductible on your Federal income taxes.
4. Since the home is worth more, your mortgage payment is larger, and in particular your monthly interest payment is larger, which means that you can deduct more interest every month on your Federal income taxes.

All told, I work out that the net out-of-pocket monthly expense for an $800,000 triple-decker is about $1000. Which is a whole lot less than the $2,800 you’d spend every month on a single-family home. But of course a multi-family means you’re a landlord, with all the badness that that implies.