For all those gen-X and gen-Y out there, maybe you’ve realized that this bailout from the government around our financial future in my opinion really wasn’t totally around Wall Street, but it was in part for our own greed for wanting to have a big house as a first starter home.
Who can blame us? Truthfully speaking, most people couldn’t really stand to have a $200,000 home for their first starter home. So, everybody wanted a McMansion. You saw it on MTV’s Cribs, Lifestyles of the Rich and Famous, and you even saw it on CNN and CNBC. Wouldn’t it be great to have the American Dream, but have it in surround sound. However, your American Dream wasn’t really to have a $200,000 dollar house. Your dream was to have exactly what you saw on TV. The $450,000 house with the four bedrooms, the Pottery Barn furniture, a beautifully landscaped lawn, and a hot tub to boot in the backyard.
What most of you didn’t realize when you went through the mortgage process is that getting a mortgage alone isn’t the only fact in making a home buying decision. When you think about it, most people don’t realize that when you buy a house you need to highly consider something called the primary obligation ratio. What this means is that your total debt incurred on a mortgage shouldn’t be any more that 28 to 36% of your overall paycheck. For example, if you make $5,000, your total payment for principal, interests, taxes, and insurance shouldn’t be more than $1,500 a month. Here is where the main problem occurred for most of the Gen-X and Gen-Y people in America.
The issue is that if you squeezed yourself into a home at a 40% or 50% primary obligation ratio, it just didn’t occur to you what would be the cost of furnishing and upkeep on the home. Once you went into the house, you realized you wanted to furnish the house, which is roughly 10 to 15% of the overall value of your home. On a $500,000 house it will take somewhere between $50,000 to $75,000 to furnish the home depending on your taste.
The last part that most people didn’t realize is that your bills and upkeep of the house we’re nearly triple and quadruple what your overall bills where when you had an apartment or a condo. So, add the equation up. What this is that you’ve got a high mortgage, plus putting in new furnishings, and having upkeep in the house which is leading to the foreclosures and bankruptcies you see today.
My moral of the story is that you don’t need a McMansion. Home ownership is a great idea over the long haul, you just have to take it in baby steps, and stay within the ratios that make sense based upon your income. All of us could afford to downscale just a little.