The Economics of Home Buying

By: Richard O. Byrne
Date: August/September 2008
Source: FineHomebuilding.com

Ednote: This math may be a little dated but the thought is good food to ponder in light of today’s and tomorrow’s finances and cost of money. Are you pondering to rent or to buy ?

Kevin Ireton’s essay “Is green building too expensive?” (FHB #195), as thoughtful as it is, misses some important considerations in the cost of buying a house. Ireton states that over the life of a 30-year mortgage, a $350,000 home actually costs $796,000—a lot of money. But the real cost is vastly more if you account for the pretax dollars you must earn, then pay taxes on, before paying the mortgage with what is left.

If you consider taxes and other costs that reduce your income—for argument’s sake, say 40%—then you have a different equation for determining the earnings needed to afford a $350,000 home. The $796,000 30-year mortgage payback cost becomes a whopping $1,327,000, plus or minus. Add to this the cost of transportation, clothing, and so forth required for the job over 30 years, and you easily push needing to earn more than $1,500,000 to pay for a $350,000 house.

The equation of having to earn about $4 to $4.50 for every dollar spent to buy a house certainly is an incentive to build your own house, where your labor becomes sweat equity. If you can get the cost of the $350,000 house down to less than $150,000, including land and utility hookups (and I’ve seen this done many a time at even lower figures), you give yourself the gift of not having to earn hundreds of thousands of dollars for the same housing results. Not bad pay for a year or two of work. If you were making a modest $35,000 a year, this savings would mean not having to put in an extra 15 to 20 years of work, with the resulting societal and carbon cost of getting to and from the job.