Wednesday, June 29, 2011

Just How Nice Should Your Castle Be?

I'm currently reading (and thoroughly enjoying) The Big Short by Michael Lewis. It's all about the financial crisis of 2008, including the events leading up to it. Since I'm also reading Andrew Ross Sorkin's Too Big to Fail, on the very same topic, you might say I'm swimming in that particular topic at the moment!

Anyway, something I just encountered in The Big Short involves the ratio of house prices-to-income, for home-owners. Lewis mentions that, historically, the median for such a ratio in the U.S. was always around 3:1, but in the run-up to the Great Recession, it rose to 4:1 (with some areas of the country hitting as high as 10:1!).

That got me thinking about where Vicki and I had been when we bought each of the two houses we've lived in together (so far). In 1990, our combined income would've been around $80K or $90K, and we purchased a house that cost $124K, meaning that the ratio would've been roughly 1.5:1. In 1998, we moved into our current house, by which time we were grossing approximately $130K between us, and the price tag on this lovely property was $222K. The ratio that time was slightly higher, but still well below the 2:1 level. (And I should mention that, personally, I think it makes more sense to consider mortgage principal-to-income, rather than using the house price. After all, if I buy a $500K house but only have to take on a $100K mortgage to do so, what significance does the much higher value have on anything? It's all about the debt load, not the bling factor! In our situation, the 1998 mortgage was only for $160K, meaning that our principal-to-income ratio actually went down!)

At any rate, I've always been fairly convinced that Vicki and I were atypical in our spending when it came to houses... and this would seem to confirm that theory. Since we consistently maintained a price-to-income ratio well below 2:1, whereas the median value (for the States, but I have to think Canada's similar) has been more like 3:1 or even 4:1, we've clearly been living within our means... and then some! Which probably goes a long way toward explaining why we were able to enter semi-retirement as early as we did.

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