How much house should you finance? Follow the 20/28/36 rule.

[Jim Nickerson]

Re: How much house should you finance? Follow the 20/28/36 rule.

This is one of the rare threads here where there is perhaps some misinformation or incomplete information at least.

1. Let's not overrrate higher education. It depends on what you plan to do with it. To quote Judge Smails.....The world needs ditchdiggers, too. Perhaps that overstates it. But it's funny.

I know this is a highly educated bunch but there is a whole world out there of non- information based jobs that pay decently and do not require advanced degrees. And when the economy does tank, there will be much more demand for a good electrician or better yet a car mechanic than for a FIRE economy brainiac who may be brilliant a financial analyst but can't even change a tire. Anything associated with ESSENTIALS will likely do well.

Part of our nations's problem is that we are teaching an entire generation that they are either going to have some 100% brain-powered job in an office or be destitute. That producing and creating, or providing a skilled service, is a path to poverty. This is why our poor darlings can't be bothered to get jobs that we all used to do as youngsters and we have to import immigrants to do what we now consider ourselves too good for.

100 is said to be the average IQ. So for every valedictorian at 130 there's another kid at 70. This means that not everyone's kid is suited to go to college. Forcing square pegs into round holes like that is doing them a disservice (and inflating tuition) Better an employed welder than a chronically unemployed MBA for whom the reduction of the FIRE economy means lean pickings in terms of job opportunities. Go ask a businessman how hard it is to find a trained machinist. Then go ask him how easy it is to find a kid with a degree is sociology.

2. Tell my wife she needs an MBA. She made $150K last year with a HS diploma...in FINANCE! Other than in official HR dept job descriptions, at no point was education even mentioned in the job hunt processes at any of her jobs in her 10 year "career". Experience learned on the job mattered much much more. MBA's are overrated and some of her employees had them and were just about worthless and went nowhere. I have a bachelor's degree in business and don't make as much as she. Anyone who goes $100K into debt to get a degree in business hasn't even managed to learn enough from it to realize that the opportunity costs are huge (4-6 years of lost wages plus actual out of pocket costs ).

What we need to spend more on is job TRAINING, not pumping the value of degrees where maybe 1.5 years of your time spent there is learning anything even remotely related to you field. College is great for a well rounded person. But he'll be a broke well-rounded person if he doesn't go into select fields which require that degree. Few 18 y/o's are capable of making that choice.

We also have a problem with kids being sold on the idea that they can educate themselves into high paying jobs. With a few exceptions like law or technical fields, that usually isn't the case. It gets you into the first door, that's all.

3. Loans? Anyone ever hear of working their way through school? I did. Costs may have been lower then, but it's possible to at least minimize debt by doing so. The idea of sitting on my rear end weekends, summers, and holidays while incurring massive debt to go to college didn't even occur to me. Today there seems to be money for spectacular spring break vacations and ski trips around Christmas, all borrowed of course. No wonder we have a labor problem. The college kids used to work. Now it's seen as something to protect them from.

4. I'm not getting this 7 year ARM thing. Rates on those are not suffciently lower to justify the risk in case you wind up staying and rates trend upwards. Right now, they're virtually the same as a 30 yr fixed rate mortgage. What if rates skyrocket as some think? What if you aren't able to afford a 18% mortgage on a nicer home in 7 years? What if you aren't able to afford 18% on your current one in 7 years? With a fixed rate, inflation works FOR you in terms of home affordability.

5. A plan based on owning a multifamily rental place is a risky one. First, it means you're instantly eager to move up and on to better things. That is by definition more expensive. Ok, so what if mortgage rates are triple what they are now by then and you hate living next door to the redneckersons or college party animals you're renting to? Then you're stuck living in a low-rent duplex. Better to, if you can, buy a MODERATELY nice single family place you could stand living in the rest of your life in if you had to, locking in the historically low fixed rates today. If rates go up, you let inflation help pay your mortgage off for you. Then you use the cash from that home to move up if you want. But if you do the old "I'll buy a duplex and rent out the other side" thing, you risk being stuck being a landlord.

I think this is a historic time for low mortgage rates vs the expectations for them in the future.

6. Better yet, if valuations don't make sense now in your area, rent and invest the difference. Just be aware that if home prices go down another 25% but rates skyrocket, your affordability factor may have gotten worse, not better.

Of course not buying when you can't afford it always applies.

Very nice thoughtful post, Bruce. It is good to see someone thinking rather than reacting.

[zmas28]

Re: How much house should you finance? Follow the 20/28/36 rule.

Similar thoughts/questions have occurred to me on the advisability of buying a new home. If we do expect inflation to raise its head in the "not-so-distant" future and mortgage rates to rise from the low values of today, I suppose it makes sense to lock in those (fixed!) rates fairly soon. Perhaps not too soon as home prices are still in decline (actually not so much in the Houston area), but perhaps a couple of years out.

[c1ue]

Re: How much house should you finance? Follow the 20/28/36 rule.

Similar thoughts/questions have occurred to me on the advisability of buying a new home. If we do expect inflation to raise its head in the "not-so-distant" future and mortgage rates to rise from the low values of today, I suppose it makes sense to lock in those (fixed!) rates fairly soon. Perhaps not too soon as home prices are still in decline (actually not so much in the Houston area), but perhaps a couple of years out.

I personally hate to try and catch falling knives.

However, were you to try and buy a home in the near future, here's what I'd consider:

Input data:

1) interest rate as a divergence from historical average

2) price of home as a divergence from historical average

Calculation:

Present price plus present interest rate = $x monthly payment plus $y taxes. Assuming maintenance same.

a) What is the divergence interest rate w/ present price as a monthly payment?

b) What is the divergence price w/ present interest rate as a monthly payment?

c) What are the numbers above with taxes going up?

This will give you an idea how good or bad things can get. The point of this exercise is to not get caught up in price or interest rate, but to focus on the cash flow comparisons.

This exercise also gives you a better understanding in situations where one variable or another is above historical trend; for example it gives you an idea on future possibilities should prices be above trend but interest rates below. Why does this matter? because interest rates can change via a refinance, but prices are fixed once you pay them.

Again, for me I look at rent cash flow vs. buy cash flow and am perfectly willing to live in rentals if that is what it takes. But this is my own choice.

[mcgurme]

Re: How much house should you finance? Follow the 20/28/36 rule.

This is one of the rare threads here where there is perhaps some misinformation or incomplete information at least.

1. Let's not overrrate higher education. It depends on what you plan to do with it. To quote Judge Smails.....The world needs ditchdiggers, too. Perhaps that overstates it. But it's funny.
...

Bruce, great post. But lets not underrate higher education. There are areas of real need for education to retain our ability to compete globally. Areas such as:

1. Engineering. People with HS diplomas cannot generally design bridges, microchips, satellites, spaceships, or buildings.

2. Software. While there are exceptions, the majority of programmers that develop software infrastructure have college degrees.

3. Healthcare. Would you want someone with only an HS diploma operating on you or prescribing your medicines? It is challenging enough to find a decent doctor *with* an MD (and, with the aging of baby boomers, the supply of health care workers is going to fall far short of the demand).

4. Science. This includes the development of antibiotics, batteries that power hybrid cars, technologies that allow fabrication of high density microchips, technologies for enhanced food production, development of new plumbing and building materials, and etc. Major leaps in science are rarely done by those without any college education these days (there are a few exceptions, but those are rare).

I agree with you that there are far too many people with degrees in areas that don't translate into real-world skills.

And I agree that far too many students are focused on things like their next spring break vacation.

But I can also assure you that the serious students in computer science, engineering, and science programs at the major universities do a lot of hard work focusing on their studies. I know this having been one of those students, and now being on the other end of the stick, involved in training students in the computational sciences. We work them hard.

I think the bottom line is that a college degree is still useful if you choose the right area and work hard. But there is also, as you point out, a need for people with practical skills like plumbing, electrical work, repair work, and etc, and it is unfortunate that people are busy getting MBA's just because it's the popular thing.