It’s Hard to Think Rationally about Bigger Housing Numbers

Sometimes it just feels wrong, even when the math technically checks out.
This question caught my eye the other day on Quora:

Why do people complain about cost of living in the Bay Area so much when it seems like two successful software engineers could easily afford a home?

The premise is that, with $250k/year of income, a professional couple in the Bay Area ought to be able to afford the expensive homes in the area, even those priced at north of $1.5 million1. Indeed, when I did the math on getting a $1 million home in one of the cheaper towns down the Bay Area peninsula, the absolute minimum salary requirement was “only” $120k/year.

The responses to the question, though, show that it’s not just a matter of financial mathematics. Sure, you can account for a higher risk of foreclosure with higher mortgage payments (i.e., if you lose your job, making up a higher mortgage payment is more difficult and more taxing on your savings). You can also note that saving enough money for a proportional down payment—20%, though offer competition can drive that percentage higher—is itself more difficult.

But I think the true disconnect is trying to internalize the cost of a million, million-and-a-half dollar home in the context of salaries and monthly mortgage payments. At these high amounts, the true cost of the house becomes abstract; for the vast majority of people who can’t pay it in pure cash, the only “real” part of the cost is manifested in the mortgage bills and their monthly cash flows. It’s not so much that a $6,000-7,000 mortgage payment is out of reach, but rather that it takes up so much of a $10,000 paycheck that itself had looked big before the home purchase.

Which gets to one of the underlying assumptions: that $250k is a great amount of household income. Of course, it still is compared to the national average of $52k, but less impressive on a local scale when your neighbors are on a similar if not higher level. This is the same phonemonen some students experience when they first enter an elite college; when everybody is a high school valendictorian but still need to be graded on a curve, there will be some really smart folks who’ll be disappointed that they fare worse than their even smarter peers.

That $1.5 million home will eat up a good percentage of a $250k income, but less of a $400k income. In some of the nicer neighborhoods in the Bay Area, however, the latter becomes our hypothetical couple’s measuring stick.