The No. 1 factor in determining what real estate is worth in any given area is the income of the people living there.
This is an abstract concept that a lot of people don’t understand, but it’s the primary reason why a 1-bedroom apartment in New York City costs anywhere from $500,000 to $1 million but you can find a 6-bedroom house with a 4-car garage and a swimming pool in the same price range almost anywhere else in the country.
To give you a better idea of this correlation, let’s look at the specific ratio between income and housing costs.
A good financial rule of thumb is that you should spend no more than 35% of your gross monthly income on housing. For example, let’s say you make $120,000 per year (or $10,000 per month), which means you’d put $2,000 of that toward your housing costs. Let’s also imagine that you have car payments and student loan payments that cost $1,500 a month.
"The next time you’re buying a home and you have to think about appreciation, consider this correlation."
Doesn’t that seem light? Why can you only spend $2,000 on housing costs when you make $120,000 per year?
Let’s dive a little deeper. If you make $120,000 at a 30% tax rate ($36,000), that means you only take home $84,000 of that income. Each month, $2,000 of that goes to housing, while $1,500 goes to other expenses. After those expenses, you have $42,000 left. If you want to put 10% of that total into your savings, that equates to $8,400. All told, you’re taking home $646 per week out of that $120,000 yearly income to spend on whatever else you need.
So, the next time you’re buying a home and you have to think about appreciation, consider this correlation.
If you have any more questions about the correlation between income and home values, don’t hesitate to call or email me. I’d love to talk to you.