[quote=FormerSanDiegan]….
The factor 2.5x income was a rule-of-thumb based on higher interest rates (e.g. 10%+). The 3x income factor is based on 7-8% range of rates and 28%- 36% DTIs…..[/quote]
Look at all the measures of affordability, and decide for yourself what you can really afford.
But if you had to go with only one measure of affordability, the price to income ratio is better than the monthly payment versus income measure. Why? Interest rates determine the monthly payment for a given price. But inflation correlates with interest rates. Low rates on 30-year fixed-rate home loans indicates that the market expects low rates of inflation over the next 30 years. If that unfolds, it will lower the future appreciation of your home, offsetting the savings from the lower rate.
People who bought homes at low prices and high interest rates in the 1970’s and early 1980’s did very well. Buying for $100,000 in 1980 felt bad when rates were over 10%, but that worked out well when the home appreciated to $1.5 million 30 years later and the owner had long since refinanced into a much lower rate.
If home prices appreciate at much lower rates in the future, as is likely following their appreciation since the 1970’s at rates well above average, then loans today are going to hurt when they have to be repaid. You might buy for $1 million today, and sell for $1.2 million in 10 years time.
No one knows the future, so it’s all a gamble. But be wary of the lower rate = free lunch mantra that people who make money from selling real estate tend to use.
My personal rule of thumb? Home price = 10% of net worth. Everyone is different.
