I can’t believe how much homes in Reno are going for nowadays! Lately I have been helping a friend look for a home and it appears now close to $300,000 must be spent to afford a starter home (even though the experts say the average price is closer to $250,000, I find this hard to believe). In my recent home viewing experience $300,000 affords a regular 1,900 square foot home, with a small yard and neighbors overlooking this yard. In running the numbers, a purchase price of $300,000 for this starter home equates to a monthly payment of $1,520, which would include putting 20% down or $60,000 at a very low interest rate. I find it hard to believe people who can only afford starter homes can afford this large of a down payment. With a more realistic 5% down, the monthly mortgage payment would be $1,920. According to the industry experts, 30% of gross income is the maximum amount that should be spent on mortgage. At 20%, this would imply a gross income of a minimum of $61,000, and with 5% down an income of $77,000 per year. This is by far in excess of the average household income in Reno of approximately $50,000.
I’m not implying that there is a bubble forming as happened last decade and home prices are going to crash. I just worry that home prices might have increased a bit too much with the 25% gain from just a year ago and closer to 50% from the bottom. I’m waiting for the days when these historically low interest rates go back to levels of those of last decade, which were still historically low. With a rate increase of 1.5% to 5.5% this hypothetical mortgage payment goes from $1,920 to $2,168 which would allow less people to afford the home, if it ever gets sold again. So all I’m saying to my friend is be careful.