Wednesday, March 09, 2011

Those Overpaid Federal Bureaucrats, and a Certain House

There's a house on sale for $800,000.  I got to thinking about whether the price was too high (the answer: not if the seller can find a buyer at that price. :-), a thought triggered by the note on zillow.com of the down payment and mortgage payment required.

Let me wing a few figures, based on the conventional wisdom back when I first bought a house (1976): a 20 percent down payment means a buyer needs $160,000 in cash.  I guess that's probably not a problem, at least usually, because any buyer is going to be selling their current home. Although these days there's many fewer owners who have that much equity in their homes; many owners are under water.

The principal and interest with a 30-year mortgage is roughly $3,500, or $42,000 a year. Property taxes, at $12 per 1,000 assessed valuation, might be $9,000 or so.  Add insurance of maybe a couple thousand, so you're talking PITI of around $53,000.  Call it $50,000, because I like round figures, and figure what it's 30 percent of and you come out to about $170,000 a year.

Yes, when I bought my first house, the conventional wisdom was PITI shouldn't be more than 30 percent of gross income, at least that's what I remember.  So, what's the bottom line?

Almost no federal employee could afford that $800,000 house within the constraints of 1976 wisdom.  I don't know how many houses in the U.S. would go for more than $800,000, but lots.  It's just another confirmation that high ranking federal employees are not overpaid, whatever may be true of lower ranking employees.

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