Wednesday, March 12, 2014

One Income

Buying that first house will be the largest financial gamble for most couples. In most instances, both husband and wife will have a job when they are first married. When my father was forty years old, a man without any particular skills and a high school diploma could reasonably expect to support a wife, two kids, a mortgage on a 1,200 square foot brick box, and one car if he was willing to work 40 to 50 hours a week at a boring, fairly meaningless job on an assembly line. I am afraid those days are gone forever. Today, at least for most couples, it will take two incomes to get started. The bride and groom might be bringing student debts to the table, along with car payments, perhaps even a credit card balance or two. When we were married in the mid 1970s, most young couples at least started out with a slightly positive net worth. Ours consisted of a little over $1,000, two paid for used cars, and a pretty decent stereo system. Our first major purchase as a married couple was a 19 inch black and white television for approximately $125. Today, student loan totals of $100,000 are a possibility; essentially a mortgage without a house. Unfortunately, for most young couples the first years of a marriage must be spent preparing for starting the rest of your life together, especially the cost of starting a family.

Paying down high interest debt and building an emergency fund are your first priorities. After those two beasts are under control, then start to think about building a down payment to buy your first home. Banks, the Federal Government and the governments of the several states really want you to buy a home. They have jointly conspired to offer all kinds of tax breaks and special programs for different categories of buyers. Special plans are available for first time buyers, veterans, or couples with a combined income under some threshold. Those are just a few examples of what is out there. Of course the home mortgage deduction is the single biggest tax loophole in existence. I do not hear very many reformers from either party calling for the elimination of that particular loophole.

The real estate bubble of 2006 proved conclusively that buying a single family home is not always a good idea. Real Estate does not go up forever, even with assistance from Congress and the Federal Reserve. Still, families seem to do best in single family homes. Owning a home of our own is a deeply ingrained part of the American dream. Actually, I think it is more than that. Even our distant ancestors wanted a cave they could call their own.

Ask yourself, “Do I really need a house?” The answer is no, but buying a house may be a wise investment as well as a means to fulfill a biological imperative.

If our newlyweds are college graduates living in a major metropolitan area, they might well have a combined annual income in excess of $100,000. Even those of more modest means could easily be earning a combined total in the neighborhood of $60,000. You don’t need to find ways to spend all that money. Instead live on one income if at all practical. Use the second, smaller income, to pay down existing debts or to build equity for the next big step your life. In our case that step did not turn out to be our first home. Instead, we went back to school for our second degrees. A Federal grant, scholarships, and a work study program paid for most of those two degrees. The rest came out of savings or from the income produced by whichever one of us was not in school at the time.

If the next big step in your life is buying a home and starting a family, plan on doing it with one income. Banks will qualify you for a loan based on your combined incomes and credit scores, but do not fall for that trap. Two adults, a toddler, and a baby really do not need even a 1,900 square foot home. Take a step back to your grandparents’ vision of a home. Start small. You really don’t need to be carrying $500,000 in debt to support a 3,000 square foot home even if you can afford it on two incomes.

There are just too many things that can go wrong. The young man who put down the first offer on our home lost his job just before going to closing. It is sad to say but that was a better outcome than losing a job the day after closing. Then it would be too late. There is a high probability that he would not have enough money left to cover the mortgage until he found another job. He could have ended up in a situation where the home was underwater. Then he wouldn’t have enough money to cover the difference between what he owed on the home and the selling price.

It happens. Remember 2006-2009.

Over the years, I have added this one caveat to my mortgage decision lecture. Calculate affordability on the basis of one income, not two. Young couples often decide to start a family. When babies appear on the scene young women want to stay as close as possible to their children. Fulfilling this perfectly normal instinctual desire is good for both mother and child. At least give your wife the option to be a stay at home mom for a few years if that is her desire. In five to seven years you will sell that first home and move on to something better in another city. When you are old, the time your wife spent with her babies is likely to be her most precious memory. By that time your first home, if it still even exists, will be a maintenance nightmare draining the lifeblood out of some other young couple’s combined resources.

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