Buying a home is harder than what you may have been told

If you’ve tried to buy a home in the Twin Cities, you know the impossible task for mere mortals. If you can find a half-way-decent house to buy, the price is through the roof.

The Star Tribune reported on Sunday that one of the problems is that people who were underwater in their mortgage, haven’t fully recovered and are unable to “move up.” So their “starter homes” aren’t coming on the market to allow young people to buy.

That opens up an entirely different conversation on how we view our homes and why, if we like the homes we bought, we want to move up and reset the mortgage clock at all?

Whatever the reason, it’s tough being a young person wanting to get into the homeowner game.

As mentioned in this space yesterday, many young people can expect to lead a nomadic existence of short-term gigs. That’s not conducive to owning a home.

But there’s also the immediate cash outlay. Who’s got the kind of cash hanging around that one needs to buy a home?

That’s why the story from CNBC today seems a little out of whack.

It says people need a $36,605 salary to put 10 percent down on a median $220,714 home in the Twin Cities. For a 20 percent downpayment, one would need a salary of $30,572.

This seems like nonsense. Sure, a smaller salary would support smaller mortgage payments, but who can afford to put $44,000 away when making $30,572 a year?

At current interest rates, a 30-year mortgage would cost $877.41. Throw in insurance and tax escrow amounts, and the monthly payment would likely be closer to $1500 a month.

Income taxes would likely eat up most of whatever is left.

And there you are with a house with no furniture.

These are the sorts of stories that sneak into the news and paint a false and distorted picture of reality.

Why? Because all of the data for the story came from Unisom, which makes its money financing homes. It’s in the best interest of the company to make mortgages look as affordable as possible. That’s why the real cost of home ownership isn’t revealed. That’s the shady side of the mortgage-provider business.

Even despite the inaccuracy, we get a better picture of just how unaffordable home ownership can be because in larger cities — where jobs are — the rock-bottom method of estimating a needed salary is staggering: More than $179,000 in San Francisco, near $90,000 in New York, and $80,000 in Boston.

This is the kind of financial illiteracy that helped break the economy in 2008.

What’s the reality? Read the responses to Kerri Miller’s tweet request above.

  • Tyler

    It is so frustrating being lied to as a Millennial. First it was college (still paying loans), then it was the house. Thank god I’ve got a good paying job with some form of health insurance provided.

  • Kassie

    I think your numbers off on what a mortgage looks like after taxes, insurance, etc. Our mortgage is similar to the one you use as an example, a little less, and our insurance, which includes mortgage insurance, and taxes are just under $400 a month. If you have 20% down, so no mortgage insurance, your total bill would be closer to $1100, not $1500. And $1100 is much cheaper than renting a house and many two bedroom apartments in Minneapolis.

    • At that value, homeowners insurance would run about $1200 a year. Property taxes could be between $3,000 and $7,000 depending on where you live. The principal payment is based on 4.1% 30 YR fixed, which is today’s rate.

      • Ralphy

        Plus there are other “fixed” costs of home ownership. Gas, electricity, garbage, sewer and water at a minimum. Easily at least another $250 per month.
        Then one hopes nothing breaks.

  • Mike Worcester

    //It says people need a $36,605 salary to put 10 percent down on a median
    $220,714 home. For a 20 percent downpayment, one would need a salary of

    Yeah I’m going to call shenanigans on that. I wonder if those numbers presume no other obligations, like student loan payments, kids’ expenses, car payments, or food. Then, maybe then, could that income support such a down payment.

    • MikeB

      If banks are lending on those home value/income parameters we will have the privilege of living through 2008 again

      • CB

        They are. We were approved last fall for nearly our entire month’s income as a mortgage payment on our first home. It was ridiculous to think we could afford that. We were lucky to find something just over our actual budget, but we are definitely rocking the no furniture status!

  • Dan

    “Sure, a smaller salary would support smaller mortgage payments, but who can afford to put $44,000 away when making $30,572 a year?”

    Yeah, who can save that much with these rent prices?

  • Dude (Not Sweet)

    As a homeowner, I think the rule of setting aside 1% of your home’s value each year for repairs seems correct.

  • Meghan

    My husband and I are currently in the market for our second home (i.e. the house after our starter home…not a vacation home), and have been looking since November. Anything good is getting snapped up in a day or two, and we’ve seen houses go for over 40k over asking price. It’s really frustrating, because it seems like we’re competing against people who are willing to be unreasonable in their offers for the sake of landing a home, and we just aren’t willing to offer a price we’ll regret after closing. In the end, we win I guess, because we’re not stuck with an overinflated mortgage that we regret. But it’s frustrating competing with people who let their emotions get the best of them.

    • Kassie

      What’s happening in my neighborhood is the houses go on sale on Thursday and on Sunday the owners look at all the offers and choose the best one. It is unbelievable how much houses are going for in certain neighborhoods.

      • I’ve never understood why if houses are selling more quickly, owners aren’t jacking up the prices even more.

        Also, this feels like a bubble.

        • KTN

          We didn’t want to be greedy. We just sold our house in north Mpls; the house went live on the market a couple of weeks ago on a Friday at noon. By 2, we had three showings and 2 offers. We took the offer that was 8% over asking price. In retrospect maybe we should have priced the house higher, but we felt very strongly that we priced fairly.
          We also could have done what Kassie mentioned, and just let the offers come in for a few days, and then decide, but that felt wrong. The family we sold to wanted what we had, they made a great offer, and we feel very comfortable that.

        • Meghan

          In my experience, they are. There are a bunch I’ve seen in our MLS search results that are priced probably 40-50k more than they should be. But if they start out too high, they are still sitting on the market for awhile, even in this market. Based on what I’ve observed in the 6 months we’ve been looking, the best thing a seller can do to get a good price is price their home reasonably, despite the crazy market. Let enough people get invested in their decision once they put an offer in, and watch the bidding war commence (which is made even better for sellers by people making offers based on guesses about other buyers’ offer amounts).

  • Tom Larson

    I started looking in 2015. As someone who lost a house in the last bust, I was too cautious early on, but prices just keep surging, both in rents and houses. I don’t know how people are affording the prices they’re willing to pay, as I make above the median and have a decent downpayment, but started feeling “here we go again” over two years ago. Still, with the ridiculous rents, you’re stuck either way.

    Edit: I recently went to a rental open house where they asked for bids on the monthly RENT people were willing to pay. It was up $100 over the Craigslist ad by the time I arrived. Multiple bidding is contagious.

    • Dan

      That’s where I was when I bought my first property. Free advice, if there’s a bubble, you’ll be in a much better position when it bursts if you stick with paying the high rents vs. the high purchase prices.

      Edit: which you already know, having lost a house previously. More intended for anyone else reading, who’s getting frustrated looking — if you think prices are too high to sustain, they might be. If it’s true, you’re better off waiting, even if rents are high.

      Rents have a ceiling too. As my first property is a rental, now I’m concerned about the apartment building bubble and a rent bubble, and hoping I can sell my property before it’s underwater… again.

    • Shoua Yang

      You are totally on point. It’s all marketing hype and scare tactics… Buy now or else it’s going to keep getting higher! Yeah, I fell for that back then too. I am ready to buy again but it’s seems I am going to have to wait too. It’s been almost a year since I started looking. High rent for now but at least I won’t be under water.